Application for an interim order that a multilateral trading facility authorized by the United Kingdom Financial Conduct Authority is exempt from the requirement to register as an exchange in Ontario with respect to swaps – requested order granted.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21, 147.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
IN THE MATTER OF
BLOOMBERG TRADING FACILITY LIMITED
(Section 147 of the Act)
WHEREAS Bloomberg Trading Facility Limited (the Applicant) has filed an application dated August 2, 2017 (Application) with the Ontario Securities Commission (Commission) pursuant to section 147 of the Act requesting an interim order exempting the Applicant from the requirement to be recognized as an exchange under subsection 21(1) of the Act (Order);
AND WHEREAS the Applicant has represented to the Commission that:
1. The Applicant is a limited company organized under the laws of England and Wales, and is a wholly owned subsidiary of Bloomberg L.P., a Delaware limited partnership;
2. On July 23, 2015, the U.K. Financial Conduct Authority (the “FCA” or “Foreign Regulator”), a financial regulatory body in the United Kingdom, authorized the Applicant to act as the operator of a multilateral trading facility (MTF) for interest rate swaps and credit default swaps under Part 4A of the UK Financial Services and Markets Act 2000. On June 10, 2016, the FCA granted the Applicant a Variation of Permission that expanded the Applicant’s authorization to additional financial instruments;
3. On January 3, 2018, the Markets in Financial Instruments Directive 2014/65/EU of the European Parliament and of the Council (MiFID II) will be implemented, requiring the Applicant to ensure that multilateral trading by European Union (EU)/European Economic Area (EEA) participants takes place on an EU-regulated trading venue. Without the Requested Relief, participants in Ontario will be precluded from trading with EU/EEA participants after January 3, 2018 in products that are required by regulatory technical standards made under Article 32 of Markets in Financial Instruments Regulation (EU) No 600/2014 of the European Parliament of the Council (MiFIR) to be traded on venues referred to in Article 28(1) of MiFIR (Mandatory Trading Requirement);
4. The Applicant is a marketplace for trading over-the-counter (OTC) derivative instruments and certain securities (the “MTF Instruments”). The Applicant’s MTF supports request-for-quote and request-for-trade functionality for interest rate swaps, credit default swaps, government and corporate bonds and similar fixed-income instruments, foreign exchange derivatives (e.g., foreign exchange forwards, non-deliverable forwards and options), securities financing transactions (including repurchase transactions, buy-sell and sell-buy back transactions), exchange-traded funds (which are not listed, quoted or traded on a Canadian exchange), equity swaps and OTC equity options. The Applicant may add other types of financial instruments in the future, subject to obtaining required regulatory approvals;
5. The Applicant is subject to regulatory supervision by the FCA and is required to comply with the FCA’s Handbook, which includes, among other things, rules on (i) the conduct of business (including rules regarding client categorization, communication with clients and other investor protections and client agreements), (ii) market conduct (including rules applicable to firms operating an MTF), and (iii) systems and controls (including rules on outsourcing, governance, record-keeping and conflicts of interest). The FCA requires the Applicant to comply at all times with a set of threshold conditions for authorization, including requirements that the Applicant is “fit and proper” to be authorized and that it has appropriate resources for the activities it carries on. The Applicant is subject to prudential regulation, including minimum regulatory capital requirements, and is capitalized in excess of regulatory requirements. The Applicant is required to maintain a permanent and effective compliance function, which is headed by the Applicant’s Chief Compliance Officer, an FCA-approved person. The Applicant’s Compliance Department is responsible for implementing and maintaining adequate policies and procedures designed to ensure that the Applicant (and all of its employees) comply with their obligations under the FCA rules.
