Proposed Recognition Order - Canadian Trading and Quotation System Inc. (CNQ)
IN THE MATTER OF
THE SECURITIES ACT, R.S.O. 1990,
CHAPTER S.5, AS AMENDED (the "Act")
AND
IN THE MATTER OF
CANADIAN TRADING AND QUOTATION INC.
RECOGNITION ORDER
(Section 21.2.1)
WHEREAS the Canadian Trading and Quotation System Inc. (CNQ) has applied for recognition as a quotation and trade reporting system pursuant to section 21.2.1 of the Act;
AND WHEREAS CNQ will operate a screen-based, automated electronic marketplace.
AND WHEREAS CNQ has agreed to the terms and conditions set out in Schedule A;
AND WHEREAS the Commission has received certain representations and undertakings from CNQ in connection with CNQ's application for recognition as a quotation and trade reporting system;
AND WHEREAS the Commission has determined that the recognition of CNQ would not be prejudicial to the public interest;
THE COMMISSION hereby recognizes CNQ as a quotation and trade reporting system pursuant to section 21.2.1 of the Act, subject to the terms and conditions attached at Schedule A.
DATED *
____________________ ____________________
SCHEDULE A
TERMS AND CONDITIONS
1. CORPORATE GOVERNANCE
(a) CNQ's arrangements with respect to the appointment, removal from office and functions of the persons ultimately responsible for making or enforcing the Rules of CNQ, namely, the governing body, are such as to ensure a proper balance between the interests of the different entities desiring access to the facilities of CNQ (CNQ Dealer) and companies seeking to be quoted on CNQ (CNQ Issuer), and a reasonable number and proportion of directors will be "independent" in order to ensure diversity of representation on the Board. An independent director is a director that is not:
(i) an associate, director, officer or employee of a CNQ Dealer;
(ii) an associate, director, officer or employee of a CNQ Issuer;
(iii) an officer or employee of CNQ or its affiliates;
(iv) an associate, director, officer or employee of any person or company who owns or controls, directly or indirectly, over 10% of CNQ; or
(v) a person who owns or controls, directly or indirectly, over 10% of CNQ.
In particular, CNQ will ensure that at least fifty per cent (50%) of its directors will be independent. In the event that at any time CNQ fails to meet such requirement, it will promptly remedy such situation.
(b) Without limiting the generality of the foregoing, CNQ's governance structure provides for:
(i) fair and meaningful representation on its governing body, in the context of the nature and structure of CNQ, and any governance committee thereto and in the approval of Rules;
(ii) appropriate representation of independent directors or persons not associated with any CNQ Dealer, CNQ Issuer or control person on any CNQ committees; and
(iii) appropriate qualifications, remuneration, conflict of interest provisions and limitation of liability and indemnification protections for directors and officers and employees of CNQ generally.
2. FITNESS
In order to ensure that CNQ operates with integrity and in the public interest, each person or company that owns or controls, directly or indirectly, more than 10% of CNQ and each officer or director of CNQ is a fit and proper person and the past conduct of each person or company that owns or controls, directly or indirectly, more than 10% of CNQ and each officer or director of CNQ affords reasonable grounds for belief that the business of CNQ will be conducted with integrity.
3. FAIR AND APPROPRIATE FEES
(a) Any and all fees imposed by CNQ will be equitably allocated. Fees will not have the effect of creating barriers to access and must be balanced with the criteria that CNQ will have sufficient revenues to satisfy its responsibilities.
(b) CNQ's process for setting fees will be fair, appropriate and transparent.
4. ACCESS
(a) CNQ's requirements permit all properly registered dealers that are members of a recognized SRO and satisfy access requirements established by CNQ to access the facilities of CNQ.
(b) Without limiting the generality of the foregoing, CNQ will:
(i) establish written standards for granting access to CNQ Dealers trading on CNQ;
(ii) not unreasonably prohibit or limit access by a person or company to services offered by it; and
(iii) keep records of
(A) each grant of access including, for each CNQ Dealer, the reasons for granting such access, and
(B) each denial or limitation of access, including the reasons for denying or limiting access to any applicant.
5. FINANCIAL VIABILITY
(a) CNQ will maintain sufficient financial resources for the proper performance of its functions.
