TD Commodity & Energy Trading Inc. - MRRS Decision

Headnote

Mutual Reliance Review System for ExemptiveRelief Applications -- relief granted from prospectus and registrationrequirements in connection with certain over-the-counter derivativestransactions entered into between sophisticated or "qualified"parties -- relief granted in Ontario from fees otherwise payablein connection with these over-the-counter derivatives transactions.

Ontario Statutes

Securities Act, R.S.O. 1990, c. S.5, as am.,ss. 25(1), 53(1), and 74(1).

Ontario Regulations

Regulation made under the Securities Act, R.R.O.1990, Reg. 1015, as am., Schedule I.

Ontario Rules

None.

Ontario Policies

None.

IN THE MATTER OF

THE CANADIAN SECURITIES LEGISLATIONOF

ALBERTA, BRITISH COLUMBIA,MANITOBA, NEW BRUNSWICK,

NEWFOUNDLAND AND LABRADOR,NOVA SCOTIA, ONTARIO,

PRINCE EDWARD ISLAND, QUEBEC,SASKATCHEWAN,

THE YUKON, THE NORTHWEST TERRITORIESANDTHE NUNAVUT TERRITORY

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEWSYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

TD COMMODITY & ENERGYTRADING INC.

MRRS DECISION DOCUMENT

WHEREAS the local securities regulatoryauthority or regulator (Decision Maker) in each of the provincesand territories of Canada (collectively, the Jurisdictions)has received an application from TD Commodity & Energy TradingInc. (Applicant) for a decision under the securities legislationof the Jurisdictions (the Legislation) that (i) the requirementsin the Legislation to be registered to trade in a security (RegistrationRequirement) and to file and obtain a receipt for a preliminaryprospectus and a prospectus in respect of such security (ProspectusRequirement) shall not apply to trades in over-the-counter (OTC)derivatives entered into between the Applicant and certain counterparties,and (ii) any fees required to be paid under the Legislationin respect of such OTC derivatives transactions shall not berequired to be paid in the Jurisdictions;

AND WHEREAS pursuant to the Mutual RelianceReview System for Exemptive Relief Applications (the System)the Ontario Securities Commission is the principal regulatorfor this application;

AND WHEREAS, unless otherwise defined,the terms herein have the meaning set out in National Instrument14-101 Definitions or in Québec Commission Notice 14-101;

AND WHEREAS the Applicant has representedto the Decision Makers that:

1. The Applicant is a corporation organizedunder the laws of Canada. The Applicant is a direct, wholly-ownedsubsidiary of TD Securities Inc. (TD Securities). TD Securitiesis a direct, wholly-owned subsidiary of The Toronto-DominionBank (TD Bank), a bank listed on Schedule I of the BankAct (Canada). TD Securities is registered under the Legislationas a dealer in the categories of "broker" and "investmentdealer" and is a member of the Investment Dealers Associationof Canada.

2. The head office of the Applicant is locatedin Calgary, Alberta. The Applicant is not registered as adealer or adviser under the securities legislation in anyprovince or territory of Canada. The Applicant is also nota reporting issuer in any province or territory of Canada.

3. The Applicant proposes to design, createand market a full range of commodity-related derivative productsthat address the broad operational, risk management and investmentneeds of its clients. Such derivative products may also includeinterest rate, foreign exchange, equity and credit-relatedcomponents and will be settled either physically or in cash.

4. The Applicant will originate and marketall of the Applicant's derivative products business and boththe Applicant and its affiliates will act as counterpartiesto the Applicant's clients in respect of both cash and physicallysettled derivative products.

5. The Applicant is proposing to engage inthe marketing and trading of OTC derivatives with certaincounterparties in the Jurisdictions. The OTC derivatives inwhich the Applicant proposes to transact are designed on acase-by-case basis to fit the needs of the particular client.These OTC derivatives will consist of one or more of an option,a forward contract, a swap or a contract for differences ofa type commonly considered to be a derivative, in which:

(a) the agreement relating to, and the materialeconomic terms of the option, forward contract, swap orcontract for differences have been customized to the purposesof the parties to the agreement and the agreement is notpart of a fungible class of agreements that are standardizedas to their material economic terms;

(b) the creditworthiness of a party havingan obligation under the agreement would be a material considerationin entering into or determining the terms of the agreement;and

(c) the agreement is not entered into ortraded on or through an organized market, stock exchangeor futures exchange and is not cleared by a clearing corporation.

6. The underlying interest of the OTC derivativestransacted between the Applicant and the counterparties willconsist entirely of a commodity, an interest rate, a foreignexchange rate, a security, an index, a benchmark or othervariable, another OTC derivative, or some relationship between,or combination of, one or more of any of them.