6. An MTF is obliged under FCA rules to have requirements governing the conduct of participants, to monitor compliance with those requirements and report to the FCA (a) significant breaches of Bloomberg MTF Rules, (b) disorderly trading conditions, and (c) conduct that may involve market abuse. The Applicant will also notify the FCA when a participant’s access is terminated, and may notify the FCA when a participant is temporarily suspended or subject to condition(s). As required by FCA rules, the Applicant has implemented a trade surveillance program. As part of the program, the Applicant’s Compliance Department conducts real-time market monitoring of trading activity on Bloomberg MTF to identify disorderly trading and market abuse or anomalies. The trade surveillance program is designed to maintain a fair and orderly market for Bloomberg MTF participants;
7. The Bloomberg MTF is available to participants via the Bloomberg Terminal and via application programming interface (“API”). This access is available for no additional fee to participants that are subscribers to the Bloomberg Terminal and pay the monthly subscription fee for the Bloomberg Terminal to Bloomberg Finance L.P. (“BFLP”), an affiliate of the Applicant. Although the Applicant does not currently charge a fee to Bloomberg MTF participants for the use of Bloomberg MTF, it plans to at a later time to charge Bloomberg MTF participants a per-trade fee or other fee for the use of Bloomberg MTF;
8. An MTF must submit all trades that are required to be cleared to a clearing house for clearing. The Applicant provides direct connectivity to the following clearing houses for clearing interest rate swaps: LCH Ltd. (formerly known as LCH.Clearnet Ltd.) and Chicago Mercantile Exchange, Inc., each of which is recognized or has obtained an exemption from recognition as a clearing agency in Ontario. The Applicant provides direct connectivity to the following clearing houses for credit default swaps: ICE Clear Credit LLC and Chicago Mercantile Exchange Inc., each of which has obtained an exemption from recognition as a clearing agency in Ontario;
9. The Applicant requires that its participants be “professional clients,” as defined by the FCA in the FCA’s Conduct of Business Sourcebook, Chapter 3 “Client categorisation” (“Professional Clients”) and as set forth in Appendix I of this Application and be either (i) authorised as a credit institution with a license in an EEA country or as an EEA investment firm, or (ii) an entity that has satisfied and will continue to satisfy the Applicant that it is fit and proper to become a participant, with adequate organizational arrangements in place and a sufficient level of trading ability and competence. Each prospective participant must: comply and ensure that its authorized traders comply, and, in each case, continue to comply, with the Bloomberg MTF Rulebook and applicable law; have the legal capacity to trade in the instruments it selects to trade on the Bloomberg MTF; have appropriate systems and arrangements for the orderly clearance and/or settlement, as applicable, of transactions in all instruments it selects to trade on the Bloomberg MTF; have all registrations, authorizations, approvals and/or consents required by applicable law in connection with trading in instruments on the Bloomberg MTF; have adequate experience, knowledge and competence to transact in the MTF Instruments; and not be a natural person, independent software provider, trading venue or unregulated organized trading platform or system.
10. All participants that are located in Ontario (“Ontario Participants”) will be required to sign a user acknowledgment representing that they meet the criteria set forth in the user acknowledgment, including that they are appropriately registered under Ontario securities laws, exempt from registration or not subject to registration requirements. The user acknowledgment will require an Ontario Participant to make an ongoing representation each time it uses the Bloomberg MTF that it continues to meet the criteria set forth in the user acknowledgment. An Ontario Participant will also be required to immediately notify the Applicant if it ceases to meet any of the above criteria represented by it on an ongoing basis;
11. The Applicant expects that Ontario Participants will include financial institutions, asset managers, dealers, government entities, pension funds and other well-capitalized entities that meet the criteria described above. The Applicant will not offer access to retail clients;
12. Because the MTF sets requirements for the conduct of its participants and surveils the trading activity of its participants, it is considered by the Commission to be an exchange;
13. Since the Applicant seeks to provide Ontario Participants with direct access to trading of the MTF Instruments on the Bloomberg MTF, it is considered by the Commission to be “carrying on business as an exchange” in Ontario and is required to be recognized as such or exempted from recognition pursuant to section 21 of the Act;
14. The Applicant has no physical presence in Ontario and does not otherwise carry on business in Ontario except as described herein;
15. The Applicant intends to file a full application to the Commission for a subsequent order exempting it from the requirement to be recognized as an exchange under section 147 of the Act (“Subsequent Order”).
