Order - Application for Exemptive Relief - CME Group Exchanges
Headnote
Section 147 of the Securities Act (OSA) and sections 38 and 80 of the Commodity Futures Act (CFA) -- exemption from: (1) the requirement for each CMEG Exchange to be recognized as an exchange under section 21 of the OSA; (2) the requirement for each CMEG Exchange to be registered as a commodity futures exchange under section 15 of the CFA; and (3) the registration requirement of section 22 of the CFA with respect to trades in contracts on the CMEG Exchanges by "hedgers", as defined in the CFA.
Statutes Cited
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21, 147.
Commodity Futures Act, R.S.O. 1990, as am., ss. 15, 22, 38, 80.
Rules Cited
Ontario Securities Commission Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario (1997) 20 OSCB 1739.
IN THE MATTER OF
THE SECURITIES ACT, R.S.O. 1990,
CHAPTER S. 5, AS AMENDED (THE OSA)
AND
IN THE MATTER OF
THE COMMODITY FUTURES ACT, R.S.O. 1990,
CHAPTER C.20, AS AMENDED (THE CFA)
AND
IN THE MATTER OF
CHICAGO MERCANTILE EXCHANGE INC.,
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.,
COMMODITY EXCHANGE, INC.,
AND
NEW YORK MERCANTILE EXCHANGE, INC.
ORDER
(Section 147 of the OSA and sections 38 and 80 of the CFA)
WHEREAS Chicago Mercantile Exchange Inc. (CME), Board of Trade of the City of Chicago, Inc. (CBOT), Commodity Exchange, Inc. (COMEX) and New York Mercantile Exchange, Inc. (NYMEX) (together, the CMEG Exchanges, and each individually, a CMEG Exchange) have filed an application dated August 2, 2013 (Application) with the Ontario Securities Commission (Commission) requesting:
(a) an order pursuant to section 147 of the OSA exempting each of the CMEG Exchanges from the requirement to be recognized as an exchange under subsection 21(1) of the OSA;
(b) an order pursuant to section 80 of the CFA exempting each of the CMEG Exchanges from the requirement to be registered as a commodity futures exchange under subsection 15(1) of the CFA (together with the requested order above, Exchange Relief); and
(c) an order pursuant to section 38 of the CFA exempting trades in contracts on the CMEG Exchanges by a “hedger”, as defined in subsection 1(1) of the CFA (Hedger), from the registration requirement under section 22 of the CFA (Hedger Relief);
AND WHEREAS OSC Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario (Rule 91-503) exempts trades of commodity futures contracts or commodity futures options made on commodity futures exchanges not registered with or recognized by the Commission under the CFA from sections 25 and 53 of the OSA;
AND WHEREAS the deemed rule titled In the Matter of Trading in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges in the United States of America provides that section 33 of the CFA does not apply to trades entered into a commodity futures exchanges designated by the United States (U.S.) Commodity Futures Trading Commission (CFTC) under the U.S. Commodity Exchange Act (CEA);
AND WHEREAS the CMEG Exchanges have not requested as part of the Application that the Exchange Relief apply to the operation of any trading system or platform that is a “swap execution facility” as defined in section 1a of the CEA, or to the provision of access to any such trading system or platform to prospective participants in Ontario;
AND WHEREAS the CMEG Exchanges have represented to the Commission that:
1.1 Each of CME, CBOT and NYMEX is a corporation organized under the laws of the State of Delaware in the U.S. and is a wholly-owned subsidiary of CME Group Inc. (CMEG), a publicly traded for-profit corporation organized under the laws of Delaware and listed for trading on the NASDAQ National Market. COMEX is a corporation organized under the laws of the State of New York in the U.S. and is a wholly-owned subsidiary of CMEG. CMEG is the ultimate parent company of each of the CMEG Exchanges;
1.2 CMEG is also the ultimate parent holding company of Board of Trade of Kansas City, Missouri, Inc. (KCBT), a corporation organized under the laws of the State of Missouri in the U.S. and a wholly owned subsidiary of CMEG. CMEG acquired KCBT pursuant to an acquisition transaction completed on November 30, 2012. Trades executed on KCBT began clearing at CME Clearing on April 15, 2013 and KCBT’s open outcry floor-trading operations migrated to CBOT on July 1, 2013. KCBT is not seeking the Exchange Relief and Hedger Relief requested by the CMEG Exchanges and will not provide access to Ontario Participants to its trading systems and facilities. If KCBT wishes to carry on business as an exchange or a commodity futures exchange in Ontario, it will seek similar exemptive relief from the Commission before doing so;
1.3 The CMEG Exchanges receive a majority of their revenue from clearing and transaction fees, which include electronic trading fees, surcharges for privately-negotiated transactions and other volume-related charges for contracts executed through the CMEG Exchanges’ trading venues;
