Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. - s. 38

Headnote

The Applicants will offer to certain of their clients in Ontario (Institutional Clients) the ability to trade in futures contracts that trade on exchanges located outside Canada through the Applicant. The Institutional Clients are the same as "designated institutions" as that term is defined in section 204(1) of Ont. Reg. 1015 General Regulation made under the Securities Act (Ontario) (OSA).

Relief granted to permit the Applicant to execute trades in exchange-traded futures for its own account as well as those placed by its Institutional Clients in Ontario on a basis that it is exempt from registration, except that the Applicant is, and will continue to be, registered as an international dealer under the OSA.

Statutes Cited

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., s. 38.

IN THE MATTER OF

THE COMMODITY FUTURES ACT,

R.S.O. 1990, c. C.20

(the "Act")

AND

IN THE MATTER OF

MERRILL LYNCH, PIERCE,

FENNER & SMITH INCORPORATED

AND

MERRILL LYNCH PROFESSIONAL CLEARING CORP.

ORDER

(Section 38 of the Act)

UPON the application (the Application) of Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch U.S.) and Merrill Lynch Professional Clearing Corp. (Merrill Lynch Pro) (collectively, the Applicants) to the Ontario Securities Commission (the Commission), in connection with trades (Futures Trades) in commodity futures contracts and options on commodity futures contracts (collectively, Futures Contracts) that trade on certain exchanges located outside Canada (Exchange Traded Futures) by its clients in Ontario that fall within the category of investors listed in Appendix I to this Order (Institutional Clients), for an order pursuant to section 38 of the Act;

AND UPON the Applicants having represented to the Commission as follows:

1. Merrill Lynch U.S. is a corporation incorporated under the laws of the state of Delaware. Its head office is located in New York, New York, United States of America.

2. Merrill Lynch U.S. is a wholly owned, indirect subsidiary of Merrill Lynch & Co., Inc. Merrill Lynch U.S. is an affiliate of (i) Merrill Lynch Canada Inc., which is registered as an investment dealer (or equivalent) in all provinces of Canada; and (ii) Merrill Lynch & Co. Canada Inc., which is a public company having its shares listed and traded on the Toronto Stock Exchange.

3. Merrill Lynch U.S. is registered as a broker-dealer and investment adviser with the U.S. Securities and Exchange Commission (U.S. SEC), a member of the Financial Industry Regulatory Authority (FINRA), a registered futures commission merchant with the United States Commodity Futures Trading Commission (U.S. CFTC), and a member of the U.S. National Futures Association (U.S. NFA).

4. In the United States, Merrill Lynch U.S. acts as a broker for corporate, institutional, government and other clients and as a dealer in the purchase and sale of corporate securities, mutual funds, money market instruments, government securities, high yield bonds, municipal securities, financial futures contracts and options. Merrill Lynch U.S. also provides a variety of financial services, including underwriting, financing, private placements, financial planning services, investment and custodial services, and advisory services.

5. Merrill Lynch U.S. is also a clearing member of the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange and other domestic United States exchanges.

6. Merrill Lynch U.S. is registered under the Securities Act (Ontario) (the OSA) as a dealer in the categories of international dealer and limited market dealer and as an adviser in the categories of non-Canadian adviser and international adviser.

7. Merrill Lynch Pro is a corporation incorporated under the laws of the state of Delaware. Its head office is located in New York, New York, United States of America.

8. Merrill Lynch Pro is a wholly owned subsidiary of Merrill Lynch U.S.

9. Merrill Lynch Pro is registered as a broker-dealer with the U.S. SEC and is a member of FINRA, a registered futures commission merchant with the U.S. CFTC, and a member of the U.S. NFA.

10. Merrill Lynch Pro provides securities clearing services for affiliated and unaffiliated broker-dealers. Merrill Lynch Pro is involved in the prime brokerage business of Merrill Lynch U.S. and also makes a market in listed option contracts on various options exchanges.

11. Merrill Lynch Pro is also a clearing member of the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange and other domestic United States exchanges.

12. Merrill Lynch Pro is registered under the OSA as an international dealer.

13. The Applicants propose to offer certain of their Institutional Clients in Ontario the ability to trade in Exchange-Traded Futures through the Applicants.

14. The Applicants will solicit business in Ontario only from persons who qualify as Institutional Clients.

15. The Applicants will not provide securities advice to the Institutional Clients, and currently do not, and do not intend to, act as an adviser to the Institutional Clients.

16. Institutional Clients of the Applicants will only be offered the ability to trade Exchange-Traded Futures trading on exchanges located outside Canada (the Recognized Exchanges).

17. The Exchange-Traded Futures to be traded by Institutional Clients will include, but will not be limited to, Futures Contracts for equity index, interest rate, energy, agricultural and other commodity products.

18. Institutional Clients will be able to execute trades in Exchange-Traded Futures through the Applicants by contacting the particular Applicant's exchange floor staff or global execution desk. Institutional Clients may also be able to self execute trades electronically in Exchange Traded Futures via an independent service vendor and/or other electronic trading routing.

19. The Applicants may execute a client's order on the relevant Recognized Exchange in accordance with the rules and customary practices of the exchange, or engage another broker to assist in the execution of orders. The Applicants will remain responsible for the execution of each such trade.

