Desjardins Securities Inc. – s. 80 of the CFA
Headnote
Applicant requested relief from the trade confirmation and statement of account requirements in sections 42, 43, 44 and 45 of the Commodity Futures Act where the Applicant acts as executing broker for "Give-up Transactions" in respect of trades in commodity futures contracts and commodity futures options, either directly or through an agent known as a direct market access partner, in accordance with an Institutional Client's instructions and the Institutional Client's clearing broker is responsible for clearing, settlement and/or custody -- The services provided by the Applicant are limited to trade execution only -- Relief granted with respect to Give-up Transactions for Institutional Clients provided the Applicant enters into a Give-Up Agreement with each Institutional Client and the Institutional Client's clearing broker.
Applicable Legislative Provisions
Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 42, 43, 44, 45 and 80.
June 4,2024
IN THE MATTER OF THE COMMODITY FUTURES ACT, R.S.O. 1990, CHAPTER C. 20, AS AMENDED (the CFA) AND IN THE MATTER OF DESJARDINS SECURITIES INC. (the Applicant)
ORDER (Section 80 of the CFA)
UPON the application by the Applicant to the Ontario Securities Commission (the Commission) for an order pursuant to section 80 of the CFA granting relief from sections 42, 43, 44 and 45 of the CFA which contain the requirements to deliver certain confirmations and statements of trade to customers (the Trade Reporting Requirements) in respect of trades in commodity futures contracts and commodity futures options (Futures Contracts) in the context of trade "give-ups";
AND WHEREAS the Applicant has represented to the Commission that:
1. The Applicant is a corporation governed by the Business Corporations Act (Québec). It is an indirect, wholly-owned subsidiary of Fédération des caisses Desjardins du Québec. Its head office is located in Montreal, Québec.
2. The Applicant is registered as an investment dealer under the securities legislation of all provinces and territories of Canada, as a futures commission merchant under both the CFA and The Commodity Futures Act (Manitoba) and as a derivatives dealer under the Derivatives Act (Québec). It is also a member of the Canadian Investment Regulatory Organization (CIRO) and the TSX Venture Exchange, an approved participant of the Montréal Exchange (MX) and a participating organization of the Toronto Stock Exchange.
3. The Applicant acts as an executing broker for give-up transactions that involve the purchase and sale of Futures Contracts that are listed on one or more domestic or foreign commodity futures and derivatives exchanges.
4. Give-up transactions are conducted by institutional investors, each of which is an "institutional client" within the meaning of Rule 1200 of CIRO's Investment Dealer and Partially Consolidated Rules (the Institutional Client) that has an existing relationship as a client with a clearing broker but wishes to use the trade execution services of one or more executing brokers for the purpose of executing trades on one or more markets. Under these circumstances, the executing broker executes trades in accordance with the Institutional Client's instructions and then "gives up" the trades to the clearing broker for clearing, settlement and/or custody (Give-up Transaction).
5. An Institutional Client in a Give-up Transaction is a client of the clearing broker and the service provided by the executing broker to such Institutional Client is limited to trade execution. The clearing broker maintains an account for the Institutional Client that is administered in accordance with the terms and conditions of the account documentation of the clearing broker that has been signed by the Institutional Client. The Institutional Client does not sign account documentation with the executing broker and the executing broker does not receive any money, securities, margin or collateral from the client. The Institutional Client does, however, enter into an agreement with the executing broker and the clearing broker that governs their give-up transaction relationship (a Give-Up Agreement).
6. In connection with Give-up Transactions pertaining to Futures Contracts traded on Canadian commodity futures exchanges, including the MX, the Applicant acts as an executing broker for such transactions and gives up the trades to the Institutional Client's clearing broker for clearing, settlement and/or custody. In connection with Give-up Transactions pertaining to Futures Contracts traded on foreign commodity futures exchanges of which the Applicant is not a member (and therefore not in a position to execute trades itself), and where the Applicant is permitted under the rules of the relevant foreign commodity futures exchange to provide access to Futures Contracts execution by forwarding client orders, either directly or through an agent, to a broker known as a direct market access partner (the DMAP) for the relevant foreign commodity futures exchange (Futures Execution Access Services), a DMAP will execute the trades in accordance with the Institutional Client's instructions and give up the trades to the Institutional Client's clearing broker for clearing, settlement and/or custody.
