Newedge USA, LLC -- s. 38 of the Act and s. 6.1 of Rule 91-502 Trades in Recognized Options
Headnote
Application to the Commission pursuant to section 38 of the Commodity Futures Act (Ontario) (CFA) for a ruling that the Applicant be exempted from the dealer registration requirement in paragraph 22(1)(a) and the prohibition against trading on non-recognized exchanges in section 33 of the CFA. Applicant will offer the ability to trade in commodity futures contracts and commodity futures options that trade on exchanges located outside Canada to certain of its clients in Ontario who meet the definition of "permitted client" in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Application to the Director for an exemption, pursuant to section 6.1 of OSC Rule 91-502 Trades in Recognized Options (Rule 91-502), exempting the Applicant and its Representatives from the proficiency requirements in section 3.1 of Rule 91-502 for trades in commodity futures options on exchanges located outside Canada.
Statutes Cited
Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 22, 33, 38.
Securities Act, R.S.O. 1990, c. S.5, as am.
Rules Cited
Ontario Securities Commission Rule 91-502 Trades in Recognized Options, ss. 3.1, 6.1.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 8.18.
IN THE MATTER OF
THE COMMODITY FUTURES ACT,
R.S.O. 1990, c. C. 20, AS AMENDED
(the Act)
AND
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
(the OSA)
AND
ONTARIO SECURITIES COMMISSION
RULE 91-502 TRADES IN RECOGNIZED OPTIONS
(RULE 91-502)
AND
IN THE MATTER OF
NEWEDGE USA, LLC
RULING AND EXEMPTION
(Section 38 of the Act and Section 6.1 of Rule 91-502)
UPON the application (the Application) of Newedge USA, LLC (the Applicant) to the Ontario Securities Commission (the Commission) for:
(a) a ruling of the Commission, pursuant to section 38 of the Act, that the Applicant is not subject to the dealer registration requirement in the Act (as defined below) or the trading restrictions in the Act (as defined below), in respect of Futures Trades (as defined below) on Non-Canadian Exchanges (as defined below), where the Applicant is acting as principal or agent in such trades to, from or on behalf of Permitted Clients (as defined below);
(b) a ruling of the Commission, pursuant to section 38 of the Act, that a Permitted Client is not subject to the dealer registration requirement or the trade restrictions in the Act in respect of Future Trades on Non-Canadian Exchanges, where the Applicant acts in respect of Future Trades on behalf of the Permitted Client pursuant to the above ruling; and
(c) a decision of the Director, pursuant to section 6.1 of OSC Rule 91-502, exempting the Applicant, and its salespersons, directors, officers and employees (the Representatives), from section 3.1 of Rule 91-502, in respect of Futures Trades;
AND WHEREAS for the purposes of this ruling and exemption (collectively, the Decision):
(i) "CFTC" means the United States Commodity Futures Trading Commission;
"contract" means a commodity futures contract or a commodity futures option that trades on one or more organized exchanges located outside of Canada and is cleared through one or more clearing corporations located outside of Canada;
"dealer registration requirement in the Act" means the provisions of section 22 of the Act that prohibit a person or company from trading in a contract unless the person or company satisfies the applicable provisions of section 22 of the Act;
"FINRA" means the Financial Industry Regulatory Authority in the USA;
"Futures Trade" means a trade in a contract;
"NI 31-103" means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;
"NFA" means the National Futures Association in the USA;
"Non-Canadian Exchange" means an exchange located outside of Canada;
"Permitted Client" means, a client in Ontario that is a "permitted client" as that term is defined in section 1.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;
"SEC" means the Securities and Exchange Commission of the USA;
"specified affiliate" has the meaning ascribed to that term in Form 33-109F6 to National Instrument 33-109 Registration Information;
"trading restrictions in the Act" means the provisions of section 33 of the Act that prohibit a person or company from trading in a contract unless the person or company satisfies the applicable provisions of that section;
"USA" means the United States of America; and
(ii) terms used in this Decision that are defined in the OSA, and not otherwise defined in this Decision or the Act, shall have the same meaning as in the OSA, unless the context otherwise requires;
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON the Applicant having represented to the Commission and the Director as follows:
1. The Applicant is a limited liability company organized under the laws of the State of Delaware, USA. The Applicant's head office is located in Chicago, Illinois, USA.