1.4 CMEG, as the holding company for each of the CMEG Exchanges, has no operations of its own, does not have employees, relies upon the dividends declared and paid by its subsidiaries and has limited contractual arrangements. CME is the primary employer within the CMEG organization, with approximately 2,200 employees out of approximately 2,700 employees. Employees are employed elsewhere in the CMEG organization based upon the nature of the business, such as by CME Clearing Europe Limited, an indirect wholly-owned subsidiary of CMEG and the European clearing house for the CMEG Exchanges, and the particular office location, such as CMEG’s technology-focused Belfast office;
1.5 Each of CME, CBOT, COMEX and NYMEX is a designated contract market (DCM) within the meaning of that term under the CEA. The CMEG Exchanges are subject to regulatory supervision by the CFTC, a U.S. federal regulatory agency. The CMEG Exchanges are obligated under the CEA to give the CFTC access to all records unless prohibited by law or such records are subject to solicitor-client privilege. The CFTC reviews, assesses and enforces the CMEG Exchanges’ adherence to the CEA and the regulations thereunder on an ongoing basis, including the DCM core principles (DCM Core Principles) relating to the operation and oversight of the CMEG Exchanges’ markets, including financial resources, systems and controls, maintenance of an orderly market, execution and settlement of transactions, rule-making and investor protection;
1.6 CME is also regulated as a derivatives clearing organization (DCO) by the CFTC, which results in CME being subject to extensive regulation by the CFTC under its principles-based approach and requires CME to satisfy the requirements of the DCO core principles relating to CME’s activities as a DCO. Additionally, CME is deemed to be registered with the U.S. Securities and Exchange Commission (SEC) as a securities clearing agency, effective July 16, 2011, in accordance with certain provisions under subsection 763(b) of the Dodd Frank Wall Street Reform and Consumer Protection Act, and is therefore also subject to limited regulatory supervision by the SEC in connection with its offering of clearing services for single stock and narrow-based security index products;
1.7 The CFTC’s Division of Market Oversight, Market Compliance Section conducts regular in-depth reviews of each DCM’s ongoing compliance with CFTC regulations in order to enforce its rules, prevent market manipulation and customer and market abuses, and to ensure the recording and safe storage of trade information. The results of these rule enforcement reviews (RERs) are in most cases summarized in reports by the CFTC which are made available to the public and posted on the CFTC’s website. The most recent RER for CME and CBOT was completed in September of 2010 and the most recent RER for NYMEX and COMEX was completed in August of 2011, and the CFTC’s reports of such RERs did not identify any material deficiencies;
1.8 The CMEG Exchanges together form the largest commodity futures exchanges in the world and provide customers with trading and execution services for a diverse range of exchange-traded futures and options on futures (exchange-traded products). The exchange-traded products relate to underlyings in various asset classes, including short-term interest rates (Eurodollar, Euribor, U.S. Treasury Bills), government bonds (U.S. Treasury Bonds and Notes), medium and long-term swap rates (U.S. Dollar), narrow-based equity indices (U.S.-related S&P, NASDAQ and DJIA indices and Nikkei indices), commodity index swaps (gold, crude oil, UBS commodity index) and a broad range of commodities (e.g., gold, silver, platinum, palladium, copper, steel and uranium, cocoa, coffee, corn, sugar, wheat, oats, soybeans, live cattle and butter). In addition, the CMEG Exchanges offer trading in freight futures, forwards and options, iron futures, options and swap futures, fertilizer swaps and electricity swap futures (collectively with all other exchange-traded products offered for trading on the CMEG Exchanges, the CMEG Contracts);
1.9 The CMEG Exchanges have a wide range of sophisticated customers comprised of both buy- and sell-side investors, including commercial and investment banks, corporations, pension funds, money managers, proprietary trading firms, hedge funds, commodity trading advisers, currency overlay managers, other institutional customers and individuals;
1.10 The CMEG Exchanges do not have any offices or maintain other physical installations in Ontario or any other Canadian province or territory, except for a CMEG marketing office in Calgary, Alberta whose activities are limited to marketing and development of energy products;
1.11 CME Globex is an electronic trading platform and also functions as the electronic central limit order book for each of the CMEG Exchanges. It is maintained and operated by CME on behalf of each of the CMEG Exchanges in connection with their respective DCM registrations;