20. The Applicants may perform both execution and clearing functions for Futures Trades or may direct that a trade executed by the Applicants be cleared through a carrying broker if the particular Applicant is not a member of the Recognized Exchange on which the trade is executed. Alternatively, the client will be able to direct that trades executed by the particular Applicant be cleared through clearing brokers not affiliated with the Applicants in any way (each a Non-ML Clearing Broker).

21. If the particular Applicant performs only the execution of a client's Futures Contract order and "gives-up" the transaction for clearance to a Non-ML Clearing Broker, such clearing broker will also be required to comply with the rules of the exchanges of which it is a member and any relevant regulatory requirements, including requirements under the Act as applicable. Each such Non-ML Clearing Broker will represent to the particular Applicant in a give-up agreement that it will perform its obligations in accordance with applicable laws, governmental, regulatory, self-regulatory, exchange and clearing house rules and the customs and usages of the exchange or clearing house on which the relevant client's Futures Contract orders will be executed and cleared. The Applicants will not enter into a give-up agreement with any Non-ML Clearing Broker located in the United States unless such clearing broker is registered with the U.S. CFTC and/or U.S. SEC, as applicable.

22. As is customary for all trading in Exchange-Traded Futures, a clearing corporation appointed by the exchange or clearing division of the exchange is substituted as a universal counterparty on all trades in Futures Contracts and client orders are submitted to the exchange in the name of the Non-ML Clearing Broker or the particular Applicant or, on exchanges where the particular Applicant is not a member, in the name of another carrying broker. The client is responsible to the particular Applicant for payment of daily mark-to-market variation margin and/or proper margin to carry open positions and the particular Applicant, the carrying broker or the Non-ML Clearing Broker is in turn responsible to the clearing corporation/division for payment.

23. Clients that direct the particular Applicant to give up transactions in Exchange-Traded Futures for clearance and settlement by Non-ML Clearing Brokers will execute the give-up agreements described above.

24. Clients will pay commissions for trades to the Applicants or the Non-ML Clearing Broker or such commissions may be shared with the Non-ML Clearing Broker.

25. As futures commission merchants subject to regulatory oversight by the U.S. CFTC, the Applicants are required to ensure that customer positions and monies be separately accounted for and segregated from the positions and monies of the particular Applicant. The U.S. CFTC regulations are designed to protect customers in the event of insolvency or financial instability of a futures commission merchant through which they clear their futures and futures options business. The Applicants receive acknowledgements from those of its banks and brokers holding the particular Applicant's client funds that such funds are to be separately held on behalf of the Applicant's clients, with no right of set-off against the Applicant's obligations or debts.

AND UPON considering the Application and the recommendation of Staff of the Commission;

AND UPON the Commission being satisfied that it would not be prejudicial to the public interest to grant the order requested;

IT IS ORDERED pursuant to section 38 of the Act that the Applicants be exempted from the dealer registration requirements set out in the Act in connection with Exchange-Traded Futures with its clients in Ontario that fall within the category of Institutional Clients, provided that:

(a) at the time trading activity is engaged in:

(i) Merrill Lynch U.S. and Merrill Lynch Pro are registered with the U.S. SEC as a broker-dealer and with the U.S. CFTC as futures commission merchants and are members of the U.S. NFA and FINRA in good standing; and

(ii) the Applicants are either registered as an international dealer under the OSA or are exempted from registration as an international dealer in accordance with applicable Ontario securities law;

(b) each client in Ontario effecting Futures Trades is an Institutional Client and, if using a Non-ML Clearing Broker, has represented and covenanted that the broker is or will be appropriately registered or exempt from registration under the Act;

(c) the Applicants only execute Futures Trades for Ontario clients on exchanges located outside Canada, unless such Futures Trades are routed through an agent that is a dealer registered in Ontario under the Act; and

(d) each client in Ontario effecting Futures Trades receives disclosure upon entering into the agreement by which it establishes an account with the particular Applicant that includes:

(i) a statement that there may be difficulty in enforcing any legal rights against the Applicant or any of its directors, officers or employees because they are resident outside of Canada and all or substantially all of their assets are situated outside of Canada; and

(ii) a statement that the Applicant is not registered under Ontario commodities futures legislation and, accordingly, the protection available to clients of a dealer registered under such commodities futures legislation will not be available to clients of the Applicant.

October 17, 2008

Appendix 1

INSTITUTIONAL CLIENTS

In this Order, "Institutional Client" means:

a) a financial intermediary;

b) the Federal Business Development Bank;

c) a subsidiary of any company referred to in clause (a) or (b), where the company beneficially owns all of the voting securities of the subsidiary;

d) the Government of Canada or any province or territory of Canada;

e) any municipal corporation or public board or commission in Canada;

f) a mutual fund, other than a private mutual fund, having net assets of at least $5,000,000;

g) a trusteed pension plan or fund sponsored by an employer for the benefit of its employees and having net assets of at least $5,000,000;

h) a registered dealer;

i) a company or person, other than an individual, that is an accredited investor as defined in section 1.1 of National Instrument 45-106 Prospectus and Registration Exemptions; and

j) a person or company deemed to be a "designated institution" under subsection 204(2) of Ont. Reg. 1015 -- General Regulation made under the Securities Act (Ontario).