7. The counterparties to such transactionswill consist exclusively of parties that meet the followingcriteria:

(a) they are Qualified Parties, as definedin Appendix 1 to this MRRS Decision Document;

(b) they have a high level of business andfinancial sophistication;

(c) they have access to their own in-houseor external advisors who can assist in the determinationof the suitability of the transaction and the creditworthinessof the Applicant; and

(d) in the ordinary course of their businesses(or investing activity), they enter into OTC derivativetrades in order to hedge or otherwise manage specific risks.

AND WHEREAS pursuant to the System thisMRRS Decision Document evidences the decision of the DecisionMakers (the Decision);

AND WHEREAS each of the Decision Makersis satisfied that the test contained in the Legislation thatprovides the Decision Maker with the jurisdiction to make theDecision has been met;

THE DECISION of the Decision Makers underthe Legislation is that the Applicant and the Applicant's counterpartieswho are Qualified Parties shall each be exempt from the RegistrationRequirement and the Prospectus Requirement in respect of tradesin OTC derivatives subject to the following conditions:

(i) each trade involves an OTC derivativeof which the underlying interest consists entirely of a commodity,an interest rate, a foreign exchange rate, a security, anindex, a benchmark or other variable, or another OTC derivative,or some relationship between, or combination of, one or moreof any of them; and

(ii) each trade is marketed by the Applicantand is between either the Applicant and a Qualified Partyor two Qualified Parties, each acting as principal.

AND THE FURTHER DECISION of the DecisionMaker of Ontario under the Legislation is that trades enteredinto in reliance on this Decision are hereby exempted from thefees which would otherwise be payable in connection with suchOTC derivative transactions pursuant to the Legislation.

June 9, 2003.

APPENDIX A

OVER-THE-COUNTER DERIVATIVESQUALIFIED PARTIES

Interpretation

(1) The terms "subsidiary" and "holdingbody corporate" used in paragraphs (w), (x) and (y) ofsubsection (3) of this Appendix have the same meaning as theyhave in the Business Corporations Act (Ontario).

(2) All requirements contained in this Appendixthat are based on the amounts shown on the balance sheet ofan entity apply to the consolidated balance sheet of the entity.

Qualified Parties Acting as Principal

(3) The following are Qualified Parties forall OTC derivatives transactions, if acting as principal:

Banks

(a) A bank listed in Schedule I or II tothe Bank Act (Canada).

(b) The Business Development Bank of Canadaincorporated under the Business Development Bank of CanadaAct (Canada).

(c) A bank subject to the regulatory regimeof a country that is a member of the Basle Accord, or thathas adopted the banking and supervisory rules set out inthe Basle Accord, if the bank has a minimum paid up capitaland surplus, as shown on its last audited balance sheet,in excess of $25 million or its equivalent in another currency.

Credit Unions and Caisses Populaires

(d) A credit union central, federation ofcaisses populaires, credit union or regional caisse populaire,located, in each case, in Canada.

Loan and Trust Companies

(e) A loan corporation or trust corporationregistered under the Loan and Trust Corporations Act(Ontario) or under the Trust and Loan Companies Act(Canada), or under comparable legislation in any other provinceor territory of Canada.

(f) A loan company or trust company subjectto the regulatory regime of a country that is a member ofthe Basle Accord, or that has adopted the banking and supervisoryrules set out in the Basle Accord, if the loan company ortrust company has a minimum paid up capital and surplus,as shown on its last audited balance sheet, in excess of$25 million or its equivalent in another currency.

Insurance Companies

(g) An insurance company licensed to dobusiness in Canada or a province or territory of Canada;

(h) An insurance company subject to theregulatory regime of a country that is a member of the BasleAccord, or that has adopted the banking and supervisoryrules set out in the Basle Accord, if the insurance companyhas a minimum paid up capital and surplus, as shown on itslast audited balance sheet, in excess of $25 million orits equivalent in another currency.

Sophisticated Entities

(i) A person or company that, together withits affiliates:

(i) has entered into one or more transactionsinvolving OTC derivatives with counterparties that arenot its affiliates, if

(A) the transactions had a total grossdollar value of or equivalent to at least $1 billionin notional principal amount; and

(B) any of the contracts relating toone of these transactions was outstanding on any dayduring the previous 15-month period, or

(ii) had total gross marked-to-marketpositions of or equivalent to at least $100 million aggregatedacross counterparties, with counterparties that are notits affiliates in one or more transactions involving OTCderivatives on any day during the previous 15-month period.

Individuals

(j) An individual who, either alone or jointlywith the individual's spouse, has a net worth of at least$5 million, or its equivalent in another currency, excludingthe value of his or her principal residence.

Governments/Agencies

(k) Her Majesty in right of Canada or anyprovince or territory of Canada and each crown corporation,instrumentality and agency of a Canadian federal, provincialor territorial government.

(l) A national government of a country thatis a member of the Basle Accord, or that has adopted thebanking and supervisory rules set out in the Basle Accord,and each instrumentality and agency of that government orcorporation wholly-owned by that government.