7. Although the Applicant is responsible for record keeping, bookkeeping, custody and other administrative functions (Account Services) in respect of its own clients, it does not provide Account Services in respect of execution only Institutional Clients in Give-up Transactions. Such Account Services remain the responsibility of those execution only Institutional Clients' clearing brokers. The Applicant does, however, capture each Give-up Transaction that it executes in its electronic blotter or that it forwards to a DMAP in providing Futures Execution Access Services to an Institutional Client. Give-up Transactions effected through the electronic platforms used by the Applicant and the DMAP are in most cases automatically allocated to clearing brokers as trades executed under a Give-Up Agreement, and a manual daily control is also conducted by the Applicant and the DMAP to identify the Futures Contract positions held by the Applicant or the DMAP, as applicable, that have not been allocated to any Institutional Clients' clearing brokers. Each such leftover position is then investigated by the Applicant (and the DMAP, as applicable) and is either:
• sent to an Institutional Client's clearing broker as a trade that was executed under a Give-Up Agreement; or
• upon receipt of new instructions from the Institutional Client, and supporting documentation to open a brokerage account if the Institutional Client does not have an account with the Applicant or the DMAP, as applicable, allocated to that Institutional Client's account.
8. For each execution only Institutional Client that is a party to a Give-Up Agreement, the Applicant prepares a monthly or trade-by-trade invoice that provides details of all Give-up Transactions that the Applicant or the DMAP, as applicable, conducted for the Institutional Client during the month and the amount of commission owing to the Applicant and/or, indirectly, to the DMAP, as applicable, for such trade execution services or Futures Execution Access Services. The Applicant delivers the monthly invoice to the clearing broker which reconciles the trades described in the invoice with its own records and then pays the Applicant and/or the DMAP the amount owing to it pursuant to the invoice (this function may also be performed by the FIA TECH ATLANTIS electronic platform, which connect futures exchange, execution brokers and clearing agents together). Payment of the invoice therefore serves as evidence of the fact that the Applicant's own internal records reconcile with those of the Institutional Client.
9. The clearing broker has the primary relationship with the Institutional Client and is contractually responsible for risk monitoring, overall trade monitoring as well as reporting trade confirmations and sending out monthly statements. The clearing broker is subject to trade confirmation requirements and statement of account requirement in respect of its Institutional Clients in Give-up Transactions.
10. Sections 42 and 45 of the CFA require a registered dealer that has acted as agent in connection with any trade in a Futures Contract to promptly deliver a prescribed form of written trade confirmation of the transaction to its client.
11. Section 43 of the CFA requires every registered dealer who has acted as an agent in connection with a liquidating trade in a commodity futures contract for a client to promptly deliver a prescribed form of the statement of purchase and sale to the client in addition to the trade confirmation that must be delivered in accordance with sections 42 and 45 of the CFA.
12. Section 44 of the CFA provides that so long as any unexpired and unexercised Futures Contract is outstanding in a client's account with a registered dealer, the registered dealer must deliver a prescribed form of monthly statement to the client.
13. The application of the Trade Reporting Requirements to the Applicant when it provides trade execution only services or Futures Execution Access Services in respect of Give-up Transactions would:
a) be both duplicative and confusing because they would capture only some, not all, of the trading information that would be contained in the trade confirmations, statements of account and statements of purchase and sale that are delivered to the same Institutional Clients by their clearing brokers; and
b) not be required to establish an audit trail or to facilitate reconciliation of Give-up Transactions as between the Applicant and a clearing broker.
14. Subject to the matter to which this decision relates, the Applicant is not in default of securities, commodify futures or derivatives legislation in any jurisdiction of Canada.
15. Once the appropriate relief from CIRO is obtained, the Applicant will be in compliance with all CIRO requirements relating to the maintenance of records of executed transactions.
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;
THIS ORDER of the Commission is that the Applicant is exempt from the requirements of sections 42, 43, 44 and 45 of the CFA provided that:
1. the Applicant remains registered as a futures commission merchant and a member of CIRO;
2. the Applicant provides trade execution services or Futures Execution Access Services in respect of Give-up Transactions only for Institutional Clients;
3. the Applicant enters into a Give-Up Agreement with each Institutional Client and their clearing broker; and
4. the clearing broker has agreed to provide the Institutional Client with written trade confirmations and statements of account that include information for each Give-Up Transaction subject to this order.
OSC File #: 2024/0154