OTCX Trading Limited – s. 147
Headnote
Section 147 of the Securities Act (Ontario), section 15.1 of NI 21-101, section 12.1 of NI 23-101 and section 10 of NI 23-103 -- Application for an order that a multilateral trading facility authorized by the United Kingdom's Financial Conduct Authority to be exempt from the requirement to be recognized as an exchange in Ontario and from the requirements of NI 21-101, NI 23-101 and NI 23-103 in their entirety -- requested order granted.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21, 147.
National Instrument 21-101 Marketplace Operation, s. 15.1.
National Instrument 23-101 Trading Rules, s. 12.1.
National Instrument 23-103 Electronic Trading and Direct Electronic Access to Marketplaces, s. 10.
IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, CHAPTER S. 5, AS AMENDED (the Act) AND IN THE MATTER OF OTCX TRADING LIMITED
ORDER (Section 147 of the Act)
WHEREAS OTCX Trading Limited (Applicant) has filed an application dated May 01, 2024 (Application) with the Ontario Securities Commission (Commission) requesting an order for the following relief (collectively, the Requested Relief):
(a) exempting the Applicant from the requirement to be recognized as an exchange under subsection 21(1) of the Act pursuant to section 147 of the Act; and
(b) exempting the Applicant from the requirements in National Instrument 21-101 Marketplace Operation (NI 21-101) pursuant to section 15.1 of NI 21-101, the requirements of National Instrument 23-101 Trading Rules (NI 23-101) pursuant to section 12.1 of NI 23-101 and the requirements of National Instrument 23-103 Electronic Trading and Direct Electronic Access to Marketplaces (NI 23-103) pursuant to section 10 of NI 23-103;
AND WHEREAS the Applicant has represented to the Commission that:
1. The Applicant is a private limited company organized under the laws of England and Wales. The ultimate parent company of the Applicant is OTCX Limited, a private limited company organized under the laws of England and Wales;
2. OTCX Trading Limited provides electronic trading capabilities in OTC derivatives and structured products;
3. On July 24, 2023 the U.K. Financial Conduct Authority (the FCA or Foreign Regulator), a financial regulatory body in the United Kingdom (U.K.), authorized the Applicant to act as the operator of the OTCX UK MTF, which is a multilateral trading facility (MTF). The Applicant currently has approval from the FCA to offer the following products for trading on the OTCX UK MTF: UK MiFID Financial Instruments; C4 Derivatives (interest rate, other interest rate, equity) and C8 Credit Derivatives (credit default swaps, total return swaps, constant maturity swaps). The OTCX UK MTF began operations on December 11, 2023. Structured products do not trade on the OTCX UK MTF and are not part of this order;
4. The financial products included in this order are single and multi-currency interest rate swaps, overnight index swaps, inflation swaps, swaptions, forward rate agreements, constant maturity swaps, caps/floors and total return swaps, which are either approved by the FCA or are subject to the requirements established by the FCA. The above product set will be restricted to Ontario Users unless otherwise approved by the Commission;
5. The OTCX UK MTF supports a request for quote trading platform for trading derivatives;
6. The Applicant is subject to regulatory supervision by the FCA and is required to comply with the FCA's Handbook, which includes rules on business conduct, market conduct, systems controls, technical resilience, fair and orderly trading and identifying and managing conflicts of interest;
7. The FCA has direct regulatory oversight of U.K. MTFs, and OTCX is subject to the FCA's threshold conditions and principles. The FCA Handbook has specific MTF requirements, including reporting to the FCA any significant breaches of MTF rules, disorderly trading conditions and market abuse. As a result, OTCX UK MTF operates real-time trade surveillance with policies and procedures to escalate potential breaches.
OTCX has the following policies and procedures to monitor participants' adherence to these FCA rules:
- a compliance monitoring program that reviews activity in respect of compliance with the MTF rulebook that results in immediately notifying the FCA any significant breaches of MTF rules; and
- operational and compliance procedures to detect disorderly trading, system disruptions and conduct that may involve market abuse and notify the FCA immediately if detected.