Municipalities

(m) Any Canadian municipality with a populationin excess of 50,000 and any Canadian provincial or territorialcapital city.

Corporations and other Entities

(n) A company, partnership, unincorporatedassociation or organization or trust, other than an entityreferred to in paragraph (a), (b), (c), (d), (e), (f), (g)or (h), with total revenue or assets in excess of $25 millionor its equivalent in another currency, as shown on its lastfinancial statement, to be audited only if otherwise required.

Pension Plan or Fund

(o) A pension fund that is regulated byeither the Office of the Superintendent of Financial Institutions(Canada) or a provincial pension commission, if the pensionfund has total net assets, as shown on its last auditedbalance sheet, in excess of $25 million, provided that,in determining net assets, the liability of a fund for futurepension payments shall not be included.

Mutual Funds and Investment Funds

(p) A mutual fund or non-redeemable investmentfund if each investor in the fund is a Qualified Party.

(q) A mutual fund that distributes its securitiesin any of the Jurisdictions, if the portfolio manager ofthe fund is registered as an adviser, other than a securitiesadviser, under any of the Legislation.

(r) A non-redeemable investment fund thatdistributes its securities in any of the Jurisdictions,if the portfolio manager of the fund is registered as anadviser, other than a securities adviser, under any of theLegislation.

(s) A mutual fund or non-redeemable investmentfund established and located outside Canada that distributesits securities primarily abroad and only distributes itssecurities in Canada in reliance upon exemptions from theprospectus requirements of the Legislation.

Brokers/Investment Dealers

(t) A person or company registered underthe Legislation or securities legislation elsewhere in Canadaas a broker or an investment dealer or both.

(u) A person or company registered underthe Legislation as an international dealer if the personor company has total assets, as shown on its last auditedbalance sheet, in excess of $25 million or its equivalentin another currency.

Futures Commission Merchants

(v) A person or company registered underthe CFA as a dealer in the category of futures commissionmerchant, or in an equivalent capacity elsewhere in Canada.

Affiliates

(w) A wholly-owned subsidiary of any ofthe organizations described in paragraph (a), (b), (c),(d), (e), (f), (g), (h), (j), (n), (o), (t), (u) or (v).

(x) A holding body corporate of which anyof the organizations described in paragraph (w) is a wholly-ownedsubsidiary.

(y) A wholly-owned subsidiary of a holdingbody corporate described in paragraph (x).

(z) A firm, partnership, joint venture orother form of unincorporated association in which one ormore of the organizations described in paragraph (w), (x)or (y) have a direct or indirect controlling interest.

Guaranteed Party

(aa) A party whose obligations in respectof the OTC derivatives transaction for which the determinationis made is fully guaranteed by another Qualified Party.

Qualified Party Not Acting as Principal

(4) The accounts of a person, company, pensionfund or pooled fund trust that are fully managed by a portfoliomanager or financial intermediary referred to in paragraphs(a), (d), (e), (g), (t), (u), (v) or (x) of paragraph (3)or a broker or investment dealer acting as a trustee or agentfor the person, company, pension fund or pooled fund trustunder section 148 of the Ontario Regulation are QualifiedParties, in respect of all OTC derivative transactions.

Subsequent Failure to Qualify

(5) A party is a Qualified Party for the purposeof any OTC derivatives transaction if it, he or she is a QualifiedParty at the time it, he or she enters into the transaction.

Qualified Party for Specified Commodity DerivativeTransaction

(6) A commercial user is a Qualified Partywith respect to any specified commodity derivative transaction.For these purposes:

"commercial user" meansa person or company that enters into a specified commodityderivative transaction, if

(a) the person or company deals in itsbusiness with a specified commodity, and

(b) the transaction involves a specifiedcommodity derivative of which the underlying interest,or a material component of the underlying interest, is

(i) a specified commodity referred toin paragraph (a),

(ii) a related specified commodity toa specified commodity referred to in paragraph (a),or

(iii) a specified commodity derivative,the underlying interest of which is

A. a specified commodity, or

B. a related specified commodity toa specified commodity referred to in paragraph (a);

"related specified commodity"means a specified commodity that is part or all of an underlyinginterest of a specified commodity derivative that is usedby a commercial user to hedge its exposure to a risk resultingfrom its use of another specified commodity in its business;

"specified commodity" means

(a) whether in the original or a processedstate, an agricultural product, forest product, productof the sea, mineral, metal, hydrocarbon fuel product orprecious stone or other gem,

(b) a pollutant emission level,

(c) electricity,

(d) a liability from an insurance contract,and

(e) a matter designated by the Commissionsas a specified commodity, if that designation has notbeen revoked; and

"specified commodity derivative"means an OTC derivative of which an underlying interestis:

(a) a specified commodity, or

(b) another OTC derivative of which theunderlying interest is a specified commodity.