Canadian Derivatives Clearing Corporation – s. 147
Headnote
Application under section 147 of the Securities Act (Ontario) (OSA) to exempt on a temporary basis Canadian Derivatives Clearing Corporation from recognition as a clearing agency under subsection 21.2(0.1) of the OSA.
(Editor's note: this decision was first published in the February 25, 2011 Bulletin, (2011) 34 OSCB 2302-2303 and 2305. It is being republished due to an error in the original publication).
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21.2(0.1), 147.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
(the "Act")
AND
IN THE MATTER OF
THE CANADIAN DERIVATIVES CLEARING CORPORATION
ORDER
(section 147 of the Act)
WHEREAS the Canadian Derivatives Clearing Corporation (the "Corporation") filed an application (the "Application"), pursuant to section 147 of the Act, for an order (the "Temporary Exemption Order") temporarily exempting the Corporation from the requirement to be recognized as a clearing agency under section 21.2 of the Act.
AND WHEREAS the Corporation has represented to the Commission as follows:
1. The Bourse de Montréal Inc. (the "Bourse"), the Corporation's sole shareholder, is a wholly-owned subsidiary of the TMX Group Inc., a widely held public company, the common shares of which are listed on the Toronto Stock Exchange.
2. The Corporation is currently recognized as a self-regulatory organization in Québec under section 169 of the Securities Act (Québec) which enables it to carry on the activities of a clearing house in Québec. As such, the Corporation is subject to the regulatory oversight of the Autorité des marches financiers ("AMF").
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 "Bourse Exemption Order").
4. The Bourse Exemption Order includes regulatory oversight terms and conditions applicable to the Corporation (the "CDCC T&Cs"), including a term and condition requiring the Corporation to concurrently provide to the Commission copies of all rules that it files for review and approval with the AMF.
5. Section 21.2 of the Act will, effective March 1, 2011, prohibit clearing agencies from carrying on business in Ontario unless they are recognized by the Commission as a clearing agency.
6. The Corporation's operations are undergoing major changes and are likely to evolve significantly in the near future. In this regard, the Corporation will be adding clearing for fixed income transactions (including both repurchase transactions and cash buy and sell trades) (the "Fixed Income CCP Service") and has recently responded to an industry-issued request for information by indicating its intention to operate as a central clearing counterparty for the Canadian OTC swap market (the "OTC Swaps CCP Service").
AND WHEREAS the Bank of Canada ("BOC") is undertaking a comprehensive assessment of the Corporation's operations, systems, rules, and risk management, primarily in the context of the Fixed Income CCP Service, for the purposes of designation and regulatory oversight by the BOC pursuant to the Payment Clearing and Settlement Act (Canada).
AND WHEREAS the Commission has determined that the Temporary Exemption Order will provide sufficient time for:
(i) the Corporation to finalize its new clearing functions, particularly the Fixed Income CCP Service, and
(ii) the Commission to assess the impact of the Corporation's new functions on Ontario's capital markets and consider an appropriate regulatory framework.
AND WHEREAS the CDCC T&Cs will terminate in the Bourse Exemption Order upon the Corporation being recognized by the Commission as a recognized clearing agency under the Act or recognized clearing house under the CFA or upon the Corporation being exempt from any requirement to be recognized.
AND WHEREAS based on the Application and the representations of the Corporation, the Commission is satisfied that granting the Corporation the Temporary Exemption Order pursuant to section 147 of the Act would not be prejudicial to the public interest.
IT IS HEREBY ORDERED by the Commission, pursuant to section 147 of the Act, that the Corporation be exempt from the requirement to be recognized as a clearing agency under section 21.2 of the Act;
Provided that:
A. the Corporation complies with the terms and conditions attached hereto as Schedule "A"; and
B. this Temporary Exemption Order shall terminate on the earlier of:
(i) the date that the Commission renders a subsequent order recognizing the Corporation 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) March 1, 2012.
DATED at Toronto on February 15, 2011.
SCHEDULE "A"
Terms and Conditions
1. The Corporation continues to be recognized as a self-regulatory organization under the Securities Act (Québec) or is and remains recognized as a clearing house under section 14 of the Derivatives Act (Québec).
2. The Corporation shall continue to comply with the CDCC T&Cs, namely that it will:
a) provide to the Commission, 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 the Commission in both English and French;
b) provide to the Commission, concurrently with the AMF, copies of all audited financial statements and reports prepared by an independent auditor in respect of the Corporation's financial situation and operations;
c) provide to the Commission, concurrently with the AMF, 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 the Corporation's risk management policies, controls and standards undertaken by an independent person;
d) provide to the Commission, concurrently with the AMF, prompt notification of any material failures or changes to its systems;
e) provide to the Commission, 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 the Corporation to promptly fulfil its settlement obligations that could materially affect the operations or financial situation of the Corporation;
f) promote fair access to the Corporation and will not unreasonably prohibit or limit access by a person or company to services offered by the Corporation; and
g) promote within the Corporation a corporate governance structure that minimizes the potential for any conflict of interest between the Bourse and the Corporation that could adversely affect the clearance and settlement of trades in contracts or the effectiveness of the Corporation's risk management policies, controls and standards.
3. The Corporation 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 OTC Swaps CCP Service.