Canadian Derivatives Clearing Corporation – s. 144
Headnote
Application under section 144 of the Securities Act (Ontario) (OSA) to vary and restate a temporary order dated February 15, 2011 exempting Canadian Derivatives Clearing Corporation from the requirement in subsection 21.2(0.1) of the Act to be recognized as a clearing agency.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21.2(0.1), 144.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
(the "Act")
AND
IN THE MATTER OF
CANADIAN DERIVATIVES CLEARING CORPORATION ("CDCC")
VARIATION TO THE TEMPORARY EXEMPTION ORDER
(Section 144 of the Act)
WHEREAS the Ontario Securities Commission (Commission) issued a temporary order dated February 15, 2011 pursuant to section 147 of the Act exempting CDCC from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the Act (Temporary Exemption Order);
AND WHEREAS the Temporary Exemption Order will terminate on March 1, 2012 unless extended by order of the Commission;
AND WHEREAS the Commission has received an application from CDCC pursuant to section 144 of the Act requesting that the Commission vary and restate the Temporary Exemption Order to extend CDCC's temporary exemption from the requirement to be recognized as a clearing agency pursuant to subsection 21.2(0.1) of the Act;
AND WHEREAS the Commission has received certain representations from CDCC in connection with the application to vary and restate the Temporary Exemption Order;
AND WHEREAS the Commission has considered these representations, CDCC's application, and other factors;
AND WHEREAS the Commission has determined that it is not prejudicial to the public interest to issue this order that varies and restates the Temporary Exemption Order to extend CDCC's temporary exemption from the requirement to be recognized as a clearing agency pursuant to subsection 21.2(0.1) of the Act subject to additional terms and conditions;
IT IS ORDERED, pursuant to section 144 of the Act, that the Temporary Exemption Order be varied and restated as follows:
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
(the "Act")
AND
IN THE MATTER OF
CANADIAN DERIVATIVES CLEARING CORPORATION
ORDER
(section 147 of the Act)
WHEREAS in February 2011 Canadian Derivatives Clearing Corporation ("CDCC") filed an application, pursuant to section 147 of the Act, for an order temporarily exempting CDCC from the requirement ("Recognition Requirement") to be recognized as a clearing agency under section 21.2 of the Act;
AND WHEREAS the following facts have been represented to the Ontario Securities Commission ("Commission"):
1. The Bourse de Montréal Inc. (the "Bourse"), CDCC's sole shareholder, is a wholly-owned subsidiary of TMX Group Inc., a widely held public company, the common shares of which are listed on Toronto Stock Exchange;
2. CDCC is currently recognized as a self-regulatory organization ("SRO") in Québec under section 169 of the Securities Act (Québec) ("QSA") which enables it to carry on the activities of a clearing house in Québec. As such, CDCC is subject to the regulatory oversight of the Autorité des marchés financiers ("AMF");
3. CDCC is subject to the Derivatives Act (Québec) ("QDA"), which enables the Bourse and CDCC to implement rule changes based on a self-certification process for a "recognized regulated entity" under the QDA;
4. On March 16, 2004, the Commission granted the Bourse an exemption, pursuant to section 147 of the Act, from recognition as a stock exchange under section 21 of the Act and an exemption, pursuant to section 80 of the Commodity Futures Act (the "CFA"), from registration as a commodity futures exchange under section 15 of the CFA, subsequently amended on April 30, 2008;
5. CDCC currently offers central counterparty ("CCP") clearing services (the "Current CCP Services") for Bourse-traded financially or physically settled interest rate and equity futures and options, as well as for a limited number of financially or physically settled over-the-counter ("OTC") equity options;
6. CDCC was chosen by the Investment Industry Association of Canada ("IIAC") in December 2009 to develop a CCP facility in Canada for fixed income transactions (repurchase transactions ("repo") and cash buy and sell trades) (the "Fixed Income CCP Service") and CDCC's operations have been undergoing major changes since then as a result;
7. The Bank of Canada ("BOC") has undertaken a comprehensive assessment of CDCC's operations, systems, rules, and risk management, primarily in the context of the Fixed Income CCP Service, for the purposes of designation and regulatory oversight by the BOC pursuant to the Payment Clearing and Settlement Act (Canada) ("PCSA"); CDCC does not expect to be designated and regulated by the BOC until after the launch of Phase 1 of the Fixed Income CCP Service;