1.12 As an electronic trading platform, CME Globex facilitates trading for users in the U.S. and foreign jurisdictions of exchange-traded products that are traded and executed on the CMEG Exchanges. CME Globex also facilitates trading of futures and options on futures on other exchanges, including: BM&FBOVESPA, Bursa Malaysia, the Dubai Mercantile Exchange and the Minneapolis Grain Exchange;
1.13 The CMEG Exchanges propose to offer access in Ontario to their trading systems and facilities, via CME Globex, to prospective participants in Ontario (Ontario Participants). To obtain direct access to the trading systems and facilities of the CMEG Exchanges, via CME Globex, an Ontario Participant must either be:
(a) a “Member Firm”, as defined in the rules of the CMEG Exchanges, that is also a “Clearing Member”, as defined in the rules of the CMEG Exchanges (CMEG Exchange Clearing Member);
(b) a “Member” or “Member Firm”, as defined in the rules of the CMEG Exchanges (collectively, CMEG Exchange Members), that has executed a customer connection agreement with CME through which the CMEG Exchange Member can transmit orders and trades directly into CME Globex with the guarantee of a CMEG Exchange Clearing Member; or
(c) a non-CMEG Exchange Member that has executed a customer connection agreement with CME through which the non-CMEG Exchange Member:
(i) can transmit orders and trades directly into CME Globex with the guarantee of a CMEG Exchange Clearing Member, and
(ii) is required, among other things, to comply with the rules of the CMEG Exchanges to which access is granted, when entering and executing transactions via CME Globex, and to comply with all applicable laws pertaining to the use of CME Globex (all such non-CMEG Exchange Members herein referred to as Direct Access Users);
1.14 Indirect access by Ontario Participants to the trading systems and facilities of the CMEG Exchanges, via CME Globex, may be facilitated via an order-routing arrangement between the Ontario Participant and a CMEG Exchange Clearing Member whereby orders of the Ontario Participant, as client of the CMEG Exchange Clearing Member, are routed through the CMEG Exchange Clearing Member onto a CMEG Exchange (Order-Routing Client);
1.15 The CMEG Exchanges expect that an Ontario Participant seeking direct access in accordance with above paragraph 1.13 (Ontario User) will be certain Canadian financial institutions (within the meaning of such term in subsection 1.1(3) of National Instrument 14-101 Definitions) and certain other market participants that have a head office or principal place of business in Ontario, such as (i) dealers that are engaged in the business of trading commodity futures in Ontario; (ii) utilities and other commercial enterprises that are exposed to risks attendant upon fluctuations in the price of a commodity; and (iii) institutional investors and proprietary trading firms. In each case, the CMEG Exchanges expect that Ontario Users will be (i) dealers that are engaged in the business of trading commodity futures and commodity options in Ontario, or (ii) Hedgers;
1.16 The CMEG Contracts fall within the definitions of “commodity futures contract” or “commodity futures option” as defined in section 1 of the CFA (collectively, Commodity Futures). As a result, each of the CMEG Exchanges is considered a “commodity futures exchange” as defined in section 1 of the CFA. Therefore the CMEG Exchanges are prohibited from carrying on business in Ontario unless they are registered or exempt from registration as a commodity futures exchange under subsection 15(1) of the CFA;
1.17 As the CMEG Exchanges intend to provide Ontario Participants with access in Ontario to their trading systems and facilities to trade the CMEG Contracts via CME Globex, the CMEG Exchanges are considered to be “carrying on business as commodity futures exchanges in Ontario”;
1.18 None of the CMEG Exchanges is registered with or recognized by the Commission as a commodity futures exchange under the CFA and no CMEG Contracts have been accepted by the Director (as defined in the OSA) under the CFA. As a result, CMEG Contracts are also considered “securities” under paragraph (p) of the definition of “security” in section 1 of the OSA and each of the CMEG Exchanges is considered to be an “exchange” under the OSA. Therefore, the CMEG Exchanges are prohibited from carrying on business in Ontario unless they are recognized or exempt from recognition under subsection 21(1) of the OSA;
1.19 Further, while the CMEG Contracts are also considered “securities” under paragraph (p) of the definition of “security” in section 1 of the OSA for the reasons outlined in the preceding paragraph, the CMEG Contracts would not be considered “securities” under any other paragraph contained in that definition, nor would any CMEG Contract be considered a “derivative” as defined in section 1 of the OSA;