2. The Applicant is a subsidiary of Newedge Group SA and an affiliate of Newedge Canada Inc. (Newedge Canada).
3. Newedge Canada is registered under the OSA as an "investment dealer", and under the Act as a "futures commission merchant".
4. The Applicant is registered as a "securities broker-dealer" with the SEC and is a member of FINRA. The Applicant is a member of several major securities and commodity future exchanges, including the New York Stock Exchange, the NASDAQ Stock Market and the Chicago Board Options Exchange.
5. The Applicant is registered as a "futures commission merchant" with the CFTC, and is a member of the NFA.
6. The Applicant is a clearing firm member of the CME Group (including the Board of Trade of the City of Chicago, Inc., the Chicago Mercantile Exchange Inc., the New York Mercantile Exchange, Inc., and the Commodity Exchange, Inc.); and it trades through affiliated or unaffiliated member firms on other exchanges, including exchanges in Canada, France, Italy, Japan, Singapore, Spain, Taiwan, Mexico, Korea and the UK.
7. Pursuant to its registrations and memberships, the Applicant is authorized to handle customer orders and receive and hold customer margin deposits, and otherwise act as a futures broker, in the USA. Rules of the CFTC and NFA require the Applicant to maintain adequate capital levels; make and keep specified types of records relating to customer accounts and transactions; and comply with other forms of customer protection rules, including rules respecting: know-your-customer obligations, account-opening requirements, suitability requirements, anti-money laundering checks, credit checks, delivery of confirmation statements, clearing deposits, and initial and maintenance margins. These rules do not permit the Applicant to treat Permitted Clients materially differently from its customers in the USA. With respect to transactions made on exchanges in the USA, in order to protect customers in the event of its insolvency or financial instability, the Applicant is required to ensure that customer securities and monies be separately accounted for, segregated at all times from the securities and monies of the Applicant, and custodied exclusively with such banks, trust companies, clearing organizations or other licensed futures brokers or intermediaries as may be approved for such purposes under the Commodity Exchange Act of the USA and the rules promulgated by the CFTC thereunder (collectively, the Newedge Approved Depositories). The Applicant is further required to obtain acknowledgements from any Newedge Approved Depository holding customer funds or securities related to US-based transactions or accounts that such funds and securities are to be separately held on behalf of such customers, with no right of set-off against the Applicant's obligations or debts.
8. The Applicant is not registered in any capacity under the Act or the OSA.
9. The Applicant proposes to offer to certain persons and companies in Ontario that meet the definition of a "permitted client" in section 1.1 of NI 31-103 the ability to effect or execute Futures Trades through the Applicant.
10. The Applicant will not maintain an office, sales force or physical place of business in Ontario.
11. The Applicant will solicit business in Ontario only from persons or companies who meet the definition of a "permitted client" in section 1.1 of NI 31-103.
12. The Permitted Clients of the Applicant will only be offered the ability to effect Futures Trades on Non-Canadian Exchanges.
13. The contracts that may be traded by Permitted Clients in Futures Trades will include, but will not be limited to, contracts for equity index, interest rate, energy, agricultural and other commodity products.
14. Permitted Clients of the Applicant will be able to execute Futures Trades through the Applicant by contacting the Applicant's exchange floor staff or global execution desk. Permitted Clients may also be able to self-execute Futures Trades electronically via an independent service vendor and/or other electronic trading routing.
15. The Applicant may execute a Permitted Client's order on the relevant Non-Canadian Exchange in accordance with the rules and customary practices of the exchange, or engage another broker to assist in the execution of the order. The Applicant will remain responsible for the execution of the trade.