8. An MTF must submit all trades that are required or requested to be cleared to a clearing house for clearing. OTCX UK MTF provides connectivity to LCH Limited and CME Inc via established third party middleware. For Ontario clients LCH Limited is a recognized clearing agency and CME is an exempted clearing agency by the OSC, and consequently both can provide clearing services for interest rate swaps directly to Ontario users;
9. The Applicant requires that its participants be "professional clients" or "eligible counterparties," as defined by the FCA in COBS 3 of the FCA Handbook. OTCX UK MTF has onboarding requirements and procedures to ensure that regulatory, compliance, operational and technical set up is completed before participants are enabled to participate on the venue. These include know your client, anti-money laundering checks and subsequent verification of conduct and technical capabilities as required by the Applicant's rulebook;
10. All participants that are located in Ontario, including participants with their headquarters or legal address in Ontario (e.g., as indicated by a participant's Legal Entity Identifier (LEI)) and all traders conducting transactions on its behalf, regardless of the traders' physical location (inclusive of non-Ontario branches of Ontario legal entities), as well as any trader physically located in Ontario who conducts transactions on behalf of any other entity (Ontario Participants) are required to be registered under Ontario securities laws, exempt from registration or not subject to registration requirements. All participants are permitted clients as defined by National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. An Ontario Participant is required to immediately notify the Applicant if it ceases to meet any of the above criteria represented by it on an ongoing basis;
11. Because an MTF regulates the conduct of its participants, OTCX UK MTF is considered by the Commission to be an exchange for purposes of the Act;
12. Because the Applicant has participants that are Ontario Participants, it is considered by the Commission to be carrying on business as an exchange in Ontario and is required to be recognized as such or exempted from recognition pursuant to section 21 of the Act;
13. The Applicant has no physical presence in Ontario and does not otherwise carry on business in Ontario except as described above;
14. OTCX UK MTF does not offer access to retail clients; and
15. The Applicant satisfies the exemption criteria as described in Appendix I to Schedule "A".
AND WHEREAS the products traded on the OTCX UK MTF are not commodity futures contracts as defined in the Commodity Futures Act (Ontario) and the Applicant is not considered to be carrying on business as a commodity futures exchange in Ontario;
AND WHEREAS the Commission will monitor developments in international and domestic capital markets and the Applicant's activities on an ongoing basis to determine whether it is appropriate for the Requested Relief to continue to be granted subject to the terms and conditions set out in Schedule "A" to this order;
AND WHEREAS the Applicant has acknowledged to the Commission that the scope of the Requested Relief and the terms and conditions imposed by the Commission set out in Schedule "A" to this order, or the determination whether it is appropriate that the Applicant continue to be exempted from the requirement to be recognized as an exchange, may change as a result of the Commission's monitoring of developments in international and domestic capital markets or the Applicant's activities, or as a result of any changes to the laws in Ontario affecting trading in derivatives or securities;
AND WHEREAS based on the Application, together with the representations made by and acknowledgments of the Applicant to the Commission, the Commission has determined that the Applicant satisfies the criteria set out in Appendix I to Schedule "A" and that the granting of the Requested Relief would not be prejudicial to the public interest;
IT IS HEREBY ORDERED by the Commission that
(i) pursuant to section 147 of the Act, the Applicant is exempt from recognition as an exchange under subsection 21(1) of the Act; and
(ii) pursuant to sections 15.1 of NI 21-101, 12.1 of NI 23-101 and 10 of NI 23-103, the Applicant is exempt from the requirements in NI 21-101, NI 23-101 and NI 23-103.
PROVIDED THAT the Applicant complies with the terms and conditions contained in Schedule "A".