1.20 Similar to paragraph 1.17 above, since the CMEG Exchanges seek to provide Ontario Participants with access in Ontario to trade the CMEG Contracts via CME Globex, they are considered to be “carrying on business as exchanges in Ontario”;
1.21 Additionally, the exemption from registration in subsection 32(a) of the CFA applies for trades “by a hedger through a dealer”. This exemption will be available for trades in CMEG Contracts by Ontario-resident Hedgers that are Order-Routing Clients of CMEG Exchange Clearing Members that are dealers. However, this exemption will not be available for trades in CMEG Contracts by Ontario-resident Hedgers that become Ontario Users, since they will have direct access to a CMEG Exchange but will not be considered to be executing “through a dealer”. For this reason, the CMEG Exchanges are seeking Commission approval for the Hedger Relief;
1.22 The CMEG Exchanges ensure that all applicants for membership must satisfy certain criteria before their applications are considered by their membership committees, including, among other things: age of majority, good moral character, good reputation, business integrity and adequate financial resources to assume the responsibilities and privileges of membership;
1.23 All CMEG Exchange Clearing Members that guarantee a CMEG Exchange Member or Direct Access User in connection with the provision of direct access under above paragraph 1.13 or that provide order routing access to an Order-Routing Client under above paragraph 1.14 will be registered futures commission merchants with the CFTC. Such CMEG Exchange Clearing Members are subject to the compliance requirements of the CEA, the CFTC and the National Futures Association as they relate to customer accounts, including various know-your-client, suitability, risk disclosure, anti-money laundering and anti-fraud requirements. These requirements, in conjunction with the margin requirements of the CMEG Exchanges applicable to CMEG Exchange Clearing Members, and subsequently to their clients whose trades they guarantee, ensure that Ontario Participants seeking to become Direct Access Users or Order-Routing Clients that are not also CMEG Exchange Members are subjected to appropriate due diligence procedures and fitness criteria. In addition, Direct Access Users are responsible for, among other things, compliance with the rules of the CMEG Exchanges to which access is granted, as those rules relate to the entering and executing of transactions via CME Globex, and to comply with all applicable laws pertaining to the use of CME Globex;
1.24 Based on the facts set out in the Application, each of the CMEG Exchanges satisfies the criteria for exemption set out in Appendix 1 of Schedule “A” to this order;
AND WHEREAS the Commission will monitor developments in international and domestic capital markets and the CMEG Exchange's activities on an ongoing basis to determine whether it is appropriate for the Commission to continue to grant the Exchange Relief or Hedger Relief and, if so, whether it is appropriate for the Exchange Relief and Hedger Relief to continue to be granted subject to the terms and conditions set out in Schedule “A” to this order;
AND WHEREAS the CMEG Exchanges have acknowledged to the Commission that the scope of the Exchange Relief or Hedger Relief and the terms and conditions imposed by the Commission set out in Schedule “A” to this order may change as a result of its monitoring of developments in international and domestic capital markets or the CMEG Exchange’s activities, or as a result of any changes to the laws in Ontario affecting trading in derivatives, Commodity Futures or securities;
AND WHEREAS based on the Application, together with the representations made by and acknowledgements of the CMEG Exchanges to the Commission, the Commission has determined that:
(a) the CMEG Exchanges satisfy the criteria for exemption set out in Appendix 1 of Schedule “A”;
(b) the granting of the Exchange Relief would not be prejudicial to the public interest; and
(c) the granting of the Hedger Relief would not be prejudicial to the public interest;
AND WHEREAS the Exchange Relief granted by the Commission will not apply to the operation of any trading system or platform that is a “swap execution facility” as defined in section 1a of the CEA, or to the provision of access to any such trading system or platform to prospective participants in Ontario;
IT IS HEREBY ORDERED by the Commission that:
(a) pursuant to section 147 of the OSA, each of the CMEG Exchanges is exempt from recognition as an exchange under subsection 21(1) of the OSA,
(b) pursuant to section 80 of the CFA, each of the CMEG Exchanges is exempt from registration as a commodity futures exchange under subsection 15(1) of the CFA, and
(c) pursuant to section 38 of the CFA, trades in CMEG Contracts by Hedgers who are Ontario Users are exempt from the registration requirement under section 22 of the CFA;
PROVIDED THAT the CMEG Exchanges comply with the terms and conditions attached hereto as Schedule “A”.
