BMO Nesbitt Burns Inc. et al. -- s. 80 of the CFA
Headnote
Application for an order pursuant to section 80 of the Commodity Futures Act granting relief from sections 42, 43, 44 and 45 which contain requirements to deliver confirmations and statements to customers in the context of trade "give-ups".
Statutes Cited
Commodity Futures Act, R.S.O. 1990, c. C.20. as am., ss. 42, 43, 44, 45, 80.
November 25, 2011
IN THE MATTER OF
THE COMMODITY FUTURES ACT,
R.S.O. 1990, CHAPTER C.20, AS AMENDED
(the CFA)
AND
IN THE MATTER OF
BMO NESBITT BURNS INC.
CIBC WORLD MARKETS INC.
RBC DOMINION SECURITIES INC.
SCOTIA CAPITAL INC.
TD SECURITIES INC.
(the Applicants)
ORDER
(Section 80 of the CFA)
UPON the application by the Applicants to the Ontario Securities Commission (the Commission) for an order pursuant to section 80 of the CFA granting relief from sections 42, 43, 44 and 45 of the CFA which contain the requirements to deliver certain confirmations and statements of trade to customers (the Delivery Requirements) in respect of trades in commodity futures contracts and commodity futures options in the context of trade "give-ups";
AND WHEREAS the Applicants have represented to the Commission that:
1. Each Applicant is registered as an investment dealer under the securities legislation of all provinces and territories of Canada, as a futures commission merchant under the CFA and The Commodity Futures Act (Manitoba) and as a derivatives dealer under the Derivatives Act (Quebec).
2. Each Applicant is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the TSX Venture Exchange, an approved participant of the Montreal Exchange and a participating organization of the Toronto Stock Exchange.
3. The head office of each Applicant is located in Toronto, Ontario.
4. Each Applicant acts as an executing and clearing broker for give-up transactions that involve, among other things, the purchase and sale of commodity futures contracts and commodity futures options (Futures Contracts).
5. Give-up Transactions are purchases or sales of Futures Contracts by investors, each of whom is an "institutional customer" within the meaning of IIROC Dealer Member Rule 1.1, that have an existing relationship as a client with a clearing broker but wish to use the trade execution services of one or more executing brokers for the purpose of executing such purchases or sales (Subject Transactions). Under these circumstances, the executing broker will execute the Subject Transactions in accordance with the institutional client's instructions and then "give up" the Subject Transactions to the clearing broker for clearing, settlement and/or custody (Give-up Transactions). The service provided by the executing broker is limited to trade execution only.
6. The clearing broker remains subject to applicable Delivery Requirements in respect of its client in Give-up Transactions. The clearing broker maintains an account for the institutional client that is administered in accordance with the terms and conditions of the account documentation of the clearing broker that has been signed by the institutional client. For a Give-up Transaction, the institutional client does not sign account documentation with the executing broker, and the executing broker does not receive any money, securities, margin or collateral from the institutional client. The institutional client does, however, enter into an agreement with the executing broker and the clearing broker that governs their Give-up Transaction relationship (a Give-up Agreement).
7. Although each Applicant is responsible for record-keeping, bookkeeping, custody and other administrative functions (Account Services) in respect of its own clients, it does not provide Account Services for execution-only customers in Give-up Transactions, such Account Services remain the responsibility of those clients' clearing brokers.
8. Each Applicant does, however, record in its own books and records and accounting system all Give-up Transactions that it executes, which generally comprise those Futures Contract positions held by it that are not allocated to any of its own institutional client accounts. The Applicant communicates these unallocated positions to the relevant clearing brokers who either accept or reject the positions so allocated on behalf of their clients based on existing Give-Up Agreements. If a clearing broker rejects a proposed allocation, the Applicant contacts the person who executed the trade to obtain clarifying instructions and then allocates the position in accordance with the instructions so received.
9. Each Applicant prepares a monthly or transaction-by-transaction invoice detailing all Give-up Transactions (including the amount of any commission to the Applicant for execution thereof) that the Applicant conducted during the month for each institutional client under a Give-up Agreement. The Applicant delivers such invoice to the clearing broker who then reconciles the Give-up Transaction with its own records.
10. Each Applicant is, to the best of its knowledge, in compliance with all IIROC requirements relating to the maintenance of records of executed transactions.
11. Section 42 of the CFA requires that a registered dealer that has acted as an agent in connection with a trade in a commodity futures contract promptly send customers a written confirmation of the trade.
12. Section 43 of the CFA requires that a registered dealer that has acted as an agent in connection with a liquidating trade in a commodity futures contract promptly send customers a written statement of purchase and sale.
13. Section 44 of the CFA requires that registered dealers send customers a written monthly statement.
14. Section 45 of the CFA requires that a registered dealer that has acted as an agent in connection with a trade in a commodity futures option promptly send customers a written confirmation of the trade.
15. Application of the Delivery Requirements to the Applicants when they provide only trade execution services in respect of Give-Up Transactions would:
(a) be duplicative and confusing because delivery of the required trade confirmations and the statements of account to execution-only clients would capture only some, not all, of the information that would be contained in the trade confirmations and statements of account delivered to the same clients by their clearing brokers; and
(b) not be required to establish an audit trail or to facilitate reconciliation of give-up trades as between an Applicant and a clearing broker.
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;
THIS ORDER of the Commission is that each Applicant is exempt from the requirements of sections 42, 43, 44 and 45 of the CFA provided that:
1. each Applicant provides trade execution services in respect of Give-Up Transactions only for institutional customers within the meaning of IIROC Rule 1.1;
2. each Applicant enters into a Give-Up Agreement with the clearing broker and the institutional customer; and
3. the clearing broker has agreed to provide each institutional customer with written trade confirmations and statements of account that include information for any Subject Transaction.