DATED September 13, 2024
SCHEDULE "A"
TERMS AND CONDITIONS
Meeting Criteria for Exemption
1. The Applicant will continue to meet the criteria for exemption included in Appendix I to this Schedule.
Regulation and Oversight of the Applicant
2. The Applicant will maintain its permission to operate a multilateral trading facility (MTF) with the Financial Conduct Authority (FCA) in the United Kingdom (U.K.) and will continue to be subject to the regulatory oversight of the FCA.
3. The Applicant will continue to comply with the ongoing requirements applicable to it as the operator of an MTF registered with the FCA.
4. The Applicant will promptly notify the Commission if its authorization as the operator of an MTF has been revoked, suspended, or amended by the FCA, or the basis on which its authorization as an operator has been granted has significantly changed.
5. The Applicant must do everything within its control, which includes cooperating with the Commission as needed, to carry out its activities in compliance with Ontario securities law.
Access
6. The Applicant will not provide direct access to a participant in Ontario including a participant with its headquarters or legal address in Ontario (e.g., as indicated by a participant's Legal Entity Identifier (LEI)) and all traders conducting transactions on its behalf, regardless of the traders' physical location (inclusive of non-Ontario branches of Ontario legal entities), as well as any trader physically located in Ontario who conducts transactions on behalf of any other entity (Ontario User) unless the Ontario User is appropriately registered under Ontario securities laws or is exempt from or not subject to those requirements, and qualifies as a "professional client" or an "eligible counterparty", as defined by the FCA in COBS 3 of the FCA's Handbook.
7. Before being provided direct access to the Applicant, the Applicant will confirm that each Ontario User is a non-individual "permitted client" as that term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Retail customers and natural persons will not be provided with access to the Applicant.
8. For each Ontario User provided direct access to its MTF, the Applicant will require, as part of its application documentation or continued access to the MTF, the Ontario User to represent that it is appropriately registered under Ontario securities laws or is exempt from or not subject to those requirements.
9. The Applicant may reasonably rely on a written representation from the Ontario User that specifies either that it is appropriately registered under Ontario securities laws or is exempt from or not subject to those requirements, provided the Applicant notifies such Ontario User that this representation is deemed to be repeated each time it enters an order, request for quote or response to a request for quote or otherwise uses the Applicant's MTF.
10. The Applicant will require Ontario Users to notify the Applicant if their registration as applicable under Ontario securities laws has been revoked, suspended, or amended by the Commission or if they are no longer exempt from or become subject to those requirements and, following notice from the Ontario User and subject to applicable laws, the Applicant will promptly restrict the Ontario User's access to the Applicant's MTF if the Ontario User is no longer appropriately registered or exempt from those requirements.
Trading by Ontario Users
11. The Applicant will not provide access to an Ontario User to trading in products other than the Approved Products set out in Representation 4, without prior Commission approval.
12. Trading in the Approved Products by Ontario Users must be cleared and settled through a clearing agency or clearing house that is regulated as a clearing agency or clearing house by the applicable regulator.
Submission to Jurisdiction and Agent for Service
13. With respect to a proceeding brought by the Commission arising out of, related to, concerning or in any other manner connected with the Commission's regulation and oversight of the activities of the Applicant in Ontario, the Applicant will submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario.
14. The Applicant will submit to the Commission a valid and binding appointment of an agent for service in Ontario upon whom the Commission may serve a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding arising out of, related to, concerning or in any other manner connected with the Commission's regulation and oversight of the Applicant's activities in Ontario.
Prompt Reporting
15. The Applicant will notify staff of the Commission promptly of any if:
(a) any authorization to carry on business granted by the FCA is revoked or suspended or made subject to terms or conditions on the Applicant's operations;
(b) the Applicant institutes a petition for a judgment of bankruptcy or insolvency or similar relief, or to wind up or liquidate the Applicant or has a proceeding for any such petition instituted against it;
(c) a receiver is appointed for the Applicant or the Applicant makes any voluntary arrangement with creditors;
(d) there is a material change to the Applicant's ownership or the ownership of a parent company of the Applicant;
(e) the Applicant is not in compliance with this Order or with any applicable requirements, laws or regulations of the FCA where it is required to report such non-compliance to the FCA;
(f) any known investigations of, or disciplinary action against, the Applicant by the FCA or any other regulatory authority to which it is subject; and
(g) the Applicant makes any material change to the eligibility criteria for Ontario Users.