DATED this 22nd day of October, 2013.
| " Vern Krishna " Commissioner Ontario Securities Commission |
" James D. Carnwath " Commissioner Ontario Securities Commission |
SCHEDULE “A”
TERMS AND CONDITIONS
Meeting Criteria for Exemption
1. Each CMEG Exchange will continue to meet the criteria for exemption included in Appendix 1 to this schedule.
Regulation and Oversight of the CMEG Exchanges
2. Each CMEG Exchange will maintain its registration as a DCM with the CFTC and will continue to be subject to the regulatory oversight of the CFTC.
3. Each CMEG Exchange will continue to comply with the ongoing requirements applicable to it as a DCM registered with the CFTC.
4. Each CMEG Exchange must do everything within its control, which would include cooperating with the Commission as needed, to carry out its activities as an exchange exempted from recognition under subsection 21(1) of the OSA, as a commodity futures exchange exempted from registration under subsection 15(1) of the CFA, and in compliance with Ontario securities law and Ontario commodity futures law.
Access
5. A CMEG Exchange will not provide direct access to an Ontario User unless the Ontario User is appropriately registered to trade in CMEG Contracts or is a Hedger; in making this determination, a CMEG Exchange may reasonably rely on a written representation from the Ontario User that specifies either that it is appropriately registered to trade in CMEG Contracts or that it is a Hedger, and the CMEG Exchange will notify such Ontario User that this representation is deemed to be repeated each time it enters an order for a CMEG Contract.
6. Each Ontario User that intends to rely on the Hedger Relief will be required to, as part of its application documentation or continued access to trading in CMEG Contracts:
(a) represent that it is a Hedger;
(b) acknowledge that the CMEG Exchanges deem the Hedger representation to be repeated by the Ontario User each time it enters an order for a CMEG Contract and that the Ontario User must be a Hedger for the purposes of each trade resulting from such an order;
(c) agree to notify the CMEG Exchanges if it ceases to be a Hedger;
(d) represent that it will only enter orders for its own account;
(e) acknowledge that it is a market participant under the CFA and is subject to applicable requirements; and
(f) acknowledge that its ability to continue to rely on the Hedger Relief in accessing trading on the CMEG Exchanges will be dependent on the Commission continuing to grant the relief and may be affected by changes to the terms and conditions imposed in connection with the Hedger Relief or by changes to Ontario securities laws or Ontario commodity futures laws pertaining to derivatives, Commodity Futures or securities.
7. Each CMEG Exchange will require Ontario Users to notify the CMEG Exchange if their registration has been revoked, suspended or amended by the Commission or if they have ceased to be a Hedger and, following notice from the Ontario User or the Commission and subject to applicable laws, the CMEG Exchange will promptly restrict the Ontario User’s access to the CMEG Exchange if the Ontario User is no longer appropriately registered with the Commission, or is no longer a Hedger.
8. Each CMEG Exchange must provide guidance to all CMEG Exchange Clearing Members that provide access to trading for Order-Routing Clients that are Ontario Participants that indicates that the CMEG Exchange Clearing Member is permitted to grant such access provided that (i) the Order-Routing Client is a registered futures commission merchant (FCM) under the CFA; (ii) the CMEG Exchange Clearing Member is a registered FCM under the CFA or (iii) the CMEG Exchange Clearing Member is regulated as a “dealer” (as that term is defined in subsection 1(1) of the CFA) in its home jurisdiction and the Order-Routing Client is a Hedger or is able to rely on another exemption from registration under the CFA.
9. Each CMEG Exchange must make available to Ontario Users appropriate training for each person who has access to trade in CMEG Contracts on CME Globex.
Trading by Ontario Users
10. A CMEG Exchange will not provide access to an Ontario User to trading in the exchange-traded products of an exchange other than those of the CMEG Exchange, unless such other exchange has sought and received appropriate regulatory standing in Ontario.
11. A CMEG Exchange will not provide access to an Ontario User to trading in CMEG Contracts other than those that meet the definition of “commodity futures contract” or “commodity futures option” as defined in subsection 1(1) of the CFA, and which also fall under paragraph (p) of the definition of “security” in subsection 1(1) of the OSA, without prior Commission approval.
Submission to Jurisdiction and Agent for Service
12. With respect to a proceeding brought by the Commission arising out of, related to, concerning or in any other manner connected with the Commission’s regulation and oversight of the activities of a CMEG Exchange in Ontario, the CMEG Exchange will submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario.
13. Each CMEG Exchange will file with the Commission a valid and binding appointment of an agent for service in Ontario upon whom the Commission may serve a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding arising out of or relating to or concerning the Commission’s regulation and oversight of a CMEG Exchange’s activities in Ontario.
