Canadian Derivatives Clearing Corporation -- s. 144
Headnote
Application under section 144 of the Securities Act (Ontario) (OSA) to further vary and restate a temporary order exempting Canadian Derivatives Clearing Corporation from the requirement in subsection 21.2(0.1) of the Act to be recognized as a clearing agency.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21.2(0.1), 144.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
(the "Act")
AND
IN THE MATTER OF
CANADIAN DERIVATIVES CLEARING CORPORATION
("CDCC")
SECOND VARIATION TO THE TEMPORARY EXEMPTION ORDER
(Section 144 of the Act)
WHEREAS the Ontario Securities Commission (Commission) issued an order (Temporary Exemption Order) dated February 15, 2011 pursuant to section 147 of the Act temporarily exempting CDCC from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the Act;
AND WHEREAS the Commission issued an order dated February 14, 2012 (First Variation Order) pursuant to section 144 of the Act varying and restating the Temporary Exemption Order to extend CDCC's temporary exemption and to amend its terms and conditions in Schedule "A" thereto;
AND WHEREAS the Temporary Exemption Order, as varied and restated by the First Variation Order, will terminate on March 1, 2013 unless further extended by order of the Commission;
AND WHEREAS the Commission has received an application from CDCC pursuant to section 144 of the Act requesting that the Commission further vary and restate the Temporary Exemption Order, as varied and restated by the First Variation Order, to further extend CDCC's temporary exemption from the requirement to be recognized as a clearing agency pursuant to subsection 21.2(0.1) of the Act and to amend its terms and conditions in Schedule "A" thereto;
AND WHEREAS the Commission has received certain representations from CDCC in connection with the application to further vary and restate the Temporary Exemption Order, as varied and restated by the First Variation Order;
AND WHEREAS the Commission has considered these representations, CDCC's application, and other factors;
AND WHEREAS the Commission has determined that it is not prejudicial to the public interest to issue this order that further varies and restates the Temporary Exemption Order, as varied and restated by the First Variation Order, to further extend CDCC's temporary exemption from the requirement to be recognized as a clearing agency pursuant to subsection 21.2(0.1) of the Act and to amend its terms and conditions in Schedule "A" thereto;
IT IS ORDERED, pursuant to section 144 of the Act, that the Temporary Exemption Order, as varied and restated by the First Variation Order, be further varied and restated as follows:
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
(the "Act")
AND
IN THE MATTER OF
CANADIAN DERIVATIVES CLEARING CORPORATION
ORDER
(section 147 of the Act)
WHEREAS in February 2011 Canadian Derivatives Clearing Corporation ("CDCC") filed an application, pursuant to section 147 of the Act, for an order temporarily exempting CDCC from the requirement ("Recognition Requirement") to be recognized as a clearing agency under section 21.2 of the Act;
AND WHEREAS the following facts have been represented to the Ontario Securities Commission ("Commission"):
1. The Bourse de Montréal Inc. (the "Bourse"), CDCC's sole shareholder, is a wholly-owned subsidiary of TMX Group Limited, a public company, the common shares of which are listed on Toronto Stock Exchange;
2. CDCC is currently recognized as a clearing house in Québec under section 12 of the Derivatives Act (Québec) ("QDA") pursuant to decision no 2012-PDG-0078 issued by the Autorité des marchés financiers ("AMF"). As such, CDCC is subject to the regulatory oversight of the AMF and enabled to implement rule changes based on a self-certification process for a "recognized regulated entity" under the QDA;
3. On March 16, 2004, the Commission granted the Bourse an exemption, pursuant to section 147 of the Act, from recognition as a stock exchange under section 21 of the Act and an exemption, pursuant to section 80 of the Commodity Futures Act (the "CFA"), from registration as a commodity futures exchange under section 15 of the CFA, subsequently amended on April 30, 2008 (the "Previous MX Exemption Order"), which included regulatory oversight terms and conditions applicable to CDCC;
4. On July 27, 2012, the Commission revoked the Previous MX Exemption Order and issued a new order exempting the Bourse from recognition as an exchange and from registration as a commodity futures exchange, provided that TMX Group Limited (formally known as Maple Group Acquisition Corporation), TMX Group Inc. and the Bourse comply with certain terms and conditions, effective July 31, 2012;
5. CDCC currently offers central counterparty ("CCP") clearing services for Bourse-traded financially or physically settled interest rate and equity futures and options, as well as for a limited number of financially or physically settled over-the-counter ("OTC") equity options;
6. CDCC was chosen by the Investment Industry Association of Canada in December 2009 to develop a CCP facility in Canada for fixed income transactions (repurchase transactions (repo) and cash buy and sell trades) (the "Fixed Income CCP Service") and CDCC's operations have been undergoing major changes since then as a result;
7. The Fixed Income CCP Service initiative is composed of three phases: Phase 1 was launched on February 21, 2012 and consists of providing CCP clearing services for bilaterally traded repurchase (repo) transactions on Canadian and provincial government securities among approved fixed income clearing members; Phase 2 was launched on December 10, 2012 and consists of providing additional CCP clearing services for blind trading of repo transactions introduced by inter-dealer brokers, and is expected to include cash buy or sell trades and accepting clearing of blind cash buy or sell trades introduced by inter-dealer brokers; CDCC is working with industry participants to develop Phase 3, which is intended to introduce a new form of "general collateral" repo transactions CCP service;
8. Effective April 30, 2012, the Governor of the Bank of Canada designated CDCC's clearing and settlement system, the Canadian Derivatives Clearing Service ("CDCS"), pursuant to subsection 4(1) of the Payment Clearing and Settlement Act (Canada) (the "PCSA") as subject to Part I of the PCSA. As a consequence of this designation, the CDCS is subject to oversight by the Bank of Canada;
