Natixis Securities Americas LLC and Natixis

Headnote

U.S. registered broker dealer and France registered dealer exempted from dealer registration under paragraph 25(1) of the Act for provision of securities lending and securities financing services (which do not include the execution of trades) -- Exemption limited to trades in Canadian securities for certain (institutional) permitted clients -- relief is subject to sunset clause.

Applicable Legislative Provisions

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 1(1), 19, 19(1), 19(2), 25(1), 74(1).

Instruments Cited

Multilateral Instrument 11-102 Passport System, ss. 4.7, 4.7(1).

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 1.1, 8.5, 8.18, 8.18(2), 8.21.

Form 31-103F1 Calculation of Excess Working Capital.

Ontario Securities Commission Rule 13-502 Fees.

August 20, 2021

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF NATIXIS SECURITIES AMERICAS LLC AND NATIXIS (the Filers)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from Natixis Securities Americas LLC (NSA) and Natixis S.A. (Natixis) for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filers from the dealer registration requirement under section 25(1) of the Securities Act (Ontario) (the OSA) in respect of Securities Lending Services (as defined below), a subset of services commonly known as Prime Services (as defined below), relating to securities of Canadian issuers and that are provided in Canada to Institutional Permitted Clients (as defined below) (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission (the OSC) is the principal regulator for this application, and

(b) the Filers have provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces of Canada in which NSA relies on the exemption found in section 8.18 [International dealer] of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) other than the province of Alberta (the Passport Jurisdictions and together with the Jurisdiction, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision unless otherwise defined.

For the purposes of this decision, the following term has the following meaning:

"Institutional Permitted Client" means a "permitted client" as defined in section 1.1 of NI 31-103, except for: (a) an individual, (b) a person or company acting on behalf of a managed account of an individual, (c) a person or company referred to in paragraph (p) of that definition, unless that person or company qualifies as an Institutional Permitted Client under another paragraph of that definition, or (d) a person or company referred to in paragraph (q) of that definition unless that person or company has net assets of at least $100 million as shown on its most recently prepared financial statements or qualifies as an Institutional Permitted Client under another paragraph of that definition.

Representations

This Decision is based on the following facts represented by the Filers:

1. NSA is a single member limited liability company organized under the laws of the State of Delaware. Its head office is located at 1251 Avenue of the Americas, New York, New York, 10020, United States of America (the U.S.) and it is a wholly owned indirect subsidiary of Natixis.

2. NSA is registered as a broker-dealer with the U.S. Securities and Exchange Commission (SEC) and is a member of the U.S. Financial Industry Regulatory Authority (FINRA).

3. NSA is not a member of any equity or options exchanges.

4. NSA is a broker-dealer that provides a variety of capital raising, investment banking, market making for credit products, brokerage, and advisory services, including fixed income and equity sales, and securities lending for government, corporate and financial institutions.

5. Natixis is a société anonyme organized under the laws of France. Its head office is located at 30 Avenue Pierre Mendès-France, 75013 Paris, France. Natixis is a majority owned subsidiary of BPCE, a public limited company subject to the provisions of the French Commercial Code with respect to commercial companies and the provisions of the French Monetary and Financial Code with regard to credit institutions. BPCE is the central body of the network of Caisses d' Epargne and the network of Banques Populaires and of the other affiliated entities within the meaning of the French Monetary and Financial Code.

6. Natixis is licensed as a bank by the French Financial Markets Authority (Autorité des Marchés Financiers (France)) (FAMF) and is a member of the French Prudential Supervision and Resolution Authority (Autorité de contrôle prudentiel et de resolution) (ACPR).

7. Natixis is a member of a number of exchanges and clearing organizations that trade and clear securities, including Euronext Paris.

8. Natixis is a full-service financial institution that provides, including through its subsidiaries, a variety of capital raising, investment banking, market making, brokerage and advisory services, including fixed income and equity sales, securities lending and derivatives dealing for government, corporate and financial institutions, as well as commercial banking and insurance services.