Disclosure
14. Each CMEG Exchange will provide to its Ontario Users, and also require Ontario Users that are registered FCMs under the CFA to distribute to Ontario clients, prior to the first trade by each client that is executed through the facilities of the CMEG Exchange, disclosure that states that:
(a) rights and remedies against the CMEG Exchange may only be governed by the laws of the U.S., rather than the laws of Ontario and may be required to be pursued in the U.S. rather than in Ontario;
(b) the rules applicable to trading on the CMEG Exchange may be governed by the laws of the U.S., rather than the laws of Ontario; and
(c) the CMEG Exchange is regulated by the CFTC, rather than the Commission.
Filings with the CFTC
15. Each CMEG Exchange will promptly provide staff of the Commission copies of all material rules of the CMEG Exchange, and material amendments to those rules, that it files with the CFTC under the regulations pertaining to self-certification and/or approval.
16. Each CMEG Exchange will promptly provide staff of the Commission copies of all material contract specifications and material amended contract specifications that it files with the CFTC under the regulations pertaining to self-certification and/or approval.
17. A CMEG Exchange will promptly provide staff of the Commission the following information to the extent it is required to file such information with the CFTC:
(a) the annual Board of Directors’ report regarding the activities of the board and its committees;
(b) the annual financial statements of the CMEG Exchange;
(c) details of any material legal proceeding instituted against the CMEG Exchange;
(d) notification that the CMEG Exchange has instituted a petition for a judgment of bankruptcy or insolvency or similar relief, or to wind up or liquidate the CMEG Exchange or has a proceeding for any such petition instituted against it; and
(e) the appointment of a receiver or the making of any voluntary arrangement with creditors.
Prompt Notice or Filing
18. Each CMEG Exchange will promptly notify staff of the Commission of any of the following:
(a) any material change to its business or operations or the information provided in the Application, including, but not limited to:
(i) changes to the regulatory oversight by the CFTC;
(ii) the corporate governance structure of that CMEG Exchange;
(iii) the access model, including eligibility criteria, for Ontario Participants;
(iv) systems and technology; and
(v) the clearing and settlement arrangements for that CMEG Exchange;
(b) any change in that CMEG Exchange’s regulations or the laws, rules and regulations in the U.S. relevant to futures and options where such change may materially affect its ability to meet the criteria set out in Appendix 1 to this schedule;
(c) any condition or change in circumstances whereby that CMEG Exchange is unable or anticipates it will not be able to continue to meet the DCM Core Principles or any applicable requirements of the CEA or CFTC regulations;
(d) any revocation or suspension of, or amendment to, the CMEG Exchange’s registration as a DCM by the CFTC, or if the basis on which the CMEG Exchange’s registration as a DCM was granted has significantly changed;
(e) any known investigations of, or disciplinary action against, that CMEG Exchange by the CFTC or any other regulatory authority to which it is subject;
(f) any matter known to that CMEG Exchange that may affect its financial or operational viability, including, but not limited to, any significant system failure or interruption; and
(g) any default, insolvency, or bankruptcy of any CME Exchange Member known to that CMEG Exchange or its representatives that may have a material, adverse impact upon the CMEG Exchange, the CME clearing system or any Ontario Participant.
19. Each CMEG Exchange will promptly file with staff of the Commission copies of any Rule Enforcement Review report regarding the CMEG Exchange once issued as final by the CFTC.
Quarterly Reporting
20. The CMEG Exchanges will maintain the following updated information and submit such information in a manner and form acceptable to the Commission on a quarterly basis (within 30 days of the end of each calendar quarter), and at any time promptly upon the request of staff of the Commission:
(a) a current list of all Ontario Users, specifically identifying for each Ontario User:
(i) its status as CMEG Exchange Clearing Member, CMEG Exchange Member or Direct Access User for each CMEG Exchange, and
(ii) the basis upon which it represented to a CMEG Exchange that it could be provided with direct access (i.e., that it is appropriately registered to trade in CMEG Contracts or is a Hedger);
(b) a list of all Ontario Users against whom disciplinary action has been taken in the last quarter by a CMEG Exchange or, to the best of the CMEG Exchanges’ knowledge, by the CFTC with respect to such Ontario Users’ activities on a CMEG Exchange;
(c) a list of all referrals to the CMEG Market Regulation Enforcement group by a CMEG Exchange concerning Ontario Users;
(d) a list of all Ontario applicants for status as an Ontario User who were denied such status or access to a CMEG Exchange during the quarter;
(e) a list of all new by-laws, rules, and contract specifications, and changes to by-laws, rules and contract specifications, not already reported under sections 15 and 16 of this schedule;
(f) a list of all CMEG Contracts available for trading during the quarter, identifying any additions, deletions or changes since the prior quarter;
(g) for each CMEG Contract,
(i) the total trading volume and value originating from Ontario Users, presented on a per Ontario User basis, and
(ii) the proportion of worldwide trading volume and value on the CMEG Exchanges conducted by Ontario Users, presented in the aggregate for such Ontario Users; and
(h) a list outlining each incident of a significant system outage that occurred at any time during the quarter for any system impacting Ontario Users’ trading activity, including trading, routing or data, specifically identifying the date, duration and reason for the outage, and noting any corrective action taken.
