TJM Institutional Services LLC – s. 38 of the CFA and s. 6.1 of OSC 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. As an introducing broker, the Applicant will offer the ability to trade in commodity futures contracts and commodity futures options that trade on exchanges located outside of Canada and that are cleared through clearing corporations located outside of 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 (OSC Rule 91-502) exempting the Applicant and its Representatives from the proficiency requirements in section 3.1 of OSC Rule 91-502 for trades in commodity futures options on exchanges located outside of Canada.

Applicable Legislative Provisions

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 22, 33 and 38.
Securities Act, R.S.O. 1990, c. S.5, as am.
Ontario Securities Commission Rule 91-502 Trades in Recognized Options, ss. 3.1 and 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 CFA)

AND

IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
(the OSA)

AND

IN THE MATTER OF
ONTARIO SECURITIES COMMISSION RULE 91-502
TRADES IN RECOGNIZED OPTIONS
(Rule 91-502)

AND

IN THE MATTER OF
TJM INSTITUTIONAL SERVICES LLC

RULING & EXEMPTION
(Section 38 of the CFA and Section 6.1 of Rule 91-502)

UPON the application (the Application) of TJM Institutional Services LLC (the Applicant) to the Ontario Securities Commission (the Commission) for:

(a)           a ruling of the Ontario Securities Commission (the Commission), pursuant to section 38 of the CFA, that the Applicant is not subject to the dealer registration requirements in section 22 of the CFA (the dealer registration requirements in the CFA) or the trading restrictions in section 33 of the CFA (the trading restrictions in the CFA) in connection with trades in commodity futures contracts or commodity futures options that trade on one or more organized exchanges located outside of Canada and cleared through one or more clearing corporations located outside of Canada (Exchange-Traded Futures) on exchanges located outside Canada (Non-Canadian Exchanges) where the Applicant is acting as principal or agent in such trades to, from or on behalf of clients in Ontario who are Permitted Clients (as defined below);

(b)           a ruling of the Commission, pursuant to section 38 of the CFA, that a Permitted Client is not subject to the dealer registration requirements in the CFA or the trading restrictions in the CFA in connection with trades in Exchange-Traded Futures on Non-Canadian Exchanges, where the Applicant acts in respect of the trades in Exchange-Traded Futures on behalf of the Permitted Client; and

(c)           a decision of the Director, pursuant to section 6.1 of OSC Rule 91-502 Trades in Recognized Options (Rule 91-502), exempting the Applicant and its salespersons, directors, officers and employees, (the Representatives) from Section 3.1 of Rule 91-502 in connection with trades in Exchange-Traded Futures;

AND WHEREAS for the purposes of this ruling and exemption (collectively, the Decision):

(i)            “CEA” means the United States Commodity Exchange Act;

“CFTC” means the United States Commodity Futures Trading Commission;

“FINRA” means the Financial Industry Regulatory Authority in the United States;

“NI 31-103” means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;

“NFA” means the National Futures Association in the United States;

“Permitted Client” means a client in Ontario that is a “permitted client” as that term is defined in section 1.1 of NI 31-103;

“SEC” means the United States Securities and Exchange Commission;

“specified affiliate” has the meaning ascribed to that term in Form 33-109F6 to National Instrument 33-109 Registration Information;

(ii)           terms used in this Decision that are defined in the Securities Act (Ontario) (OSA), and not otherwise defined in this Decision or in the CFA, 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 formed under the laws of Delaware with its head office in Chicago, Illinois.

2.             The Applicant engages in the business of execution and introduction for clearing for institutional clients only.

3.             The Applicant is wholly owned by its holding company, TJM Holdings, LLC.

4.             The Applicant is not a reporting issuer in any jurisdiction in Canada.

5.             The Applicant is not registered in any capacity under the CFA or the OSA and does not rely on any exemption from registration in Canada.

6.             The Applicant is registered as a futures introducing broker (IB) with the CFTC.

7.             The Applicant is a member of the NFA.

8.             The Applicant is a member of the Chicago Mercantile Exchange.

9.             The Applicant is not in default of securities or commodity futures legislation in any jurisdiction in Canada. The Applicant is in compliance in all material respects with US commodity futures laws.

Activities

10.          The Applicant solicits and accepts orders for trades in Exchange-Traded Futures and either: (a) introduces them to another broker for execution and clearing or (b) executes (under a sponsored access arrangement) and submits for clearing trades in Exchange-Traded Futures for customers on exchanges globally through affiliated or unaffiliated member firms on other exchanges.