AND WHEREAS the products traded on the Applicant’s MTF are not commodity futures contracts as defined in the Commodity Futures Act (Ontario) and the Applicant is not considered to be carrying on business as a commodity futures exchange in Ontario;
AND WHEREAS the Commission will monitor developments in international and domestic capital markets and the Applicant’s activities on an ongoing basis to determine whether it is appropriate for the Exchange Relief to continue to be granted subject to the terms and conditions set out in Schedule “A” to this order;
AND WHEREAS the Applicant has acknowledged to the Commission that the scope of the Exchange Relief and the terms and conditions imposed by the Commission set out in Schedule “A” to this order may change as a result of the Commission’s monitoring of developments in international and domestic capital markets or the Applicant’s activities, or as a result of any changes to the laws in Ontario affecting trading in derivatives or securities;
AND WHEREAS based on the Application, together with the representations made by and acknowledgments of the Applicant to the Commission, the Commission has determined that the granting of the Exchange Relief would not be prejudicial to the public interest;
IT IS HEREBY ORDERED by the Commission that, pursuant to section 147 of the Act, the Applicant is exempt on an interim basis from recognition as an exchange under subsection 21(1) of the Act,
1. This Order shall terminate on the earlier of (i) January 3, 2019 and (ii) the effective date of the Subsequent Order;
2. The Applicant complies with the terms and conditions contained in Schedule “A;” and
3. The Applicant files a full application to the Commission for a Subsequent Order by March 31, 2018.
DATED December 22, 2017
DEFINITION OF PROFESSIONAL CLIENTS
This Appendix I provides the definition of a “Professional Client,” as defined by the FCA in the FCA’s Conduct of Business Sourcebook, Chapter 3 “Client categorisation.”
3.5 Professional clients
3.5.1 A professional client is a client that is either a per se professional client or an elective professional client.
[Note: article 4(1)(11) of MiFID]
Per se professional clients
3.5.2 Each of the following is a per se professional client unless and to the extent it is an eligible counterparty or is given a different categorisation under this chapter:
(1) an entity required to be authorised or regulated to operate in the financial markets. The following list includes all authorised entities carrying out the characteristic activities of the entities mentioned, whether authorised by an EEA State or a third country and whether or not authorised by reference to a directive:
(a) a credit institution;
(b) an investment firm;
(c) any other authorised or regulated financial institution;
(d) an insurance company;
(e) a collective investment scheme or the management company of such a scheme;
(f) a pension fund or the management company of a pension fund;
(g) a commodity or commodity derivatives dealer;
(h) a local;
(i) any other institutional investor;
(2) in relation to MiFID or equivalent third country business a large undertaking meeting two of the following size requirements on a company basis:
(a) balance sheet total of EUR 20,000,000;
(b) net turnover of EUR 40,000,000;
(c) own funds of EUR 2,000,000;
(3) in relation to business that is not MiFID or equivalent third country business a large undertaking meeting any of the following conditions:
(a) a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) (or has had at any time during the previous two years) called up share capital or net assets of at least £5 million (or its equivalent in any other currency at the relevant time);
(b) an undertaking that meets (or any of whose holding companies or subsidiaries meets) two of the following tests:
(i) a balance sheet total of EUR 12,500,000;
(ii) a net turnover of EUR 25,000,000;
(iii) an average number of employees during the year of 250;
(c) a partnership or unincorporated association which has (or has had at any time during the previous two years) net assets of at least £5 million (or its equivalent in any other currency at the relevant time) and calculated in the case of a limited partnership without deducting loans owing to any of the partners;
(d) a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme or stakeholder pension scheme) which has (or has had at any time during the previous two years) assets of at least £10 million (or its equivalent in any other currency at the relevant time) calculated by aggregating the value of the cash and designated investments forming part of the trust's assets, but before deducting its liabilities;
(e) a trustee of an occupational pension scheme or SSAS, or a trustee or operator of a personal pension scheme or stakeholder pension scheme where the scheme has (or has had at any time during the previous two years):
(i) at least 50 members; and
(ii) assets under management of at least £10 million (or its equivalent in any other currency at the relevant time);
(f) a local authority or public authority.
(4) a national or regional government, a public body that manages public debt, a central bank, an international or supranational institution (such as the World Bank, the IMF, the ECP, the EIB) or another similar international organisation;
(5) another institutional investor whose main activity is to invest in financial instruments (in relation to the firm's MiFID or equivalent third country business) or designated investments (in relation to the firm's other business). This includes entities dedicated to the securitisation of assets or other financing transactions.
[Note: first paragraph of section I of annex II to MiFID]
3.5.2A In relation to MiFID or equivalent third country business a local authority or a public authority is not likely to be a regional government for the purposes of ● COBS 3.5.2 R (4). In the FCA's opinion, a local authority may be a per se professional client for those purposes if it meets the test for large undertakings in ● COBS 3.5.2 R (2).