Annual Reporting
21. The CMEG Exchanges will arrange to have the annual report and annual audited financial statements of CMEG filed with the Commission promptly after their issuance.
22. The CMEG Exchanges will arrange to have the annual “Service Organization Controls 1” report prepared for CMEG filed with the Commission promptly after the report is issued as final by its independent auditor.
Information Sharing
23. The CMEG Exchanges will provide information (including additional periodic reporting) as may be requested from time to time by, and otherwise cooperate with, the Commission or its staff, subject to any applicable privacy or other laws (including solicitor-client privilege) governing the sharing of information and the protection of personal information.
APPENDIX 1
CRITERIA FOR EXEMPTION
PART 1 REGULATION OF THE EXCHANGE
1.1 Regulation of the Exchange
The exchange is regulated in an appropriate manner in another jurisdiction by a foreign regulator (Foreign Regulator).
1.2 Authority of the Foreign Regulator
The Foreign Regulator has the appropriate authority and procedures for oversight of the exchange. This includes regular, periodic oversight reviews of the exchange by the Foreign Regulator.
PART 2 GOVERNANCE
2.1 Governance
The governance structure and governance arrangements of the exchange ensure:
(a) effective oversight of the exchange,
(b) that business and regulatory decisions are in keeping with its public interest mandate,
(c) fair, meaningful and diverse representation on the board of directors (Board) and any committees of the Board, including:
(i) appropriate representation of independent directors, and
(ii) a proper balance among the interests of the different persons or companies using the services and facilities of the exchange,
(d) the exchange has policies and procedures to appropriately identify and manage conflicts of interest, and
(e) there are appropriate qualifications, remuneration, limitation of liability and indemnity provisions for directors, officers and employees of the exchange.
2.2 Fitness
The exchange has policies and procedures under which it will take reasonable steps, and has taken such reasonable steps, to ensure that each director and officer is a fit and proper person.
PART 3 REGULATION OF PRODUCTS
3.1 Review and Approval of Products
The products traded on the exchange and any changes thereto are reviewed by the Foreign Regulator, and are either approved by the Foreign Regulator or are subject to requirements established by the Foreign Regulator that must be met before implementation of a product or changes to a product.
3.2 Product Specifications
The terms and conditions of trading the products are in conformity with the usual commercial customs and practices for the trading of such products.
3.3 Risks Associated with Trading Products
The exchange maintains adequate provisions to measure, manage and mitigate the risks associated with trading products on the exchange including, but not limited to, margin requirements, intra-day margin calls, daily trading limits, price limits, position limits, and internal controls.
PART 4 ACCESS
4.1 Fair Access
(a) The exchange has established appropriate written standards for access to its services including requirements to ensure
(i) participants are appropriately registered as applicable under Ontario securities laws or Ontario commodity futures laws, or exempted from these requirements,
(ii) the competence, integrity and authority of systems users, and
(iii) systems users are adequately supervised.
(b) The access standards and the process for obtaining, limiting and denying access are fair, transparent and applied reasonably.
(c) The exchange does not unreasonably prohibit, condition or limit access by a person or company to services offered by it.
(d) The exchange does not
(i) permit unreasonable discrimination among participants, or
(ii) impose any burden on competition that is not reasonably necessary and appropriate.
PART 5 REGULATION OF PARTICIPANTS ON THE EXCHANGE
5.1 Regulation
The exchange has the authority, resources, capabilities, systems and processes to allow it to perform its regulation functions, whether directly or indirectly through a regulation services provider, including setting requirements governing the conduct of its participants, monitoring their conduct, and appropriately disciplining them for violations of exchange requirements.
PART 6 RULEMAKING
6.1 Purpose of Rules
(a) The exchange has rules, policies and other similar instruments (Rules) that are designed to appropriately govern the operations and activities of participants.