9. Natixis Canada Branch is an authorized foreign bank named in Schedule III of the Bank Act (Canada), located at 1800 McGill Collège, Bureau 2811, Montréal, QC H3A 3J6.

10. "Securities Lending Services" provided by the Filers principally consist of securities borrowing and/or lending pursuant to a securities lending agreement or delivering securities on behalf of a client pursuant to a margin agreement, as well as securities financing. For greater clarity, Securities Lending Services do not include execution, settlement or clearing of trades in securities.

11. Securities Lending Services are a subset of services commonly known as "Prime Services", which generally consist of (a) settlement, clearing and custody of trades, client cash and securities positions, (b) financing of long inventory; (c) lending and delivering securities on behalf of a client pursuant to a margin agreement to facilitate client short sales; (d) securities borrowing and/or lending pursuant to a securities lending agreement; (e) asset servicing, and (f) reporting of positions, margin and other balances and activity.

12. The Filers provide, or wish to provide, Securities Lending Services in the Jurisdictions to Institutional Permitted Clients (the Securities Lending Clients) in respect of securities of Canadian and non-Canadian issuers. The Filers may provide Securities Lending Services outside of the Prime Services context.

13. Securities Lending Clients seek Securities Lending Services from the Filers in order to have greater access and flexibility in respect of securities borrowing, lending and/or financing.

14. The Filers enter into written agreements with all of their Securities Lending Clients for the provision of Securities Lending Services.

15. On September 2, 2011, in CSA Staff Notice 31-327 Broker-Dealer Registration in the Exempt Market Dealer Category, the Canadian Securities Administrators (CSA) stated that they had concerns with firms applying for registration in and with firms registered in the category of exempt market dealer (EMD) who were carrying on brokerage activities, including trading listed securities. In light of these regulatory concerns, firms applying for registration were instead registered in the restricted dealer category with terms and conditions. The interim restricted dealer registrations were time limited and were intended to allow applicants to engage in limited activities while the CSA reviewed the activities of firms registered in the category of EMD or restricted dealer.

16. On February 7, 2013, in CSA Staff Notice 31-333 Follow-up to Broker-Dealer Registration in the Exempt Market Dealer Category, the CSA stated that they would be publishing amendments to NI 31-103 that would prohibit exempt market dealers from trading in a security if the security is listed, quoted or traded on a marketplace and if the trade in the security does not require reliance on a further exemption from the prospectus requirement (the Rule Amendments). The CSA stated that restricted dealers conducting brokerage activities in accordance with the terms and conditions of their registration would have their registration and any related exemptive relief extended to the date the Rule Amendments came into effect.

17. The Rule Amendments came into effect on July 11, 2015. Since the implementation of the Rule Amendments, only investment dealers that are dealer members of the Investment Industry Regulatory Organization of Canada (IIROC) or firms relying on an applicable exemption from the dealer registration requirement are permitted to engage in trading in a security if the security is listed, quoted or traded on a marketplace and if the trade in the security does not require reliance on a further exemption from the prospectus requirement.

18. NSA is relying on the "international dealer exemption" under section 8.18 [International dealer] of NI 31-103 in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec and Saskatchewan, and Natixis is relying on that exemption in Ontario and Québec.

19. The Filers are not registered under NI 31-103, are in the business of trading in securities, and in the absence of the Exemption Sought, cannot provide the Securities Lending Services in the Jurisdictions in respect of securities of Canadian issuers without registration, except in limited circumstances including as permitted under section 8.5 [Trades through or to a registered dealer], under the exemptions found in paragraphs (a), (b) and (f) of subsection 8.18(2) [International dealer], and under section 8.21 [Specified debt] of NI 31-103.