Elective professional clients
3.5.3 A firm may treat a client as an elective professional client if it complies with (1) and (3) and, where applicable, (2):
(1) the firm undertakes an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved (the "qualitative test");
(2) in relation to MiFID or equivalent third country business in the course of that assessment, at least two of the following criteria are satisfied:
(a) the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;
(b) the size of the client’s financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;
(c) the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged;
(the “quantitative test”); and
(3) the following procedure is followed:
(a) the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product;
(b) the firm must give the client a clear written warning of the protections and investor compensation rights the client may lose; and
(c) the client must state in writing, in a separate document from the contract, that it is aware of the consequences of losing such protections.
[Note: first, second, third and fifth paragraphs of section II.1 and first paragraph of section II.2 of annex II to MiFID]
3.5.4 If the client is an entity, the qualitative test should be performed in relation to the person authorised to carry out transactions on its behalf.
[Note: fourth paragraph of section II.1 of annex II to MiFID]
3.5.5 The fitness test applied to managers and directors of entities licensed under directives in the financial field is an example of the assessment of expertise and knowledge involved in the qualitative test.
[Note: fourth paragraph of section II.1 of annex II to MiFID]
3.5.6 Before deciding to accept a request for re-categorisation as an elective professional client a firm must take all reasonable steps to ensure that the client requesting to be treated as an elective professional client satisfies the qualitative test and, where applicable, the quantitative test.
[Note: second paragraph of section II.2 of annex II to MiFID]
3.5.7 An elective professional client should not be presumed to possess market knowledge and experience comparable to a per se professional client.
[Note: second paragraph of section II.1 of annex II to MiFID]
3.5.8 Professional clients are responsible for keeping the firm informed about any change that could affect their current categorisation.
[Note: fourth paragraph of section II.2 of annex II to MiFID]
3.5.9 (1) If a firm becomes aware that a client no longer fulfils the initial conditions that made it eligible for categorisation as an elective professional client, the firm must take the appropriate action.
(2) Where the appropriate action involves re-categorising that client as a retail client, the firm must notify that client of its new categorisation.
[Note: fourth paragraph of section II.2 of annex II to MiFID and article 28(1) of the MiFID implementing Directive]
TERMS AND CONDITIONS
Regulation and Oversight of the Applicant
1. The Applicant will maintain its registration as a multilateral trading facility (MTF) with the U.K. Financial Conduct Authority (FCA) and will continue to be subject to the regulatory oversight of the FCA.
2. The Applicant will continue to comply with the ongoing requirements applicable to it as an MTF registered with the FCA.
3. The Applicant will promptly notify the Commission if its registration as an MTF has been revoked, suspended, or amended by the FCA, or the basis on which its registration as an MTF has been granted has significantly changed.
4. The Applicant must do everything within its control, which includes cooperating with the Commission as needed, to carry out its activities as an exchange exempted from recognition under subsection 21(1) of the Act in compliance with Ontario securities law.
5. The Applicant will not provide direct access to a participant in Ontario (Ontario User) unless the Ontario User is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements, and qualifies as a “professional client”, as defined by the FCA in the FCA’s Conduct of Business Sourcebook, Chapter 3 “Client Categorisation.”
6. For each Ontario User provided direct access to its MTF, the Applicant will require, as part of its application documentation or continued access to the MTF, the Ontario User to represent that it is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements.
7. The Applicant may reasonably rely on a written representation from the Ontario User that specifies either that it is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements, provided the Applicant notifies such Ontario User that this representation is deemed to be repeated each time it enters an order, request for quote or response to a request for quote or otherwise uses the Applicant’s MTF.
8. The Applicant will require Ontario Users to notify the Applicant if their registration as applicable under Ontario securities laws has been revoked, suspended, or amended by the Commission or if they are no longer exempt from or become subject to those requirements and, following notice from the Ontario User and subject to applicable laws, the Applicant will promptly restrict the Ontario User’s access to the Applicant if the Ontario User is no longer appropriately registered or exempt from those requirements.
9. The Applicant must make available to Ontario Users appropriate training for each person who has access to trade on the Applicant’s facilities.
Trading by Ontario Users
10. The Applicant will not provide access to an Ontario User to trading in products other than swaps, as defined in section 1a(47) of the United States Commodity Exchange Act as amended, without prior Commission approval.
Submission to Jurisdiction and Agent for Service
11. 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 the Applicant in Ontario, the Applicant will submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario.