(b) CNQ will calculate and report those financial ratios described below to permit trend analysis and provide an early warning signal with respect to the financial health of the company.
(c) CNQ will maintain: (i) a liquidity measure greater than or equal to zero; (ii) a debt to cash flow ratio less than or equal to 4.0/1; and (iii) a leverage ratio less than or equal to 4.0/1. For this purpose:
(i) liquidity measure is:
(working capital + borrowing capacity)
- 2 (adjusted budgeted expenses + adjusted capital expenditures - adjusted revenues)
where:
(A) working capital is current assets minus current liabilities,
(B) borrowing capacity is the principal amount of long term debt available to be borrowed under loan or credit agreements that are in force,
(C) adjusted budgeted expenses are 95% of the expenses (other than depreciation and other non-cash items) provided for in the budget for the current fiscal year,
(D) adjusted capital expenditures are 50% of average capital expenditures for the previous three fiscal years, (except that in each of the first three years, adjusted capital expenditures shall be determined as follows:
• in the first year after recognition (Year 1), 50% of 1/3rd of Start Up Capital Expenditures;
• in the second year after recognition (Year 2), 50% of [1/3rd (2/3rd Start-up Capital Expenditures plus Year 1 Capital Expenditures)]; and,
• in the second year after recognition (Year 3), 50%[1/3rd(1/3rd Start-up Capital Expenditures plus Year 1 Capital Expenditures plus Year 2 Capital Expenditures)]
where Start-up Capital Expenditures are the total Capital Expenditures prior to the commencement of quotation and trading on CNQ and
(note: start-up period needs to be defined)
(E) adjusted revenues are 80% of revenues plus 80% of investment income for the previous fiscal year,
(ii) debt to cash flow ratio is the ratio of total debt (including any line of credit drawdowns, term loans (current and long-term portions) and debentures, but excluding accounts payables, accrued expenses and other liabilities) to EBITDA (or earnings before interest, taxes depreciation and amortization) for the previous month multiplied by 12, and
(iii) financial leverage ratio is the ratio of total assets to shareholders' equity,
in each case following the same accounting principles as those used for the audited financial statements of CNQ.
(d) On a quarterly basis (along with the quarterly financial statements required to be filed pursuant to paragraph 10), CNQ will report to the Commission the monthly calculation of the liquidity measure and debt to cash flow and financial leverage ratios, the appropriateness of the calculations and whether any alternative calculations should be considered.
(e) Except as provided in "g" below, if CNQ fails to maintain any of the liquidity measure, the debt to cash flow ratio or the financial leverage ratio in any month, it shall immediately report to the Commission or its staff.
(f) Except as provided in "g" below, if CNQ fails to maintain any of the liquidity measure, the debt to cash flow ratio or the financial leverage ratio for a period of more than three months, its President will immediately deliver a letter advising the Commission or its staff of the reasons for the continued ratio deficiencies and the steps being taken to rectify the problem, and CNQ will not, without the prior approval of the Director, make any capital expenditures not already reflected in the financial statements, or make any loans, bonuses, dividends or other distributions of assets to any director, officer, related company or shareholder until the deficiencies have been eliminated for at least six months.
(g) Recognizing that CNQ is a start-up operation expecting to incur losses during the first year of operations, , paragraphs "e" and "f" above shall not apply during the first year of operations if the debt to cash flow ratio is negative or greater than 4.0/1, but CNQ will not, without the permission of the Director, make any loans or dividends to any director, officer, related company or shareholder until the deficiencies have been eliminated for six months.
6. REGULATION
(a) CNQ will maintain its ability to perform its regulation functions including setting requirements governing the conduct of CNQ Dealers and CNQ Issuers and disciplining CNQ Dealers and CNQ Issuers.
(b) CNQ will retain Market Regulation Services Inc. (RS Inc.) as a regulation services provider to provide, as agent for CNQ, certain regulation services which have been approved by the Commission. CNQ will provide to the Commission, on an annual basis, a list outlining the regulation services performed by RS Inc. and the regulation services performed by CNQ.
(c) CNQ will provide the Commission with an annual report with such information regarding its affairs as may be requested from time to time. The annual report will be in such form as may be specified by the Commission from time to time.
(d) CNQ will perform all other regulation functions not performed by RS Inc.