8. The scope and implementation of Phase 1 of the Fixed Income CCP Service will be limited to clearing repo transactions in respect of a selection of Government of Canada (and Government of Canada agency) long-term and short-term bonds and T-Bills, as more fully described in an IIAC "Phase 1 -- Securities Bring-On Strategy" document (the "Bring-On Strategy Document") in effect on the date of the launch of Phase 1 of the Fixed Income CCP Service and which is substantially similar to a "Version 1.0 -- Final for Stage A" of the Bring-On Strategy Document dated February 7, 2012;
AND WHEREAS the Commission issued a temporary order dated February 15, 2011 pursuant to section 147 of the Act exempting CDCC from the Recognition Requirement, which order terminates on March 1, 2012 ("Temporary Exemption Order");
AND WHEREAS the Commission had determined that the Temporary Exemption Order would, among other things, provide time for the Commission to assess the impact of the proposed Fixed Income CCP Service on Ontario's capital markets and consider an appropriate regulatory framework for CDCC as a result;
AND WHEREAS because the Fixed-Income CCP Service is anticipated to serve an important capital market activity in fixed-income trades of significant values which has a significant nexus to Ontario, the Commission will require more time to assess the impact of the proposed Fixed Income CCP Service on Ontario's capital markets and consider an appropriate regulatory framework for CDCC as a result;
AND WHEREAS CDCC has also filed an application with the Commission pursuant to section 144 of the Act requesting that the Commission vary and restate the Temporary Exemption Order to extend CDCC's temporary exemption from the Recognition Requirement;
AND WHEREAS the launch of Phase 1 of the Fixed Income CCP Service is scheduled to occur in February 2012;
AND WHEREAS based on the representations and application of CDCC and other factors, the Commission has determined that extending CDCC's Temporary Exemption Order subject to additional terms and conditions would not be prejudicial to the public interest;
IT IS HEREBY ORDERED by the Commission, pursuant to section 147 of the Act, that CDCC be exempt from the requirement to be recognized as a clearing agency under section 21.2 of the Act;
Provided that:
A. CDCC complies with the terms and conditions attached hereto as Schedule "A";
B. this Temporary Exemption Order shall terminate on the earlier of
(i) the date that the Commission renders a final order recognizing CDCC as a clearing agency under subsection 21.2 (0.1) of the Act or exempting it from the requirement to be recognized as a clearing agency under section 147 of the Act, and
(ii) March 1, 2013.
DATED at Toronto February 15, 2011, as varied on February 14, 2012.
SCHEDULE "A"
Terms and Conditions
1. CDCC continues to be recognized as a SRO under the QSA or is and remains recognized as a clearing house under section 14 of the QDA.
2. CDCC shall continue to comply with the following:
a) provide to Commission staff, concurrently with the AMF, copies of all Rules that it files for review and approval with the AMF and provide copies of all final Rules to Commission staff in both English and French;
b) provide to Commission staff, concurrently with the AMF, copies of all audited financial statements and reports prepared by an independent auditor in respect of CDCC's financial situation and operations;
c) provide to Commission staff, concurrently with the AMF, the report on its annual independent systems review, copies of all internal risk management reports intended for its members and any outside report, including any audit report prepared in accordance with the Canadian Institute of Chartered Accountants Handbook, on the results of an examination or review of CDCC's risk management policies, controls and standards undertaken by an independent person;
d) provide to Commission staff, concurrently with the AMF, prompt notification of any material failures or changes to its systems;
e) provide to Commission staff, concurrently with the AMF, prompt notification of any material problems with the clearance and settlement of transactions in contracts traded on the Bourse, including any failure by a member of CDCC to promptly fulfil its settlement obligations that could materially affect the operations or financial situation of CDCC;
f) promote fair access to CDCC and will not unreasonably prohibit or limit access by a person or company to services offered by CDCC; and
g) promote within CDCC a corporate governance structure that minimizes the potential for any conflict of interest between the Bourse and CDCC that could adversely affect the clearance and settlement of trades in contracts or the effectiveness of CDCC's risk management policies, controls and standards.
