UBS Securities LLC - s. 38 of the CFA and s. 6.1 of OSC Rule 91-502 Trades in Recognized Options
The Applicant will offer to certain of its clients in Ontario (Institutional Clients) the ability to trade in futures contracts and options 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 and options 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.
Rule 91-502 Trades in Recognized Options, as am., ss. 3.1, 6.1.
IN THE MATTER OF
THE COMMODITY FUTURES ACT,
R.S.O. 1990, c. C.20
(the Act)
AND
IN THE MATTER OF
ONTARIO SECURITIES COMMISSION
RULE 91-502 TRADES IN RECOGNIZED OPTIONS
(the Rule)
AND
IN THE MATTER OF
UBS SECURITIES LLC
ORDER AND RULING
(Section 38 of the Act and Section 6.1 of the Rule)
UPON the application (the Application) of UBS Securities LLC (the Applicant) to the Ontario Securities Commission (the Commission), in connection with trades (Futures Trades) in commodity futures contracts and options on commodity futures contracts (Options Trades) (collectively, Futures Contracts) that trade on certain exchanges located outside Canada (Exchange Traded Futures), and options on securities and options on securities indices (collectively, Options) by certain of its clients 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 to the Director for an order pursuant to section 6.1 of the Rule for relief from section 3.1 of the Rule for certain trades in options.
AND UPON the Applicant having represented to the Commission as follows:
1. The Applicant is a limited liability company under the laws of the state of Delaware in the United States of America. The Applicant's head office is located at 677 Washington Boulevard, Stamford, Connecticut, USA 06901.
2. The Applicant is an integrated investment bank whose clients include financial institutions, corporations, governments and individuals. The Applicant provides its clients with a broad range of financial products and services. UBS Securities Canada Inc., an Ontario corporation, is registered as an investment dealer and broker under the Securities Act (Ontario) (the OSA) and as a dealer under the Act, but does not act as a broker for Futures Trades or Options Trades.
3. The Applicant is a broker-dealer registered 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 U.S. Commodity Futures Trading Commission (U.S. CFTC), and a member of the U.S. National Futures Association (U.S. NFA).
4. The Applicant is one of 23 firms registered with the Federal Reserve Bank of New York as a primary dealer in U.S. Government securities. It is a market maker for U.S. agency securities and acts as broker for customers buying and selling equity and/or debt securities, and as a broker for futures and options on futures contracts. Its clients include financial institutions, corporations and hedge funds.
5. The Applicant is a member of all major securities and futures exchanges in the United States.
6. The Applicant is registered under the OSA as an international dealer and has attorned to the jurisdiction of the courts of Ontario and appointed an agent for service in Ontario.
7. The Applicant proposes to offer certain of its Institutional Clients in Ontario the ability to trade in Exchange-Traded Futures and Options through the Applicant. The Applicant will offer Ontario clients execution and, unless the client has directed otherwise, clearing broker services for trades in Futures Trades and Options Trades, in each case listed on exchanges located outside Canada (the Recognized Exchanges) and cleared through clearing corporations outside of Canada.
8. The Ontario clients that place orders with the Applicant will qualify as Institutional Clients.
9. 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.
10. Institutional Clients will be able to execute trades in Exchange-Traded Futures through the Applicant by contacting the 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.
11. The Applicant may perform both execution and clearing functions. If it is a member of the exchange on which the trade will be made, the Applicant executes the client order on the exchange in accordance with the rules and customary practice of the exchange. If it is not a member of the exchange on which the trade will be made, the Applicant will engage a local broker, which may be an affiliate of the Applicant, to assist in the execution and clearance of trades. The Applicant remains responsible for the execution and, unless the client has directed otherwise, clearance of each Futures Trade or Options Trade.
12. Alternatively, the client 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-UBS Clearing Broker). If the Applicant performs only the execution of a client's Futures Contract order and "gives-up" the transaction for clearance to a Non-UBS 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, which may include know-your-customer obligations, account opening, suitability, anti-money laundering checks, credit checks, delivery of confirmation statements, clearing deposits, initial and maintenance margins, custody of clients' funds and interaction with the relevant clearing corporation, among other things. Each such Non-UBS Clearing Broker will represent to the 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 Applicant will not enter into a give-up agreement with any Non-UBS 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.
13. 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-UBS Clearing Broker or the Applicant or, on exchanges where the Applicant is not a member, in the name of another carrying broker. The client 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-UBS Clearing Broker is in turn responsible to the clearing corporation/division for payment.
14. Clients that direct the Applicant to give up transactions in Exchange-Traded Futures for clearance and settlement by Non-UBS Clearing Brokers will execute the give-up agreements described above.
15. Clients will pay commissions for trades to the Applicant or the Non-UBS Clearing Broker or such commissions may be shared with the Non-UBS Clearing Broker.
AND UPON considering the Application and the recommendation of Staff of the Commission;
AND UPON the Commission and Director 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 Applicant 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) the Applicant is registered with the U.S. SEC as a broker-dealer and with the U.S. CFTC as a futures commission merchant and is a member of FINRA and the U.S. NFA in good standing; and
(ii) the Applicant is registered as an international dealer under the Securities Act (Ontario);
(b) each client in Ontario effecting Futures Trades is an Institutional Client and, if using a Non-UBS Clearing Broker, has represented and covenanted that the broker is or will be appropriately registered or exempt from registration under the Act;
(c) the Applicant only executes 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 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.
August 22, 2008
AND IT IS ORDERED pursuant to Section 6.1 of the Rule that Section 3.1 of the Rule does not apply to the Applicant in respect of Options Trades, provided that the Applicant continues to be permitted to trade options in the United States.
August 22, 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).