(e) Management of CNQ (including the President and CEO) will at least annually assess the performance by RS Inc. of its regulation functions and report to the Board, together with any recommendations for improvements. CNQ will provide the Commission with copies of such reports and shall advise the Commission of any proposed actions arising therefrom.
(f) CNQ shall provide the Commission with the information set out in Appendix A, as amended from time to time.
7. CAPACITY AND INTEGRITY OF SYSTEMS
For each of its systems that support order entry, order routing, execution, data feeds, trade reporting and trade comparison, capacity and integrity requirements, CNQ will:
(a) on a reasonably frequent basis, and in any event, at least annually,
(i) make reasonable current and future capacity estimates;
(ii) conduct capacity stress tests of critical systems to determine the ability of those systems to process transactions in an accurate, timely and efficient manner;
(iii) develop and implement reasonable procedures to review and keep current the development and testing methodology of those systems;
(iv) review the vulnerability of those systems and data centre computer operations to internal and external threats including physical hazards, and natural disasters;
(v) establish reasonable contingency and business continuity plans;
(b) annually, cause to be performed an independent review and written report, in accordance with established audit procedures and standards, of its controls for ensuring that it is in compliance with paragraph (a) and conduct a review by senior management of the report containing the recommendations and conclusions of the independent review; and
(c) promptly notify the Commission of material systems failures and changes.
8. PURPOSE OF RULES
(a) CNQ will establish rules, policies and other similar instruments (Rules) that are necessary or appropriate to govern and regulate all aspects of its business and affairs.
(b) More specifically, CNQ will ensure that:
(i) the Rules are designed to:
(A) ensure compliance with securities legislation;
(B) prevent fraudulent and manipulative acts and practices;
(C) promote just and equitable principles of trade;
(D) foster cooperation and coordination with persons or companies engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in, securities; and
(E) provide for appropriate discipline.
(ii) the Rules do not:
(A) permit unreasonable discrimination among CNQ Issuers and CNQ Dealers; or
(B) impose any burden on competition that is not necessary or appropriate in furtherance of securities legislation.
(iii) the Rules are designed to ensure that its business is conducted in a manner so as to afford protection to investors.
9. RULES AND RULE-MAKING
CNQ will comply with the rule review process set out in Appendix B, as amended from time to time, concerning Commission approval of changes in its Rules.
10. FINANCIAL STATEMENTS
CNQ will file unaudited quarterly financial statements within 60 days of each quarter end and audited annual financial statements within 90 days of each year end, prepared in accordance with generally accepted accounting principles.
11. DISCIPLINE RULES
(a) CNQ will ensure through Market Regulation Services Inc. and otherwise that any person or company subject to its regulation is appropriately disciplined for violations of securities legislation and the Rules.
(b) CNQ will have general disciplinary and enforcement provisions in its Rules that will apply to any person or company subject to its regulation.
12. DUE PROCESS
CNQ will ensure that:
(a) its requirements relating to access to the facilities of CNQ, the imposition of limitations or conditions on access and denial of access are fair and reasonable;
(b) parties are given an opportunity to be heard or make representations; and
(c) it keeps a record, gives reasons and provides for appeals of its decisions.
13. INFORMATION SHARING
CNQ will share information and otherwise co-operate with the Commission and its staff, the Canadian Investor Protection Fund, other Canadian exchanges and recognized self-regulatory organizations and regulatory authorities responsible for the supervision or regulation of securities firms and financial institutions.
14. ISSUER REGULATION
(a) CNQ has sufficient authority over its issuers.
(b) CNQ carries out appropriate review procedures to monitor and enforce issuer compliance with the Rules.
15. CLEARING AND SETTLEMENT
CNQ has appropriate arrangements in place for clearing and settlement through a clearing agency recognized by the Commission for the purposes of the Securities Act (Ontario).
16. TRANSPARENCY REQUIREMENTS
CNQ will comply with the pre-trade and post-trade transparency requirements set out in National Instrument 21-101 Marketplace Operation.
17. ADDITIONAL INFORMATION
(a) CNQ has completed and submitted Form 21-101F1 (including the exhibits) to the Commission.
(b) CNQ will provide the Commission any additional information the Commission may require from time to time.