AND WHEREAS the Commission issued a temporary order dated February 15, 2011 pursuant to section 147 of the Act exempting CDCC from the Recognition Requirement, ("Temporary Exemption Order") which was varied and restated by the Commission on February 14, 2012 ("First Variation Order") pursuant to section 144 of the Act to extend CDCC's temporary exemption from the Recognition Requirement, which terminates on March 1, 2013, and amend the terms and conditions in Schedule "A" hereto;
AND WHEREAS CDCC is currently preparing an application for an order of the Commission to be recognized as a clearing agency under subsection 21.2(0.1) of the Act, which will replace the Temporary Exemption Order;
AND WHEREAS because discussions between CDCC and Commission staff are ongoing with respect to replacing the Temporary Exemption Order with a recognition order, additional time is needed to complete the recognition process, including finalizing appropriate terms and conditions to CDCC's recognition order;
AND WHEREAS CDCC has therefore filed an application with the Commission pursuant to section 144 of the Act requesting that the Commission further vary and restate the Temporary Exemption Order, as varied and restated by the First Variation Order, to further extend CDCC's temporary exemption from the Recognition Requirement and amend the terms and conditions in Schedule "A" hereto;
AND WHEREAS based on the representations and application of CDCC and other factors, the Commission has determined that further extending CDCC's temporary exemption from the Recognition Requirement subject to amended terms and conditions would not be prejudicial to the public interest;
IT IS HEREBY ORDERED by the Commission, pursuant to section 147 of the Act, that CDCC be exempt from the requirement to be recognized as a clearing agency under section 21.2 of the Act;
Provided that:
A. CDCC complies with the terms and conditions attached hereto as Schedule "A";
B. this Temporary Exemption Order shall terminate on the earlier of
(i) the date that the Commission renders a final order recognizing CDCC as a clearing agency under subsection 21.2 (0.1) of the Act or exempting it from the requirement to be recognized as a clearing agency under section 147 of the Act, and
(ii) July 1, 2013.
DATED at Toronto February 15, 2011, as varied on February 14, 2012, and as further varied on February 26, 2013.
SCHEDULE "A"
Terms and Conditions
1. CDCC continues to be recognized by the AMF as a clearing house under section 12 of the QDA and the CDCS continues to be designated by the Bank of Canada pursuant to the PCSA.
2. CDCC shall continue to comply with the following:
a) provide to Commission staff, concurrently with the AMF, copies of all Rules that it files for review and approval with the AMF and provide copies of all final Rules to Commission staff in both English and French;
b) provide to Commission staff, concurrently with the AMF, copies of all audited financial statements and reports prepared by an independent auditor in respect of CDCC's financial situation and operations;
c) provide to Commission staff, concurrently with the AMF, the report on its annual independent systems review, copies of all internal risk management reports intended for its members and any outside report, including any audit report prepared in accordance with the Canadian Institute of Chartered Accountants Handbook, on the results of an examination or review of CDCC's risk management policies, controls and standards undertaken by an independent person;
d) provide to Commission staff, concurrently with the AMF, prompt notification of any material failures or changes to its systems;
e) provide to Commission staff, concurrently with the AMF, prompt notification of any material problems with the clearance and settlement of transactions in contracts traded on the Bourse, including any failure by a member of CDCC to promptly fulfil its settlement obligations that could materially affect the operations or financial situation of CDCC;
f) promote fair access to CDCC and will not unreasonably prohibit or limit access by a person or company to services offered by CDCC; and
g) promote within CDCC a corporate governance structure that minimizes the potential for any conflict of interest between the Bourse and CDCC that could adversely affect the clearance and settlement of trades in contracts or the effectiveness of CDCC's risk management policies, controls and standards.
3. CDCC shall, concurrently with the AMF and BOC or as soon as practicable, update Commission staff on a regular and timely basis on the progress of the development and implementation of the Fixed Income CCP Service and any other proposed new CCP service for OTC derivatives.
4. CDCC shall promptly notify Commission staff of any material systems failure, malfunction or delay or any material issue that may impact the Fixed Income CCP Service.
5. CDCC shall provide Commission staff with the following statistical information in respect of transactions cleared and settled through the Fixed Income CCP Service during each month not later than thirty (30) days after the end of such month.
a) Total number of settled CCP repo transactions divided by ISIN
b) Total net settlement value of settled CCP repo transactions divided by ISIN
c) Total number of unsettled / failed CCP repo transactions divided by ISIN, together with a brief description for the reasons for such failures
d) Total net settlement value of unsettled / failed CCP repo transactions divided by ISIN
e) Total number and net dollar value of all net settlement positions (NSPs) for future-dated end leg CCP repo transactions, separated into five buckets and divided by ISIN in the following manner:
(i) value date being anywhere from T+1 to a date that is less than or equal to 3 months from T+0;
(ii) value date being anywhere from a date that is after 3 months from T+0 to a date that is less than or equal to 6 months from T+0;
(iii) value date being anywhere from a date that is after 6 months from T+0 to a date that is less than or equal to 9 months from T+0;
(iv) value date being anywhere from a date that is after 9 months from T+0 to a date that is less than or equal to 12 months from T+0; and
(v) value date being after 12 months from T+0.
6. CDCC shall seek the Commission's prior written approval before commencing any new CCP service that would reasonably be considered to be outside the scope of CDCC's current CCP services (excluding, however, any new CCP service relating to derivatives traded on the Bourse).
7. CDCC shall provide such information as may be requested from time to time by, and otherwise cooperate with, the Commission and its staff.
8. CDCC shall share information and otherwise cooperate with CDS as appropriate in connection with the operation of the Fixed Income CCP Service (subject to applicable privacy and confidentiality requirements).