16. The Applicant may perform both execution and clearing functions for Futures Trades or may direct that a trade executed by it be cleared through a carrying broker if the Applicant is not a member of the Non-Canadian Exchange on which the trade is executed. Alternatively, the Permitted Client of the Applicant will be able to direct that trades executed by the Applicant be cleared through clearing brokers not affiliated with the Applicant in any way (each, a Non-Newedge Clearing Broker).
17. If the Applicant performs only the execution of a Permitted Client's contract order and "gives-up" the transaction for clearance to a Non-Newedge 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-Newedge Clearing Broker will represent to the Applicant, in an industry-standard 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 Permitted Client's contract orders will be executed and cleared. The Applicant will not enter into a give-up agreement with any Non-Newedge Clearing Broker located in the USA unless such clearing broker is registered with the CFTC and/or the SEC, as applicable.
18. As is customary, for all Futures Trades, a clearing corporation appointed by the exchange or clearing division of the exchange is substituted as a universal counterparty for all Permitted Client orders that are submitted to the exchange in the name of the Non-Newedge Clearing Broker or the Applicant or, on exchanges where the Applicant is not a member, in the name of another carrying broker. The Permitted Client of the Applicant is responsible to the Applicant for payment of daily mark-to-market variation margin and/or proper margin to carry open positions; and the Applicant, the carrying broker or the Non-Newedge Clearing Broker is, in turn, responsible to the clearing corporation/division for payment.
19. Permitted Clients that direct the Applicant to give up transactions in contracts for clearance and settlement by Non-Newedge Clearing Brokers will execute the give-up agreements described above.
20. Permitted Clients will pay commissions for trades to the Applicant or the Non-Newedge Clearing Broker, or such commissions may be shared with the Non-Newedge Clearing Broker.
21. Under section 33 of the Act, the prohibition against trading contracts does not apply to contracts traded on a commodity futures exchange registered by the Commission or recognized by the Commission under Part X of the Act, if the form of the contracts has been approved by the Director under Part X of the Act. To date, no Non-Canadian Exchanges have been recognized or registered under the Act.
22. If the Applicant were registered under the Act as a "futures commission merchant", it could rely upon certain exemptions from the trading restrictions in the Act to effect trades in contracts to be entered on certain Non-Canadian Exchanges.
23. The Applicant will execute and clear Future Trades on behalf of Permitted Clients in the same manner that it executes and clears trades on behalf of its clients in the USA. The Applicant will follow the same know-your-customer and client classification procedures that it follows in respect of its clients in the USA. Permitted Clients will be afforded the benefits of compliance by the Applicant with the statutory and other requirements of applicable securities regulators, self-regulatory organizations and exchanges located in the USA.
24. Permitted Clients of the Applicant will have the same contractual rights against the Applicant as USA clients of the Applicant.
25. Section 3.1 of Rule 91-502 provides that no person shall trade as agent in, or give advice in respect of, a recognized option, as defined in section 1.1 of Rule 91-502, unless he or she has successfully completed the Canadian Options Course (which has been replaced by the Derivatives Fundamentals Course and the Options Licensing Course).
26. All Representatives of the Applicant who trade options in the USA have passed the National Commodity Futures Examination (Series 3), being the relevant futures and options proficiency examination administered by FINRA.