APPENDIX A
INFORMATION TO BE FILED
1. Quarterly Reporting on Exemptions or Waivers Granted
On a quarterly basis, CNQ will submit to the Commission a report summarizing all exemptions or waivers granted pursuant to the rules, policies or other similar instruments (Rules) to any CNQ Dealer or CNQ Issuer during the period. This summary should include the following information:
(a) The name of the CNQ Dealer or CNQ Issuer;
(b) The type of exemption or waiver granted during the period
(c) Date of the exemption or waiver, and
(d) A description of CNQ staff's reason for the decision to grant the exemption or waiver.
2. Quarterly Reporting on Quotation Applications
On a quarterly basis, CNQ will submit to the Commission a report containing the following information:
(a) The number of quotation applications filed;
(b) The number of quotation applications that were accepted;
(c) The number of quotation applications that were rejected and the reasons for rejection, by category;
(d) The number of quotation applications that were withdrawn or abandoned and if known the reasons why the application was withdrawn or abandoned, by category;
(e) The number of quotation applications filed by CNQ Issuers as a result of a Fundamental Change;
(f) The number of quotation applications filed by CNQ Issuers as a result of a Fundamental Change that were accepted;
(g) The number of quotation applications filed by CNQ Issuers as a result of a Fundamental Change that were that were rejected and the reasons for rejection, by category;
(h) The number of quotation applications filed by CNQ Issuers as a result of a Fundamental Change that were withdrawn or abandoned and if known the reasons why the application was withdrawn or abandoned, by category.
In each of the foregoing cases, the numbers shall be broken down by industry category and in any other manner that the Commission requests.
APPENDIX B
RULE REVIEW PROCESS
1. CNQ will file with the Commission each new or amended rule, policy and other similar instrument (Rules) adopted by its Board.
2. More specifically, CNQ will file the following information:
(a) the proposed Rule;
(b) a notice of publication including:
(i) a description of the proposed Rule and its impact;
(ii) a concise statement, together with supporting analysis, of the nature, purpose and effect of the Rule;
(iii) the possible effects of the Rule on marketplace participants, competition and the costs of compliance;
(iv) a description of the rule-making process, including a description of the context in which the proposed Rule was developed, the process followed, the issues considered, the consultation process undertaken, the alternative approaches considered and the reasons for rejecting the alternatives;
(v) where the proposed Rule requires technological changes to be made by CNQ, CNQ Dealers or CNQ Issuers, CNQ will provide a description of the implications of the Rule and, where possible, an implementation plan, including a description of how the Rule will be implemented and the timing of the implementation; and
(vi) a reference to other jurisdictions including an indication as to whether another regulator in Canada, the United States or another jurisdiction has a comparable rule or has made or is contemplating making a comparable rule and, if applicable, a comparison of the proposed Rule to the rule of the other jurisdiction.
3. The Commission will publish for a 30 day comment period in its bulletin or on its website the notice filed by CNQ and the proposed Rule. If amendments to the Rule are necessary as a result of comments received, the Commission shall have discretion to determine whether the Rule should be re-published for comment.
4. A Rule will be effective as of the date of Commission approval or on a date determined by CNQ, whichever is later.
5. If CNQ is of the view that there is an urgent need to implement a Rule, CNQ may make a Rule effective immediately upon approval by CNQ's board of directors provided that CNQ:
(a) provides the Commission with written notice of the urgent need to implement the Rule prior to the submission of the Rule to CNQ's board of directors; and
(b) includes in the notice referenced in 8(b)(ii) an analysis in support of the need for immediate implementation of the Rule.
6. If the Commission does not agree that immediate implementation is necessary, the Commission will advise CNQ that is disagrees and provide the reasons for its disagreement. If no notice is received by CNQ within 5 business days of the Commission receiving CNQ's notification, CNQ shall assume that the Commission agrees with its assessment.
7. A Rule that is implemented immediately shall be published, reviewed and approved in accordance with the procedure set out above. Where the Commission subsequently disapproves a Rule that was implemented immediately, CNQ shall repeal the Rule and publish a notice informing its marketplace participants.
8. The terms, conditions and procedures set out in this section may be varied or waived by the Commission. A waiver or variation may be specific or general and may be made for a time or for all time.