3. CDCC shall, concurrently with the AMF and BOC or as soon as practicable, update Commission staff on a regular and timely basis on the progress of the development and implementation of the Fixed Income CCP Service and any other proposed new CCP service for OTC derivatives.
4. Prior to the launch of Phase 1 of the Fixed Income CCP Service, CDCC shall provide written confirmation to Commission staff of its readiness to proceed with the implementation of Phase 1 and inform the Commission as soon as possible of the industry sign-off for the "go-live" by CDS and the CDCC clearing members that will participate in the Fixed Income CCP Service.
5. With respect to each stage of Phase 1 of the implementation of the Fixed Income CCP Service as described in the Bring-On Strategy Document, CDCC shall provide written confirmation to Commission staff prior to moving to the next stage of the Phase 1 implementation that all exit criteria of the previous stage and all entrance criteria of the next stage have been met.
6. CDCC shall provide to Commission staff by March 31, 2012 a written analysis of its default procedures that address the inter-dependence between CDCC and CDS Clearing and Depository Services Inc. ("CDS"), particularly any potential conflicts with the default procedures of CDS.
7. CDCC shall provide written confirmation to Commission staff by February 29, 2012, that CDCC has sufficient staffing with the requisite expertise in place to support the Fixed Income CCP Service and that annual or more frequent reviews will take place to ensure CDCC continues to meet the required staffing levels as the Fixed Income CCP Service evolves.
8. CDCC shall promptly notify Commission staff of any material systems failure, malfunction or delay or any material project-related issue that may impact the Fixed Income CCP Service.
9. CDCC shall provide Commission staff with the following statistical information in respect of transactions cleared and settled through the Fixed Income CCP Service during each month not later than thirty (30) days after the end of such month.
a) Total number of settled CCP repo transactions divided by ISIN
b) Total net settlement value of settled CCP repo transactions divided by ISIN
c) Total number of unsettled / failed CCP repo transactions divided by ISIN, together with a brief description for the reasons for such failures
d) Total net settlement value of unsettled / failed CCP repo transactions divided by ISIN
e) Total number and net dollar value of all net settlement positions (NSPs) for future-dated end leg CCP repo transactions, separated into five buckets and divided by ISIN in the following manner:
(i) value date being anywhere from T+1 to a date that is less than or equal to 3 months from T+0;
(ii) value date being anywhere from a date that is after 3 months from T+0 to a date that is less than or equal to 6 months from T+0;
(iii) value date being anywhere from a date that is after 6 months from T+0 to a date that is less than or equal to 9 months from T+0;
(iv) value date being anywhere from a date that is after 9 months from T+0 to a date that is less than or equal to 12 months from T+0; and
(v) value date being after 12 months from T+0.
10. CDCC shall seek the Commission's prior written approval before commencing any new CCP service that would reasonably be considered to be outside the scope of the Current CCP Services (excluding, however, any new CCP service relating to derivatives traded on the Bourse) or that of Phase 1 of the Fixed Income CCP Service.
11. CDCC shall provide such information as may be requested from time to time by, and otherwise cooperate with, the Commission and its staff.
12. CDCC shall share information and otherwise cooperate with CDS as appropriate in connection with the operation of the Fixed Income CCP Service (subject to applicable privacy and confidentiality requirements).