AND UPON the Commission and Director being satisfied that it would not be prejudicial to the public interest to do so;
IT IS RULED, pursuant to section 38 of the Act, that the Applicant is not subject to the dealer registration requirement in the Act or the trading restrictions in the Act in respect of Futures Trades where the Applicant is acting as principal or agent in such trades to, from or on behalf of Permitted Clients, provided that:
(a) each client effecting Futures Trades is a Permitted Client and, if using a Non-Newedge Clearing Broker, has represented and covenanted that the broker is or will be appropriately registered or exempt from registration under the Act;
(b) the Applicant only executes and clears Futures Trades for Permitted Clients on Non-Canadian Exchanges;
(c) at the time trading activity is engaged in, the Applicant:
(i) has its head office or principal place of business in the USA;
(ii) is registered as "futures commission merchant" with the CFTC in good standing;
(iii) is a member in good standing with the NFA; and
(iv) engages in the business of a futures commission merchant in contracts in the USA;
(d) the Applicant has provided to the Permitted Client the following disclosure in writing:
(i) a statement that the Applicant is not registered in Ontario to trade in commodity futures contracts or commodity futures options as principal or agent;
(ii) a statement that the Applicant's head office or principal place of business is located in Chicago, Illinois, USA;
(iii) a statement that all or substantially all of the Applicant's assets may be situated outside of Canada;
(iv) a statement that there may be difficulty enforcing legal rights against the Applicant because of the above; and
(v) the name and address of the Applicant's agent for service of process in Ontario;
(e) the Applicant has submitted to the Commission a completed Submission to Jurisdiction and Appointment of Agent for Service in the form attached as Appendix A;
(f) the Applicant notifies the Commission of any regulatory action after the date of this ruling in respect of the Applicant, or any predecessors, or specified affiliates of the Applicant, by completing and filing with the Commission Appendix B hereto within ten days of the commencement of such action;
(g) by December 1 of each year, the Applicant notifies the Commission of its continued reliance on the exemption from the dealer registration requirement granted pursuant to the Ruling; and
(h) this Ruling shall expire five years after the date hereof.
AND IT IS FURTHER RULED, pursuant to section 38 of the Act, that a Permitted Client is not subject to the dealer registration requirement in the Act or the trading restrictions in the Act in respect of Future Trades on Non-Canadian Exchanges, where the Applicant acts in respect of the Future Trades on behalf of the Permitted Client pursuant to the above ruling.
March 5, 2013
IT IS THE DECISION of the Director, pursuant to section 6.1 of Rule 91-502, that section 3.1 of Rule 91-502 does not apply to the Applicant or its Representatives in respect of Future Trades, provided that:
(a) the Applicant and the Representatives maintain their respective registrations with the CFTC and NFA which permit them to trade commodity futures options in the USA; and
(b) this Decision shall expire five years after the date hereof.
March 5, 2013
APPENDIX A
SUBMISSION TO JURISDICTION AND APPOINTMENT OF AGENT FOR SERVICE
INTERNATIONAL DEALER OR INTERNATIONAL ADVISER EXEMPTED
FROM REGISTRATION UNDER THE COMMODITY FUTURES ACT, ONTARIO
1. Name of person or company ("International Firm"):
2. If the International Firm was previously assigned an NRD number as a registered firm or an unregistered exempt international firm, provide the NRD number of the firm:
3. Jurisdiction of incorporation of the International Firm:
4. Head office address of the International Firm:
5. The name, e-mail address, phone number and fax number of the International Firm's individual(s) responsible for the supervisory procedure of the International Firm, its chief compliance officer, or equivalent.
Name:
E-mail address:
Phone:
Fax:
6. The International Firm is relying on an exemption order under section 38 or section 80 of the Commodity Futures Act (Ontario) that is similar to the following exemption in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (the "Relief Order"):
[ ] Section 8.18 [international dealer]
[ ] Section 8.26 [international adviser]
[ ] Other [specify]:
7. Name of agent for service of process (the "Agent for Service"):
8. Address for service of process on the Agent for Service:
9. The International Firm designates and appoints the Agent for Service at the address stated above as its agent upon whom may be served a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal or other proceeding (a "Proceeding") arising out of or relating to or concerning the International Firm's activities in the local jurisdiction and irrevocably waives any right to raise as a defence in any such proceeding any alleged lack of jurisdiction to bring such Proceeding.
10. The International Firm irrevocably and unconditionally submits to the non-exclusive jurisdiction of the judicial, quasi-judicial and administrative tribunals of the local jurisdiction in any Proceeding arising out of or related to or concerning the International Firm's activities in the local jurisdiction.