12. The Applicant 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, related to, concerning or in any other manner connected with the Commission’s regulation and oversight of the Applicant’s activities in Ontario.
13. The Applicant will provide to its Ontario Users disclosure that:
(a) rights and remedies against the Applicant may only be governed by the laws of the United States (U.S.), rather than the laws of Ontario and may be required to be pursued in the U.S. rather than in Ontario; and
(b) the rules applicable to trading on the Applicant may be governed by the laws of the United Kingdom or U.S., rather than the laws of Ontario.
14. The Applicant will notify staff of the Commission promptly of:
(a) any material change to its business or operations or the information provided in the Application, including, but not limited to material changes:
(i) to the regulatory oversight by the FCA;
(ii) the corporate governance structure of the Applicant;
(iii) the access model, including eligibility criteria, for Ontario Users;
(iv) systems and technology; and
(v) the clearing and settlement arrangements for the Applicant;
(b) any change in the Applicant’s regulations or the laws, rules and regulations in the U.K. relevant to the financial instruments available for trading on the Applicant’s MTF where such change may materially affect its ability to meet the criteria set out in Appendix I to this Schedule;
(c) any condition or change in circumstances whereby the Applicant is unable or anticipates it will not be able to continue to meet any of the relevant rules and regulations of the FCA, as set forth in the FCA Handbook;
(d) any known investigations of, or any disciplinary action against the Applicant by the FCA or any other regulatory authority to which it is subject;
(e) any matter known to the Applicant that may materially and adversely affect its financial or operational viability, including, but not limited to, any declaration of an emergency pursuant to the Applicant’s rules;
(f) any default, insolvency, or bankruptcy of a participant of the Applicant known to the Applicant or its representatives that may have a material, adverse impact upon the Applicant; and
(g) any material systems outage, malfunction or delay.
15. The Applicant will promptly provide staff of the Commission with the following information to the extent it is required to provide to or file such information with the FCA:
(a) details of any material legal proceeding instituted against the Applicant;
(b) notification that the Applicant has instituted a petition for a judgment of bankruptcy or insolvency or similar relief, or to wind up or liquidate the Applicant or has a proceeding for any such petition instituted against it; and
(c) the appointment of a receiver or the making of any voluntary arrangement with creditors.
16. The Applicant 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 and whether the Ontario User is registered under Ontario securities laws or is exempt from or not subject to registration, and, to the extent known by the Applicant, other persons or companies located in Ontario trading on the Applicant’s MTF as customers of participants (Other Ontario Participants);
(b) the legal entity identifier assigned to each Ontario User, and, to the extent known by the Applicant, to Other Ontario Participants in accordance with the standards set by the Global Legal Entity Identifier System;
(c) a list of all Ontario Users whom the Applicant has referred to the FCA, or, to the best of the Applicant’s knowledge, whom have been disciplined by the FCA with respect to such Ontario Users’ activities on the Applicant’s MTF and the aggregate number of all participants referred to the FCA in the last quarter by the Applicant;
(d) a list of all active investigations during the quarter by the Applicant relating to Ontario Users and the aggregate number of active investigations during the quarter relating to all participants undertaken by the Applicant;
(e) a list of all Ontario applicants for status as a participant who were denied such status or access to the Applicant during the quarter, together with the reasons for each such denial;
(f) a list of all additions, deletions, or changes to the products available for trading since the prior quarter;
(g) for each product,
(i) the total trading volume and value originating from Ontario Users, and, to the extent known by the Applicant, from Other Ontario Participants, presented on a per Ontario User or per Other Ontario Participant basis; and
(ii) the proportion of worldwide trading volume and value on the Applicant conducted by Ontario Users, and, to the extent known by the Applicant, by Other Ontario Participants, presented in the aggregate for such Ontario Users and Other Ontario Participants;
provided in the required format; and
(h) a list outlining each material incident of a security breach, systems failure, malfunction, or delay (including cyber security breaches, systems failures, malfunctions or delays reported under section 15(g) of this Schedule) that occurred at any time during the quarter for any system relating to trading activity, including trading, routing or data, specifically identifying the date, duration and reason, to the extent known or ascertainable by the Applicant, for the failure, malfunction or delay, and noting any corrective action taken.
17. The Applicant will file with the Commission any annual financial report or financial statements (audited or unaudited) of the Applicant provided to or filed with the FCA promptly after filing with the FCA.
18. The Applicant will provide such information 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.