Semi-Annual Reporting
16. The Applicant will maintain the following updated information and submit such information in a manner and form acceptable to the Commission on a semi-annual basis (by July 31 for the first half of the calendar year and by January 31 of the following year for the second half), and at any time promptly upon the request of staff of the Commission:
(a) a current list of all Ontario Users and whether the Ontario User is registered under Ontario securities laws or is exempt from or not subject to registration, and, to the extent known by the Applicant, other persons or companies located in Ontario trading on the Applicant's MTF as customers of participants (Other Ontario Participants);
(b) the LEI assigned to each Ontario User, and, to the extent known by the Applicant, to Other Ontario Participants in accordance with the standards set by the Global Legal Entity Identifier System;
(c) a list of all Ontario Users whom the Applicant has referred to the FCA, or, to the best of the Applicant's knowledge, whom have been disciplined by the FCA with respect to such Ontario Users' activities on the MTF and the aggregate number of all participants referred to the FCA since the previous report by the Applicant;
(d) a list of all active investigations since the previous report by the Applicant relating to Ontario Users and the aggregate number of active investigations since the previous report relating to all participants undertaken by the Applicant;
(e) a list of all Ontario applicants for status as a participant who were denied such status or access to the Applicant since the previous report, together with the reasons for each such denial; and
(f) for each product,
(i) the total trading volume and value originating from Ontario Users, and, to the extent known by the Applicant, from Other Ontario Participants, presented on a per Ontario User or per Other Ontario Participant basis; and
(ii) the proportion of worldwide trading volume and value on the Applicant's MTF conducted by Ontario Users, and, to the extent known by the Applicant, by Other Ontario Participants, presented in the aggregate for such Ontario Users and Other Ontario Participants;
provided in the required format.
Information Sharing
16. The Applicant will provide and, if applicable, cause its regulation services provider (RSP) to provide such information as may be requested from time to time by, and otherwise cooperate with, the Commission or its staff, subject to any applicable privacy or other laws (including solicitor-client privilege) governing the sharing of information and the protection of personal information.
APPENDIX I
CRITERIA FOR EXEMPTION OF A FOREIGN EXCHANGE TRADING OTC DERIVATIVES FROM RECOGNITION AS AN EXCHANGE
PART 1 REGULATION OF THE EXCHANGE
1.1 Regulation of the Exchange
The exchange is regulated in an appropriate manner in another jurisdiction by a foreign regulator (Foreign Regulator).
1.2 Authority of the Foreign Regulator
The Foreign Regulator has the appropriate authority and procedures for oversight of the exchange. This includes regular, periodic oversight reviews of the exchange by the Foreign Regulator.
PART 2 GOVERNANCE
2.1 Governance
The governance structure and governance arrangements of the exchange ensure:
(a) effective oversight of the exchange,
(b) that business and regulatory decisions are in keeping with its public interest mandate,
(c) fair, meaningful and diverse representation on the board of directors (Board) and any committees of the Board, including:
(i) appropriate representation of independent directors, and
(ii) a proper balance among the interests of the different persons or companies using the services and facilities of the exchange,
(d) the exchange has policies and procedures to appropriately identify and manage conflicts of interest for all officers, directors and employees, and
(e) there are appropriate qualifications, remuneration, limitation of liability and indemnity provisions for directors, officers and employees of the exchange.
2.2 Fitness
The exchange has policies and procedures under which it will take reasonable steps, and has taken such reasonable steps, to ensure that each director and officer is a fit and proper person and past conduct of each officer or director affords reasonable grounds for belief that the officer or director will perform his or her duties with integrity.