11. Until 6 years after the International Firm ceases to rely on the Relief Order, the International Firm must submit to the regulator
a. a new Submission to Jurisdiction and Appointment of Agent for Service in this form no later than the 30th day before the date this Submission to Jurisdiction and Appointment of Agent for Service is terminated; and
b. an amended Submission to Jurisdiction and Appointment of Agent for Service no later than the 30th day before any change in the name or above address of the Agent for Service.
12. This Submission to Jurisdiction and Appointment of Agent for Service is governed by and construed in accordance with the laws of the local jurisdiction.
Dated: __________________________
________________________________
(Signature of the International Firm or authorized signatory)
________________________________
(Name of signatory)
________________________________
(Title of signatory)
Acceptance
The undersigned accepts the appointment as Agent for Service of ____________________ [Insert name of International Firm] under the terms and conditions of the foregoing Submission to Jurisdiction and Appointment of Agent for Service.
Dated: __________________________
_______________________________
(Signature of the Agent for Service or authorized signatory)
_______________________________
(Name of signatory)
_______________________________
(Title of signatory)
This form is to be submitted to the following address:
Ontario Securities CommissionSuite 1903, Box 5520 Queen Street WestToronto, ON M5H 3S8Attention: Registration Supervisor, Dealer TeamTelephone: (416) 593-8314email: [email protected]
APPENDIX B
NOTICE OF REGULATORY ACTION
1. Has the firm, or any predecessors or specified affiliates{1} of the firm entered into a settlement agreement with any financial services regulator, securities or derivatives exchange, SRO or similar agreement with any financial services regulator, securities or derivatives exchange, SRO or similar organization?
|
Yes _____ |
No _____ |
If yes, provide the following information for each settlement agreement:
Name of entity
Regulator/organization
Date of settlement (yyyy/mm/dd)
Details of settlement
Jurisdiction
2. Has any financial services regulator ,securities or derivatives exchange, SRO or similar organization:
Yes
No
(a) Determined that the firm, or any predecessors or specified affiliates of the firm violated any securities regulations or any rules of a securities or derivatives exchange, SRO or similar organization?
___
___
(b) Determined that the firm, or any predecessors or specified affiliates of the firm made a false statement or omission?
___
___
(c) Issued a warning or requested an undertaking by the firm, or any predecessors or specified affiliates of the firm?
___
___
(d) Suspended or terminated any registration, licensing or membership of the firm, or any predecessors or specified affiliates of the firm?
___
___
(e) Imposed terms or conditions on any registration or membership of the firm, or predecessors or specified affiliates of the firm?
___
___
(f) Conducted a proceeding or investigation involving the firm, or any predecessors or specified affiliates of the firm?
___
___
(g) Issued an order (other than en exemption order) or a sanction to the firm, or any predecessors or specified affiliates of the firm for securities or derivatives-related activity (e.g. cease trade order)?
___
___
If yes, provide the following information for each action:
Name of Entity
Type of Action
Regulator/organization
Date of action (yyyy/mm/dd)
Reason for action
Jurisdiction
3. Is the firm aware of any ongoing investigation of which the firm or any of its specified affiliate is the subject?
|
Yes _____ |
No _____ |
If yes, provide the following information for each investigation:
Name of entity
Reason or purpose of investigation
Regulator/organization
Date investigation commenced (yyyy/mm/dd)
Jurisdiction
Name of firm
Name of firm's authorized signing officer or partner
Title of firm's authorized signing officer or partner
Signature
Date (yyyy/mm/dd)
Witness
The witness must be a lawyer, notary public or commissioner of oaths.
Name of witness
Title of witness
Signature
Date (yyyy/mm/dd)
This form is to be submitted to the following address:
Ontario Securities CommissionSuite 1903, Box 5520 Queen Street WestToronto, ON M5H 3S8Attention: Registration Supervisor, Dealer TeamTelephone: (416) 593-8314email: [email protected]
{1} In this Appendix, the term "specified affiliate" has the meaning ascribed to that term in Form 33-109F6 to National Instrument 33-109 Registration Information.