Natural Gas Exchange Inc. - s. 147 of the Act and ss. 38 and 80 of the CFA

Headnote

NGX has submitted a formal application to the Commission for a permanent exemption (Permanent Exemption Application) from the requirement to be registered as a commodity futures exchange under section 15 of the Commodity Futures Act (Ontario) (CFA) and related relief. The Permanent Exemption Application is based in part on the regulatory oversight of NGX in Alberta; however NGX and the Alberta Securities Commission are currently reviewing the form of this regulatory oversight and therefore the Commission is unable to proceed with the Permanent Exemption Application at this time. In order to allow NGX to carry on business in Ontario while the Permanent Exemption Application is being processed, the Commission has granted NGX a temporary exemption from the requirement to be recognized as a stock exchange under section 21 of the Securities Act (Ontario) and the requirement to be registered as a commodity futures exchange under section 15 of the CFA. The Commission has also granted certain related registration relief from section 22 of the CFA for certain Ontario based NGX participants.

The interim order will expire on the earlier of (i) November 17, 2007 and (ii) the date a permanent order is granted by the Commission.

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21, 147.

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 15, 22, 38, 80.

IN THE MATTER OF

THE SECURITIES ACT, R.S.O. 1990, CHAPTER S.5,

AS AMENDED (OSA)

AND

IN THE MATTER OF

THE COMMODITY FUTURES ACT,

R.S.O. 1990, CHAPTER C.20,

AS AMENDED (CFA)

AND

IN THE MATTER OF

NATURAL GAS EXCHANGE INC.

ORDER

(Section 147 of the OSA and

sections 38 and 80 of the CFA)

WHEREAS Natural Gas Exchange Inc. (NGX) has filed an application dated November 16, 2006 (Application) with the Ontario Securities Commission (Commission) requesting the following interim orders (collectively, the Interim Order) pending completion of a final order:

(a) an interim order pursuant to section 147 of the OSA exempting NGX from the requirement to be recognized as a stock exchange under section 21 of the OSA;

(b) an interim order pursuant to section 80 of the CFA exempting NGX from the requirement to be registered as a commodity futures exchange under section 15 of the CFA;

(c) an interim order pursuant to section 38 of the CFA exempting trades in Current CFA Contracts (defined below) and Ontario Auction Products (defined below) on NGX by Current Ontario Participants (defined below) from the registration requirement under section 22 of the CFA; and

(d) an interim order pursuant to section 38 of the CFA exempting trades in Ontario Auction Products on NGX by New Ontario Participants (defined below) from the registration requirement under section 22 of the CFA;

AND WHEREAS Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario 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 NGX has represented to the Commission that:

1. NGX has its head office in Calgary, Alberta, and is not a reporting issuer or its equivalent in any jurisdiction in Canada;

2. NGX is a wholly-owned subsidiary of TSX Group Inc.;

3. The business of NGX (the Business) is to provide a system for certain sophisticated parties to enter into trades of NGX listed commodity contracts (Current Contracts), some of which are either commodity futures contracts or commodity futures options as defined under the CFA (Current CFA Contracts);

4. Trades in Current Contracts are made using a computer network that electronically matches bids and offers and also ensures the financial completion (clearing and settlement) of the transactions (Trading System);

5. All bids and offers in respect of Current Contracts are anonymous and are made available concurrently, through the Trading System, to all participants;

6. Access to the Trading System is limited to participants (Contracting Parties) that have satisfied certain eligibility thresholds, including prerequisite financial net worth thresholds (collectively, Eligibility Thresholds) and who have entered into a standard form agreement, the Contracting Party's Agreement (CPA);

7. Certain Contracting Parties are based in Ontario (Current Ontario Participants);

8. The CPA governs the activities of the Contracting Parties and NGX in respect of the Business; in particular, the CPA provides for the terms and conditions pursuant to which NGX will give Contracting Parties access to the Trading System, the formation and performance of the Current Contracts, a credit management system, the rules for the use of the Trading system, the recourse among the various parties and that NGX ensures the financial performance (clearing and settlement) of each Current Contract;

9. The Ontario Power Authority (OPA) has requested that NGX operate a series of standardized and centralized future auctions through NGX's Trading System (Exchange-Traded Auctions), in furtherance of the OPA's mandate to develop the Ontario electricity market;

10. In furtherance of price discovery and market transparency goals and to facilitate hedging needs, there is a marketplace demand for the prompt listing by NGX for secondary market trading of products relating to the Exchange-Traded Auctions;

11. To facilitate the auctions and the related secondary trading, it would be necessary for NGX to provide access to new Ontario-based participants (New Ontario Participants);

12. Each New Ontario Participant would be required to qualify as, and become, a Contracting Party and would only be permitted to trade in Ontario Auction Products (as defined below);

13. Certain products listed for trading through the Exchange-Traded Auctions, as well as secondary market products relating to the auctions, qualify as commodity futures contracts or commodity futures options as defined under the CFA (collectively, Ontario Auction Products);

14. Transactions in Ontario Auction Products will be cleared through NGX's centralized clearing system;

15. All Current Ontario Participants are, and all New Ontario Participants will be, hedgers as defined in section 1(1) of the CFA;

16. NGX currently operates in accordance with the terms and conditions of exemptive relief orders from applicable securities and commodities regulatory authorities in Alberta, Saskatchewan, Manitoba, British Columbia and Quebec;

17. As described in the current order renewed by the Alberta Securities Commission (ASC) on December 1, 2004, as principal regulator on behalf of the securities and commodities regulatory authorities in the provinces of Saskatchewan and Manitoba (MRRS Order), NGX is obligated to comply with nine core operating principles that are attached as Schedule A to this Interim Order (Core Principles);