PART 3 REGULATION OF PRODUCTS
3.1 Review and Approval of Products
The products traded on the exchange and any changes thereto are submitted to the Foreign Regulator, and are either approved by the Foreign Regulator or are subject to requirements established by the Foreign Regulator that must be met before implementation of a product or changes to a product.
3.2 Product Specifications
The terms and conditions of trading the products are in conformity with the usual commercial customs and practices for the trading of such products.
3.3 Risks Associated with Trading Products
The exchange maintains adequate provisions to measure, manage and mitigate the risks associated with trading products on the exchange that may include, but are not limited to, daily trading limits, price limits, position limits, and internal controls.
PART 4 ACCESS
4.1 Fair Access
(a) The exchange has established appropriate written standards for access to its services including requirements to ensure
(i) participants are appropriately registered as applicable under Ontario securities laws, or exempted from these requirements,
(ii) the competence, integrity and authority of systems users, and
(iii) systems users are adequately supervised.
(b) The access standards and the process for obtaining, limiting and denying access are fair, transparent and applied reasonably.
(c) The exchange does not unreasonably prohibit, condition or limit access by a person or company to services offered by it.
(d) The exchange does not
(i) permit unreasonable discrimination among participants, or
(ii) impose any burden on competition that is not reasonably necessary and appropriate.
(e) The exchange keeps records of each grant and each denial or limitation of access, including reasons for granting, denying or limiting access.
PART 5 REGULATION OF PARTICIPANTS ON THE EXCHANGE
5.1 Regulation
The exchange has the authority, resources, capabilities, systems and processes to allow it to perform its regulation functions, whether directly or indirectly through a regulation services provider, including setting requirements governing the conduct of its participants, monitoring their conduct, and appropriately disciplining them for violations of exchange requirements.
PART 6 RULEMAKING
6.1 Purpose of Rules
(a) The exchange has rules, policies and other similar instruments (Rules) that are designed to appropriately govern the operations and activities of participants and do not permit unreasonable discrimination among participants or impose any burden on competition that is not reasonably necessary or appropriate.
(b) The Rules are not contrary to the public interest and are designed to
(i) ensure compliance with applicable legislation,
(ii) prevent fraudulent and manipulative acts and practices,
(iii) promote just and equitable principles of trade,
(iv) foster co-operation and co-ordination with persons or companies engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in the products traded on the exchange,
(v) provide a framework for disciplinary and enforcement actions, and
(vi) ensure a fair and orderly market.
PART 7 DUE PROCESS
7.1 Due Process
For any decision made by the exchange that affects a participant, or an applicant to be a participant, including a decision in relation to access, exemptions, or discipline, the exchange ensures that:
(a) parties are given an opportunity to be heard or make representations, and
(b) it keeps a record of, gives reasons for, and provides for appeals or reviews of its decisions.
PART 8 CLEARING AND SETTLEMENT
8.1 Clearing Arrangements
The exchange has or requires its participants to have appropriate arrangements for the clearing and settlement of transactions for which clearing is mandatory through a clearing house.
8.2 Risk Management of Clearing House
The exchange has assured itself that the clearing house has established appropriate risk management policies and procedures, contingency plans, default procedures and internal controls.
PART 9 SYSTEMS AND TECHNOLOGY
9.1 Systems and Technology
Each of the exchange's critical systems has appropriate internal controls to ensure completeness, accuracy, integrity and security of information, and, in addition, has sufficient capacity and business continuity plans to enable the exchange to properly carry on its business. Critical systems are those that support the following functions:
(a) order entry,
(b) order routing,
(c) execution,
(d) trade reporting,
(e) trade comparison,
(f) data feeds,
(g) market surveillance,
(h) trade clearing, and
(i) financial reporting.