20. Neither of the Filers is in default of Canadian securities legislation in any jurisdiction in Canada.

21. NSA is subject to regulatory capital requirements under the U.S. Securities Exchange Act of 1934 (the 1934 Act), specifically SEC Rule 15c3-1 Net Capital Requirements for Brokers or Dealers (SEC Rule 15c3-1) and SEC Rule 17a-5 Reports to be Made by Certain Brokers and Dealers (SEC Rule 17a-5). NSA is subject to SEC Rule 15c3-1, which requires the maintenance of minimum net capital. NSA has elected to use the alternative method permitted by the rule, which requires that NSA maintain minimum net capital, as defined, equal to the greater of $1.5 million or 2% of aggregate debit balances arising from customer transactions, as defined.

22. SEC Rule 15c3-1 requires that NSA accounts for any guarantee of debt of a third party in calculating its excess net capital when a loss is probable and the amount can be reasonably estimated. Accordingly, NSA will, in the event that it provides a guarantee of any debt of a third party, take a deduction from net capital when both of the preceding conditions exist. NSA does not guarantee the debt of any third party.

23. SEC Rule 15c3-1 is designed to provide protections that are substantially similar to the protections provided by the capital formula requirements and specifically risk adjusted capital to which dealer members of IIROC are subject, and NSA is in compliance with SEC Rule 15c3-1 and is in compliance in all material respects with SEC Rule 17a-5. If NSA's net capital declines below the minimum amount required, NSA is required to notify the SEC and FINRA pursuant to SEC Rule 17a-11 Notification Provisions for Brokers and Dealers (SEC Rule 17a-11). The SEC and FINRA have the responsibility to provide oversight over NSA's compliance with SEC Rule 15c3-1 and SEC Rule 17a-5.

24. NSA is required to prepare and file a financial report, which includes Form X-17a-5 (the FOCUS Report), which is the financial and operational report containing a net capital calculation, and a compliance report annually with the SEC and FINRA pursuant to SEC Rule 17a-5(d). The FOCUS Report provides a more comprehensive description of the business activities of NSA, and more accurately reflects those activities, including client lending activity, than would be provided by Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1). The net capital requirements computed using methods prescribed by SEC Rule 15c3-1 are based on all assets and liabilities on the books and records of a broker-dealer whereas Form 31-103F1 is a calculation of excess working capital, which is a computation based primarily on the current assets and current liabilities on the books and records of the dealer. NSA is up-to-date in its submissions of annual reports under SEC Rule 17a-5(d), including the FOCUS Report.

25. NSA is subject to regulations of the Board of Governors of the U.S. Federal Reserve Board (FRB), the SEC and FINRA regarding the lending of money, extension of credit and provision of margin to clients (the U.S. Margin Regulations) that provide protections that are substantially similar to the protections provided by the requirements regarding the lending of money, extension of credit and provision of margin to clients to which dealer members of IIROC are subject. In particular, NSA is subject to the margin requirements imposed by the FRB, including Regulation T and under applicable SEC rules and under FINRA Rule 4210. NSA is in compliance in all material respects with applicable U.S. Margin Regulations.

26. NSA holds customer assets in accordance with Rule 15c3-3 of the 1934 Act, as amended (SEC Rule 15c3-3). SEC Rule 15c3-3 requires NSA to segregate and keep segregated all "fully-paid securities" and "excess margin securities" (as such terms are defined in SEC Rule 15c3-3) of its customers from its proprietary assets. In addition to the segregation of customers' securities, SEC Rule 15c3-3 requires NSA to deposit an amount of cash or qualified government securities determined in accordance with a reserve formula set forth in SEC Rule 15c3-3 in an account titled "Special Reserve Account for the Exclusive Benefit of Customers" of NSA at separate banks and/or custodians. The combination of segregated securities and cash reserve are designed to ensure that NSA has sufficient assets to cover all net equity claims of its customers and provide protections that are substantially similar to the protections provided by the requirements dealer members of IIROC are subject. If NSA fails to make an appropriate deposit, NSA is required to notify the SEC and FINRA pursuant to SEC Rule 15c3-3(i). NSA is in material compliance with the possession and control requirements of SEC Rule 15c3-3.

