Industry


LME CLEAR LIMITED
(LMEC)

APPLICATION FOR EXEMPTIVE RELIEF

NOTICE OF COMMISSION ORDER



On December 21, 2018, the Commission issued an order under section 147 of the Securities Act (Ontario) (OSA) exempting LMEC from the requirement in subsection 21.2(0.1) of the OSA to be recognized as a clearing agency (Order), subject to terms and conditions as set out in the Order.

The Commission published LMEC’s application and draft exemption order for comment on November 8, 2018 on the OSC website at http://www.osc.gov.on.ca/en/Marketplaces_lme_20181108_application-for-exemption.htm and at (2018), 41 OSCB 8894. A comment letter was received from TMX Group Limited (TMX). A copy of the comment letter is posted at http://www.osc.gov.on.ca/documents/en/Marketplaces/com_lme_20181207_tmx.pdf. We summarize below the main comments and Staff’s responses to them. In issuing the Order, no substantive changes were made to the draft order published for comment.

A copy of the Order is published in Chapter 2 of this Bulletin.

Comment

Response

As a general comment, TMX states that while it does not oppose LMEC’s application for exemption, the Commission should consider how its prescriptive rules-based approach to domestic clearing agency regulation and granting such exemptions to foreign based clearing agencies inadvertently undermines the interests of domestic clearing agencies and their users.

As a matter of policy, the OSC’s mandate is to provide protection to investors from unfair, improper or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk. The existence of different regulatory regimes is acknowledged in the CPMI-IOSCO's Principles for financial market infrastructures that requires authorities to cooperate with each other in promoting the safety and efficiency of financial market infrastructures (FMIs). Consistent with past practices, we allow foreign entities (such as LMEC) to enter the Ontario market under the exempted clearing agency status only when we are satisfied that doing so would not pose a significant risk to our capital markets, and that the foreign entity is subject to an appropriate and comparable regulatory oversight regime in their home jurisdiction and we have a cooperating relationship with their home regulator(s).

TMX comments that domestic clearing agencies and their users are put in a competitive disadvantage by this prescriptive rules-based approach as compared to their foreign counterparties when entering the market. TMX cites a few examples that CDS, as a recognised clearing agency is required to adhere to NI 24-102 and CP 24-102, which is comprised of rules and principles, in addition to highly prescriptive recognition orders from three provincial regulations. TMX discusses the requirements and approvals needed with regards to CDS’ fees, governance and rules; while in contrast foreign based clearing agencies are not subject to the same regulatory requirements.

Our approach to recognition or exemption of a foreign-based clearing agency is consistent with our approach to recognition or exemption of domestic clearing agencies. It is based largely on whether the clearing agency poses significant risk to the Ontario capital markets. To the extent the clearing agency does not pose a significant risk to the Ontario capital markets and is subject to an appropriate and comparable regulatory oversight regime carried out by its home jurisdiction, we rely on the oversight of the home regulator, subject to certain terms and conditions to reduce overlap and duplication.

TMX comments that a principles-based regulatory approach would more effectively leverage the expertise and experience of the domestic clearing agencies while enabling regulators to maintain the necessary oversight over systemically important domestic financial market infrastructures.

The OSC will continue to be responsive to market evolution while ensuring that its mandate to provide protection to investors and to contribute to the stability of the financial system and the reduction of systemic risk is maintained.