9.2 System Capability/Scalability
Without limiting the generality of section 9.1, for each of its systems supporting order entry, order routing, execution, data feeds, trade reporting and trade comparison, the exchange:
(a) makes reasonable current and future capacity estimates;
(b) conducts capacity stress tests to determine the ability of those systems to process transactions in an accurate, timely and efficient manner;
(c) reviews the vulnerability of those systems and data centre computer operations to internal and external threats, including physical hazards and natural disasters;
(d) ensures that safeguards that protect a system against unauthorized access, internal failures, human errors, attacks and natural catastrophes that might cause improper disclosures, modification, destruction or denial of service are subject to an independent and ongoing audit which should include the physical environment, system capacity, operating system testing, documentation, internal controls and contingency plans;
(e) ensures that the configuration of the system has been reviewed to identify potential points of failure, lack of back-up and redundant capabilities;
(f) maintains reasonable procedures to review and keep current the development and testing methodology of those systems; and
(g) maintains reasonable back-up, contingency and business continuity plans, disaster recovery plans and internal controls.
9.3 Information Technology Risk Management Procedures
The exchange has appropriate risk management procedures in place including those that handle trading errors, trading halts and respond to market disruptions and disorderly trading.
PART 10 FINANCIAL VIABILITY
10.1 Financial Viability
The exchange has sufficient financial resources for the proper performance of its functions and to meet its responsibilities.
PART 11 TRADING PRACTICES
11.1 Trading Practices
Trading practices are fair, properly supervised and not contrary to the public interest.
11.2 Orders
Rules pertaining to order size and limits are fair and equitable to all market participants and the system for accepting and distinguishing between and executing different types of orders is fair, equitable and transparent.
11.3 Transparency
The exchange has adequate arrangements to record and publish accurate and timely information as required by applicable law or the Foreign Regulator. This information is also provided to all participants on an equitable basis.
PART 12 COMPLIANCE, SURVEILLANCE AND ENFORCEMENT
12.1 Jurisdiction
The exchange or the Foreign Regulator has the jurisdiction to perform member and market regulation, including the ability to set rules, conduct compliance reviews and perform surveillance and enforcement.
12.2 Member and Market Regulation
The exchange or the Foreign Regulator maintains appropriate systems, resources and procedures for evaluating compliance with exchange and legislative requirements and for disciplining participants.
12.3 Availability of Information to Regulators
The exchange has mechanisms in place to ensure that the information necessary to conduct adequate surveillance of the system for supervisory or enforcement purposes is available to the relevant regulatory authorities, including the Commission, on a timely basis.
PART 13 RECORD KEEPING
13.1 Record Keeping
The exchange has and maintains adequate systems in place for the keeping of books and records, including, but not limited to, those concerning the operations of the exchange, audit trail information on all trades, and compliance with, and/or violations of exchange requirements.
PART 14 OUTSOURCING
14.1 Outsourcing
Where the exchange has outsourced any of its key services or systems to a service provider, it has appropriate and formal arrangements and processes in place that permit it to meet its obligations and that are in accordance with industry best practices.
PART 15 FEES
15.1 Fees
(a) All fees imposed by the exchange are reasonable and equitably allocated and do not have the effect of creating an unreasonable condition or limit on access by participants to the services offered by the exchange.
(b) The process for setting fees is fair and appropriate, and the fee model is transparent.
PART 16 INFORMATION SHARING AND OVERSIGHT ARRANGEMENTS
16.1 Information Sharing and Regulatory Cooperation
The exchange has mechanisms in place to enable it to share information and otherwise co-operate with the Commission, self- regulatory organizations, other exchanges, clearing agencies, investor protection funds, and other appropriate regulatory bodies.
16.2 Oversight Arrangements
Satisfactory information sharing and oversight agreements exist between the Commission and the Foreign Regulator.
PART 17 IOSCO PRINCIPLES
17.1 IOSCO Principles
To the extent it is consistent with the laws of the foreign jurisdiction, the exchange adheres to the standards of the International Organization of Securities Commissions (IOSCO) including those set out in the "Principles for the Regulation and Supervision of Commodity Derivatives Markets" (2022).