11.          Pursuant to its registrations and memberships, the Applicant is authorized to solicit, accept, and execute customer orders, and otherwise act as a futures execution-only broker, in the US. The Applicant is also authorized to solicit and accept customer orders and introduce them to an executing broker registered as a futures commission merchant in the US. 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 including confirmations and statements, 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 and best execution. These rules do not permit the Applicant to treat Permitted Clients materially differently from the Applicant’s US customers. In respect of Exchange-Traded Futures, the Applicant does not provide clearing services nor is it authorised to receive or hold client money in any jurisdiction.

12.          The Applicant proposes to offer certain of its Permitted Clients in Ontario the ability to trade in Exchange-Traded Futures through the Applicant, in its role as introducing broker.

13.          The Applicant will solicit and accept orders for trades in Exchange-Traded Futures on behalf of Permitted Clients in Ontario in the same manner that it solicits and accepts orders for Exchange-Traded Futures on behalf of its US clients, all of which are "Eligible Contract Participants" as defined in the CEA. The Applicant will follow the same know-your-customer, suitability and order handling procedures that it follows in respect of its US clients. Permitted Clients will be afforded the benefits of compliance by the Applicant with the statutory and other requirements of applicable securities and commodity futures regulators, self-regulatory organizations and exchanges located in the US. Permitted Clients in Ontario will have the same contractual rights against the Applicant as US clients of the Applicant.

14.          The Applicant will not maintain an office, sales force or physical place of business in Ontario.

15.          The Applicant will solicit and accept orders for trades in Exchange-Traded Futures in Ontario only from persons who qualify as Permitted Clients.

16.          The Applicant will only offer Permitted Clients in Ontario the ability to effect trades in Exchange-Traded Futures on Non-Canadian Exchanges.

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

18.          Permitted Clients of the Applicant in Ontario will be able to trade Exchange-Traded Futures through the Applicant by communicating with the Applicant's authorized Representatives or via the Applicant's proprietary electronic order routing system. Permitted Clients may also be able to self-execute trades in Exchange-Traded Futures electronically via an independent service vendor and/or other electronic trading order routing systems.

19.          The Applicant may execute a customer's order on the relevant Non-Canadian Exchange in accordance with the rules and customary practices of the exchange, or engage an executing broker registered as a futures commission merchant to assist in the execution of orders. The Applicant will remain responsible for all executions. As the Applicant will only perform the execution of a Permitted Client's contract order and "give-up" the transaction for clearance to the Permitted Client's carrying broker or clearing broker (each, a Clearing Broker), such broker will also be required to comply with any relevant regulatory requirements, including requirements under the CFA as applicable. Each 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 orders will be executed and/or cleared. The Applicant will not enter into a give-up agreement with any carrying broker or clearing broker located in the US unless such broker is registered with the CFTC and the US Securities and Exchange Commission.

20.          As is customary for all trades 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 Exchange-Traded Futures and Permitted Client orders submitted to the exchange in the name of the 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 Clearing Broker for payment of daily mark-to-market variation margin and/or proper margin to carry open positions and the Clearing Broker is in turn responsible to the clearing corporation/division for payment.

21.          Permitted Clients will pay commissions for trades to the Applicant for its role as introducing broker and Permitted Clients shall be responsible to pay any commissions to their Clearing Broker directly, if applicable.

22.          The trading restrictions in the CFA apply unless, among other things, an Exchange-Traded Future is traded on a recognized or registered commodity futures exchange and the form of the contract is approved by the Director. To date, no Non-Canadian Exchanges have been recognized or registered under the CFA.

23.          If the Applicant were registered under the CFA as a "futures commission merchant", it could rely upon certain exemptions from the trading restrictions in the CFA to effect trades in Exchange-Traded Futures to be entered into on certain Non-Canadian Exchanges.

24.          Section 3.1 of Rule 91-502 states that any person who trades as agent in, or gives advice in respect of, a recognized option as defined in section 1.1 of Rule 91-502 is required to successfully complete the Canadian Options Course (which has been replaced by the Derivatives Fundamentals Course and the Options Licensing Course).