27. NSA is a member of the Securities Investors Protection Corporation (SIPC) and, subject to the eligibility criteria of SIPC, Securities Lending Clients' assets held by NSA is insured by SIPC against loss due to insolvency.

28. NSA is in compliance in all material respects with U.S. securities laws.

29. Natixis, as a European credit institution, is subject to reporting obligations as prescribed by Commission Implementing Regulation (EU) No 680/2014 laying down implementing technical standards with regards to supervisory reporting of institutions. Pursuant to Chapter 1, Article 1 and Chapter 3, Natixis is required to report to competent authorities regarding: own funds requirements and financial information on a quarterly or semi-annual basis, losses stemming from lending collateralised by immovable property on a semi-annual basis, large exposures and other largest exposures on a quarterly basis, leverage ratio and liquidity coverage requirements on a quarterly basis and net stable funding requirements on a monthly or quarterly basis.

30. Natixis is a credit institution as defined in Article L. 511-1 of the French Monetary and Financial Code (the Financial Code) and is subject to the prudential and reporting requirements prescribed by Book V, Part I, Chapter I, Section 7 of the Financial Code which includes rules regarding liquidity, solvency, hedge and risk-division ratios, internal risk evaluation procedures and internal auditing systems. In particular, pursuant to Article L. 511-40 and Article L. 511-11, Natixis must be able to show at all times that its assets effectively exceed its liabilities to third parties by an amount at least equal to the minimum capital determined by the Minister for the Economy.

31. Natixis is also subject to the European Union Capital Requirements Directive and Regulation, comprised of Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms, which implements Basel III (the EU Capital Requirements). The EU Capital Requirements require that Natixis account for any guarantee of a debt of a third party through the credit risk element of its capital calculations. Broadly, the exposure value of a guarantee of a debt of a third party will be its accounting value remaining after certain adjustments are made as set out in the EU Capital Requirements. Where a guarantee is an off-balance sheet item, the EU Capital Requirements also specify how the exposure value of that guarantee is to be calculated.

32. The EU Capital Requirements are designed to provide protections that are substantially similar to the protections provided by the capital formula requirements and specifically risk adjusted capital to which dealer members of IIROC are subject. If Natixis's net capital declines below the minimum amount required, Natixis would notify the European Central Bank under Pillar 2 supervisory review and evaluation process of the Basel Framework. Natixis's capital ratios exceed the minimum standards imposed by the EU Capital Requirements.

33. Natixis is required to prepare and submit capital solvency, leverage and large exposures data to the European Central Bank on a quarterly basis. The disclosures are made in compliance with the Common Reporting (COREP) framework and are ultimately remitted to the European Banking Authority. The COREP reports cover the capital requirements and own funds reporting of a credit institution including, amongst other elements, capital adequacy, leverage, liquidity coverage, large exposures, stable funding and asset encumbrance. In contrast, the Form 31-103F1 is a calculation of excess working capital, which is a computation based primarily on the current assets and current liabilities on the books and records of the dealer. Natixis is up-to-date in its submissions of COREP reporting.

34. As a credit institution, Natixis is authorized by the French Prudential Supervision and Resolution Authority (Autorité de Contrôle Prudentiel et de Resolution) (ACPR). Therefore, pursuant to Article L. 312-4 of the Financial Code, Natixis is required to belong to the Deposit Guarantee and Resolution Fund (Fonds de Garantie des Depots et de Resolution) (the FGDR) and to financially contribute to the FGDR pursuant to Arrêté du 27 octobre 2015 on the financial resources of the Deposit Guarantee and Resolution Fund. Resources provided to the FGDR may be used, at the request of ACPR, to guarantee deposits of clients in the event that deposits or other repayable funds are unavailable and to finance resolution processes pursuant to Book III, Part I, Chapter II, Section 3 of the Financial Code.

35. As a listed company, Natixis is required to comply with (a) Book II of the General Regulation of the FAMF (the FAMF General Regulation), including Title II regarding periodic and ongoing disclosure obligations and (b) with Regulation (EU) 596/2014 on market abuse (market abuse regulation) regarding insiders and insider information.