18. Pursuant to the MRRS Order, NGX has provided undertakings to the ASC to: (i) immediately inform the ASC of any event, circumstance or situation that materially affects NGX's ability to comply with the Core Principles; (ii) keep trading, financial and other records sufficient to demonstrate compliance with the Core Principles, make them available and submit data promptly to the ASC upon request; (iii) file any revision to the CPA within two business days of the effective date of the revision; and (iv) immediately inform the ASC of any material change in the operation of the Trading System or in the beneficial ownership of the securities of NGX;

19. NGX, upon notification by Commission staff that it was considered to be carrying on business in Ontario due to the provision of direct electronic access to Ontario participants, agreed to apply to the Commission for the applicable exemptive relief from applicable laws in Ontario relating to its exchange activities in Ontario and relief from applicable registration requirements on behalf of its Contracting Parties based in Ontario (Final Order), which application was submitted on February 15, 2006 (OSC Application);

20. The OSC Application is based in part on the regulatory oversight of NGX in Alberta; however, NGX and the ASC are currently reviewing the form of this regulatory oversight and therefore the Commission is unable to proceed with the Final Order at this time until that review is complete;

21. It would be in the best interests of the Current Ontario Participants that NGX be allowed to continue to offer exchange services to the Current Ontario Participants while the OSC Application is pending;

22. NGX has been told by the OPA, and NGX agrees, that it would be in the best interests of the Ontario electricity markets, Current Ontario Participants and New Ontario Participants that NGX be allowed to expand its operations to include facilitating the Exchange-Traded Auctions and the related secondary market trading, while the OSC Application is pending;

AND WHEREAS NGX undertakes to:

(a) immediately inform the Commission of any event, circumstance or situation that materially affects NGX's ability to comply with the conditions and undertakings set out in this Interim Order or the MRRS Order;

(b) require any New Ontario Participants to sign the CPA and: (i) transact through the Trading System as principal; (ii) meet the NGX Eligibility Thresholds; (iii) satisfy the "accredited investor" exemption contained in NI 45-106; and (iv) trade only in Ontario Auction Products; and

(c) provide the Commission with thirty days prior notice of any material change to the NGX Eligibility Thresholds;

AND WHEREAS based on the Application and the representations NGX has made to the Commission, the Commission has determined that the granting of: (i) interim exemptions from recognition and registration to NGX; and (ii) interim exemptions from registration to Current Ontario Participants and New Ontario Participants would not be prejudicial to the public interest;

IT IS HEREBY ORDERED by the Commission that pursuant to section 147 of the OSA, NGX is exempt on an interim basis from recognition as a stock exchange under section 21 of the OSA, and pursuant to section 80 of the CFA, NGX is exempt from registration as a commodity futures exchange under section 15 of the CFA;

AND IT IS FURTHER ORDERED by the Commission that, pursuant to section 38 of the CFA, trades in Current CFA Contracts and Ontario Auction Products by Current Ontario Participants are exempt from the registration requirement under section 22 of the CFA;

AND IT IS FURTHER ORDERED by the Commission that, pursuant to section 38 of the CFA, trades in Ontario Auction Products by New Ontario Participants are exempt from the registration requirement under section 22 of the CFA;

PROVIDED THAT:

(a) NGX complies with the conditions and undertakings set out in this Interim Order and the MRRS Order (or any order that revises or replaces the MRRS Order), including the Core Principles;

(b) The Interim Order will expire on the earlier of (i) one year from the date this Interim Order is granted and (ii) the date a Final Order is granted.

Dated November 17, 2006

"Paul M. Moore"

"Harold P. Hands"

SCHEDULE A  

CORE PRINCIPLES

1. Financial Resources- The Exchange maintains adequate financial, operational and managerial resources to operate the Trading System and support its trade execution and clearing functions.

2. Operational Information Relating to Trading System and Contracts- The Exchange provides public disclosure of relevant and related information to Contracting Parties about contract terms and conditions, trading conventions, mechanisms and practices, financial integrity protections and other information relevant to participants.

3. Market Oversight- The Exchange has established appropriate standards regarding creditworthiness of Contracting Parties, the monitoring of trading to ensure an orderly market system, and assurances that the Exchange has sufficient authority to intervene where appropriate. The Exschange has adhered to, and will continue to adhere to, this principle.

4. Rule Enforcement- The Exchange maintains adequate arrangements and resources for the effective monitoring and enforcement of the rules regarding trading and clearing conducted through the Trading Facility, the commitment by the Exchange to appropriate enforcement of such rules, and the establishment of mechanisms for resolving disputes.

5. System Safeguards- The Exchange has established and maintains:

(a) a program of oversisght and risk analysis to ensure automated order entry and clearing systems function properly and have adequate capacity and security, including emergency procedures and a plan for disaster recovery to ensure daily processing, clearing and settlement of transactions; and

(b) a program of periodic objective system testing and risk review to assess the adequacy and effectiveness of the Trading System’s internal control systems and financial integrity protections, including a risk review of every new service and significant enhancement to existing services.

6. Transparency- The Exchange makes information on settlement prices, price range, trading volume, open interest and other related market information available daily to participants.

7. Record Keeping- The Exchange will maintain records of all activities related to the Trading System’s business in a form and manner acceptable to the Alberta Securities Commission for a period of five years and will make books and records available for inspection by Alberta Securities Commission representatives on request.

8. Risk Management- The Exchange identifies and manages the risks associated with clearance and settlement through the use of appropriate tools and procedures such as risk analysis tools and procedures, collateral, margin and credit limits.

9. Settlement Procedures- The Exchange prescribes standards and procedures to protect and safeguard participants’ funds and limits concentration risk, including the safekeeping of funds in accounts with depositories or with custodians which meet industry standards.