(b) The Rules are not contrary to the public interest and are designed to
(i) ensure compliance with applicable legislation,
(ii) prevent fraudulent and manipulative acts and practices,
(iii) promote just and equitable principles of trade,
(iv) foster co-operation and co-ordination with persons or companies engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in the products traded on the exchange,
(v) provide a framework for disciplinary and enforcement actions, and
(vi) ensure a fair and orderly market.
PART 7 DUE PROCESS
7.1 Due Process
For any decision made by the exchange that affects a participant, or an applicant to be a participant, including a decision in relation to access, exemptions, or discipline, the exchange ensures that:
(a) parties are given an opportunity to be heard or make representations, and
(b) it keeps a record of, gives reasons for, and provides for appeals or reviews of its decisions.
PART 8 CLEARING AND SETTLEMENT
8.1 Clearing Arrangements
The exchange has appropriate arrangements for the clearing and settlement of transactions through a clearing house.1
8.2 Regulation of the Clearing House
The clearing house is subject to acceptable regulation.
8.3 Authority of Regulator
A foreign regulator has the appropriate authority and procedures for oversight of the clearing house. This includes regular, periodic regulatory examinations of the clearing house by the foreign regulator.
8.4 Access to the Clearing House
(a) The clearing house has established appropriate written standards for access to its services.
(b) The access standards for clearing members and the process for obtaining, limiting and denying access are fair, transparent and applied reasonably.
8.5 Sophistication of Technology of Clearing House
The exchange has assured itself that the information technology used by the clearing house has been adequately reviewed and tested and provides at least the same level of safeguards as required of the exchange.
8.6 Risk Management of Clearing House
The exchange has assured itself that the clearing house has established appropriate risk management policies and procedures, contingency plans, default procedures and internal controls.
PART 9 SYSTEMS AND TECHNOLOGY
9.1 Systems and Technology
Each of the exchange’s critical systems has appropriate internal controls to ensure completeness, accuracy, integrity and security of information, and, in addition, has sufficient capacity and business continuity plans to enable the exchange to properly carry on its business. Critical systems are those that support the following functions:
(a) order entry,
(b) order routing,
(c) execution,
(d) trade reporting,
(e) trade comparison,
(f) data feeds,
(g) market surveillance,
(h) trade clearing, and
(i) financial reporting.
9.2 Information Technology Risk Management Procedures
The exchange has appropriate risk management procedures in place including those that handle trading errors, trading halts and circuit breakers.
PART 10 FINANCIAL VIABILITY
10.1 Financial Viability
The exchange has sufficient financial resources for the proper performance of its functions and to meet its responsibilities.
PART 11 TRANSPARENCY
11.1 Transparency
The exchange has adequate arrangements to record and publish accurate and timely trade and order information. This information is provided to all participants on an equitable basis.
PART 12 RECORD KEEPING
12.1 Record Keeping
The exchange has and maintains adequate systems in place for the keeping of books and records, including, but not limited to, those concerning the operations of the exchange, audit trail information on all trades, and compliance with, and/or violations of exchange requirements.
PART 13 OUTSOURCING
13.1 Outsourcing
Where the exchange has outsourced any of its key services or systems to a service provider, it has appropriate and formal arrangements and processes in place that permit it to meet its obligations and that are in accordance with industry best practices.
PART 14 FEES
14.1 Fees
(a) All fees imposed by the exchange are reasonable and equitably allocated and do not have the effect of creating an unreasonable condition or limit on access by participants to the services offered by the exchange.
(b) The process for setting fees is fair and appropriate, and the fee model is transparent.
PART 15 INFORMATION SHARING AND OVERSIGHT ARRANGEMENTS
15.1 Information Sharing and Regulatory Cooperation
The exchange has mechanisms in place to enable it to share information and otherwise co-operate with the Commission, self-regulatory organizations, other exchanges, clearing agencies, investor protection funds, and other appropriate regulatory bodies.
15.2 Oversight Arrangements
Satisfactory information sharing and oversight agreements exist between the Ontario Securities Commission and the Foreign Regulator.
PART 16 IOSCO PRINCIPLES
16.1 IOSCO Principles
To the extent it is consistent with the laws of the foreign jurisdiction, the exchange adheres to the standards of the International Organisation of Securities Commissions (IOSCO) including those set out in the “Principles for the Regulation and Supervision of Commodity Derivatives Markets” (2011).
1 For the purposes of these criteria, “clearing house” also means a “clearing agency”.