36. While Natixis' securities financing transactions are not subject to mandatory margin requirements, Natixis enters into margin contracts for all securities financing transactions (under the standards of the International Capital Market Association Global Master Repurchase Agreement (GMRA) or the International Securities Lending Association Global Master Securities Lending Agreement (GMSLA)), governing both initial and variation margin, in order to ensure that it is effectively allocating capital in accordance with applicable prudential requirements.

37. Additionally, initial and variation margin collected from counterparties with regard to the execution of securities financing transactions are subject to Regulation (EU) No 2015/2365 on transparency of securities financing transactions and of reuse which, among other things, imposes timely reporting obligations to trade repositories, rules governing trade repositories and transparency and consent requirements for reuse of financial instruments received under collateral arrangements.

38. Custody of customer assets is generally governed by Chapter I, Title II of Book III of the FAMF General Regulation, which impose requirements on custody account-keepers regarding, among other things: prevention of money-laundering and the financing of terrorism; relationships with customers and the content of agreements with each holder of a securities account; protections afforded to clients, including the requirement in Article 322-7 to distinguish the assets of clients from the custody account-keeper's own assets in the books of third parties with which it keeps the corresponding assets; information provided to clients; and resources and procedures of the custody account-keeper.

39. Natixis is in compliance in all material respects with French securities laws.

40. The Filers submit that the Exemption Sought would not be prejudicial to the public interest because:

(a) each Filer is subject to applicable regulation in its home jurisdiction, including as set out in paragraphs 21 to 39;

(b) the availability of and access to Securities Lending Services is important to Canadian institutional investors who are active market participants;

(c) the proposed client base of the Filers under the Exemption Sought will be limited to Institutional Permitted Clients;

(d) the OSC has entered into a memorandum of understanding with the SEC regarding mutual assistance in the supervision and oversight of regulated entities that operate on a cross-border basis in the U.S. and Canada;

(e) the OSC has entered into a memorandum of understanding with FINRA to provide a formal basis for the exchange of regulatory information and investigative assistance; and

(f) both the OSC and FAMF have entered into the International Organization of Securities Commissions' Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, which provides a formal basis for the exchange of regulatory information and investigative assistance.

41. Each Filer is a "market participant" as defined under subsection 1(1) of the OSA. As a market participant, among other requirements, each Filer is required to comply with the record keeping and provision of information provisions under section 19 of the OSA, which include the requirement to keep such books, records and other documents as (a) are necessary for the proper recording of business transactions and financial affairs, and the transactions executed on behalf of others, (b) as may otherwise be required under Ontario securities law, (c) as may reasonably be required to demonstrate compliance with Ontario securities laws, and (d) as may be prescribed by the regulations for the purposes of detecting, identifying or mitigating systemic risks related to the capital markets, and to deliver such records to the OSC if required.

42. At the request of the Alberta Securities Commission, the Filers will not rely on subsection 4.7(1) of MI 11-102 to passport this decision into Alberta.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought by NSA is granted so long as:

(a) NSA has its head office or principal place of business in the U.S.;

(b) NSA is registered as a broker-dealer under U.S. legislation which permits NSA to provide Securities Lending Services in the U.S.;

(c) NSA is a member of FINRA;

(d) NSA is a member of SIPC;

(e) NSA is subject to requirements over regulatory capital, lending of money, extension of credit, provision of margin, financial reporting, and segregation and custody of assets which provide protections that are substantially similar to the protections provided by the rules to which dealer members of IIROC are subject;

(f) NSA submits the financial report and compliance report as described in SEC Rule 17a-5(d) to the OSC on an annual basis, at the same time such reports are filed with the SEC and FINRA;

(g) NSA submits to the OSC immediately a copy of any notice filed under SEC Rule 17a-11 or under SEC Rule 15c3-3(i) with the SEC and FINRA;