25.          All Representatives of the Applicant who trade commodity futures and options in the U.S. 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 the 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 CFA, that the Applicant is not subject to the dealer registration requirement in the CFA or the trading restrictions in the CFA in connection with trades in Exchange-Traded Futures on Non-Canadian Exchanges 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 trades in Exchange-Traded Futures is a Permitted Client;

(b)           the executing broker and the clearing broker have each represented and covenanted to the Applicant, and the Applicant has taken reasonable steps to verify, that the broker is or will be appropriately registered under the CFA, or has been granted exemptive relief from registration under the CFA, in connection with the Permitted Client effecting trades in Exchange-Traded Futures;

(c)           the Applicant only introduces and/or executes and submits for clearing trades in Exchange-Traded Futures for Permitted Clients on Non-Canadian Exchanges;

(d)           at the time trading activity is engaged, the Applicant:

(i)            has its head office or principal place of business in the US;

(ii)           is registered as an IB with the CFTC;

(iii)           is a member of the NFA; and

(iv)          engages in the business of an IB in Exchange-Traded Futures in the US;

(e)           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 Exchange-Traded Futures as principal or agent;

(ii)           a statement specifying the location of the Applicant’s head office or principal place of business;

(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;

(f)            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;

(g)           the Applicant notifies the Commission of any regulatory action initiated 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 any such action; provided that, the Applicant may satisfy this condition by filing with the Commission (A) a copy of any notice filed by the Applicant pursuant to CFTC Regulation 1.12(k), (l) or (m) at the same time such notice is filed with the CFTC and the NFA, and (B) on a quarterly basis, (1) a copy of the regulatory actions appearing on the Applicant’s NFA Background Affiliation Status Information Center (BASIC) page and (2) a copy of any disclosures that would be required to be reported by the Applicant in the Regulatory Disclosures section of the Applicant’s Annual Registration Update to the NFA;

(h)           if the Applicant does not rely on the international dealer exemption in section 8.18 of NI 31-103 (the IDE), by December 31st of each year, the Applicant pays a participation fee based on its specified Ontario revenues for its previous financial year in compliance with the requirements of Part 3 and section 6.4 of OSC Rule 13-502 Fees, as if the Applicant relied on the IDE;

(i)            by December 1st of each year, the Applicant notifies the Commission of its continued reliance on the exemption from the dealer registration requirement granted pursuant to this Decision; and

This Decision will terminate on the earliest of:

(i)            the expiry of any such transition period as may be provided by law, after the effective date of the repeal of the CFA;

(ii)           six months, or such other such transition period as provided by law, after the coming into force of any amendments to Ontario commodity futures law or Ontario securities law (as defined in the OSA) that affects the dealer registration requirements in the CFA or the trading restrictions in the CFA; and

(iii)           five years after the date hereof.

AND IT IS FURTHER RULED, pursuant to section 38 of the CFA, that a Permitted Client is not subject to the dealer registration requirements in the CFA or the trading restrictions in the CFA in connection with trades in Exchange-Traded Futures on Non-Canadian Exchanges where the Applicant acts in connection with trades in Exchange-Traded Futures on behalf of the Permitted Clients pursuant to the above ruling.

Date: May 31, 2019

“Heather Zordel”                                                  “Cecilia Williams”
Commissioner                                                     Commissioner
Ontario Securities Commission                        Ontario Securities Commission

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 and its Representatives in respect of trades in Exchange-Traded Futures, provided that:

(a)           the Applicant and its Representatives maintain their respective registrations with the CFTC and membership with the NFA which permit them to trade commodity futures options in the United States; and

(b)           This Decision will terminate on the earliest of:

(i)            the expiry of any such transition period as may be provided by law, after the effective date of the repeal of the CFA;

(ii)           six months, or such other transition period as may be provided by law, after the coming into force of any amendment to Ontario commodity futures law (as defined in the CFA) or Ontario securities law (as defined in the OSA) that affects the dealer registration requirement in the CFA or the trading restrictions in the CFA; and

(iii)           five years after the date of this Decision.

Date: June 4, 2019

“Felicia Tedesco”
Deputy Director
Ontario Securities Commission

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;

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;

c.             a notice detailing a change to any information submitted in this form, other than the name or above address of the Agent for Service, no later than the 30th day after the change.

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, and notice of a change to any information submitted in this form, is to be submitted through the Ontario Securities Commission’s Electronic Filing Portal:

https://www.osc.gov.on.ca/filings

APPENDIX “B”

NOTICE OF REGULATORY ACTION

1.             Has the firm, or any predecessors or specified affiliates 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:

2.             Has any financial services regulator, securities or derivatives exchange, SRO or similar organization:

If yes, provide the following information for each action:

3.             Is the firm aware of any ongoing investigation of which the firm or any of its specified affiliates is the subject?

Yes _____ No _____

If yes, provide the following information for each investigation:

Witness

The witness must be a lawyer, notary public or commissioner of oaths.

This form is to be submitted through the Ontario Securities Commission’s Electronic Filing Portal:

https://www.osc.gov.on.ca/filings