(h) NSA limits its provision of Securities Lending Services in the Jurisdictions in respect of securities of Canadian issuers to Institutional Permitted Clients;

(i) NSA does not execute trades in securities of Canadian issuers with or for Securities Lending Clients, except as permitted under applicable Canadian securities laws;

(j) NSA notifies the OSC of any regulatory action initiated after the date of this decision in respect of NSA, or any predecessors or specified affiliates of NSA, by completing and filing with the OSC Schedule A hereto within ten days of the commencement of any such action; provided that NSA may also satisfy this condition by filing with the OSC within ten days of the date of this decision, a notice making reference to and incorporating by reference the disclosure made by NSA pursuant to U.S. federal securities laws that is identified in the FINRA BrokerCheck system, and any updates to such disclosure that may be made from time to time, and by providing notification, in a manner reasonably acceptable to the Director, of any filing of a Form BD "Regulatory Action Disclosure Reporting Page";

(k) NSA submits audited financial statements to the OSC on an annual basis, within 90 days of its financial year end;

(l) NSA complies with the filing and fee payment requirements applicable to a registrant under OSC Rule 13-502 Fees;

(m) NSA files in an electronic and searchable format with the OSC such reports as to any or all of its trading activities in Canada as the OSC may, upon notice, require from time to time; and

(n) NSA pays the increased compliance and case assessment costs of the principal regulator due to NSA's location outside Ontario, including, as required, the reasonable cost of hiring a third party to perform a compliance review on behalf of the principal regulator.

The decision of the principal regulator under the Legislation is that the Exemption Sought by Natixis is granted so long as:

(a) Natixis has its head office or principal place of business in France;

(b) Natixis is authorized by legislation in France to provide Securities Lending Services in France;

(c) Natixis is a credit institution as defined in Article L. 511-1 of the Financial Code;

(d) Natixis is a member of the FGDR;

(e) Natixis is subject to requirements over regulatory capital, lending of money, extension of credit, provision of margin, financial reporting, and segregation and custody of assets which provide protections that are substantially similar to the protections provided by the rules to which dealer members of IIROC are subject;

(f) Natixis submits the COREP reports to the OSC on an annual basis, at the same time such reports are filed with the ACPR;

(g) Natixis submits to the OSC immediately a copy of any notice filed under French regulations with the ACPR regarding Natixis's net capital declining below the minimum amount required;

(h) Natixis limits its provision of Securities Lending Services in the Jurisdictions in respect of securities of Canadian issuers to Institutional Permitted Clients;

(i) Natixis does not execute trades in securities of Canadian issuers with or for Securities Lending Clients, except as permitted under applicable Canadian securities laws;

(j) Natixis notifies the OSC of any regulatory action initiated after the date of this decision in respect of Natixis, or any predecessors or specified affiliates of Natixis, by completing and filing with the OSC Schedule A hereto within ten days of the commencement of any such action; provided that Natixis may also satisfy this condition by filing with the OSC within ten days of the date of this decision, a notice making reference to and incorporating by reference the disclosure made by Natixis pursuant to the securities laws of France, and any updates to such disclosure that may be made from time to time, and by providing notification, in a manner reasonably acceptable to the Director, of any such update;

(k) Natixis submits audited financial statements to the OSC on an annual basis, within 90 days of its financial year end;

(l) Natixis complies with the filing and fee payment requirements applicable to a registrant under OSC Rule 13-502 Fees;

(m) Natixis files in an electronic and searchable format with the OSC such reports as to any or all of its trading activities in Canada as the OSC may, upon notice, require from time to time; and

(n) Natixis pays the increased compliance and case assessment costs of the principal regulator due to Natixis's location outside Ontario, including, as required, the reasonable cost of hiring a third party to perform a compliance review on behalf of the principal regulator.

This decision of the principal regulator shall expire five years after the date hereof.

This decision may be amended by the principal regulator from time to time upon prior written notice to the Filers.

OSC File # 2020/0220