Securities Law & Instruments


Headnote

U.K. regulated firm exempted from dealer registration under paragraph 25(1) of the Act for provision of prime brokerage services – relief limited to trades in Canadian securities for institutional permitted clients – relief is subject to sunset clause.

Applicable Legislative Provisions

Statutes Cited

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1), 74(1).

Instruments Cited

Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 8.5, 8.18, 8.21.
National Instrument 81-102 Investment Funds.

May 15, 2018

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the Jurisdiction)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
J.P. MORGAN SECURITIES PLC
(the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer (the Application) for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Filer from dealer registration under section 25(1) of the Securities Act (Ontario) (the Act) in respect of the provision to Institutional Permitted Clients (as defined below) of Prime Services (as defined below) relating to securities of Canadian issuers (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a)           the Ontario Securities Commission (OSC) is the principal regulator for this Application, and

(b)           the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada in which the Filer relies on the exemption found in section 8.18 [International dealer] of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) other than the province of Alberta (the Passport Jurisdictions and together with the Jurisdiction, the Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

For the purposes of this decision, the following term has the following meaning:

“Institutional Permitted Client” shall mean a “permitted client” as defined in section 1.1 of NI 31-103, except for: (a) an individual, (b) a person or company acting on behalf of a managed account of an individual, (c) a person or company referred to in paragraph (p) of that definition unless that person or company qualifies as an Institutional Permitted Client under another paragraph of that definition, or (d) a person or company referred to in paragraph (q) of that definition unless that person or company has net assets of at least $100 million as shown on its most recently prepared financial statements or qualifies as an Institutional Permitted Client under another paragraph of that definition.

Representations

This decision is based on the following facts represented by the Filer:

1.             The Filer is a public limited company registered in England and Wales having its registered office at 25 Bank Street, Canary Wharf, London, E14 5JP, United Kingdom (U.K.). The Filer is a wholly-owned subsidiary of JPMorgan Chase Bank, N.A., a U.S. national banking association, and an indirect wholly owned subsidiary of JPMorgan Chase & Co. (JPMChase).

2.             The Filer is authorized by the Prudential Regulation Authority in the United Kingdom (PRA) under the U.K. Financial Services and Markets Act 2000 (as amended, including those amendments introduced by the Financial Services Act 2012) (the FSMA) to carry on a range of regulated activities within the U.K. and is subject to “dual regulation” by the Financial Conduct Authority in the United Kingdom (FCA) and the PRA. The Filer is currently licensed in the U.K. to deal with eligible counterparties, professional clients and retail clients with respect to its permitted activities. The Filer is currently authorized to carry on certain regulated activities in the U.K. in relation to certain specified investments, including the following: (a) dealing in investments as principal; (b) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments; and (c) safeguarding and administering investments. As is the case with all firms authorized in the U.K., the Filer’s current U.K. regulatory status remains subject to variation and the possible imposition of regulatory limitations or requirements and is described as at the date of the Application.

3.             The Filer has “passported” its U.K. registration into the European Economic Area (EEA) Member States. In relation to the Filer’s provision of prime services, the Filer utilizes its EEA passport to the extent that it may provide prime services in other EEA Member States, and currently provides such prime services out of its head office in London.

4.             The Filer is a member of major international securities and commodity futures exchanges and clearing houses, including but not limited to the London Stock Exchange, the London Metal Exchange, the Eurex Exchange, ICE Futures Europe, LCH.Clearnet S.A., LCH Clearnet Ltd. and ICE Clear Europe.

5.             “Prime Services” provided by the Filer principally consists of the following: (a) settlement, clearing and custody of trades; (b) financing of long inventory; (c) securities borrowing and/or lending pursuant to a securities lending agreement or delivering securities on behalf of a client pursuant to a margin agreement, in each case, to facilitate client short sales; and (d) reporting of positions, margin and other balances and activity. For greater clarity, Prime Services do not include execution of trades in securities.

6.             The Filer wishes to provide Prime Services in the Jurisdictions to Institutional Permitted Clients (the Prime Services Clients).

7.             In the case of a Prime Services Client that is an investment fund subject to Part 6 of National Instrument 81-102 Investment Funds (NI 81-102), the custodianship requirements in Part 6 of NI 81-102 would only permit the Filer to provide the Prime Services to the investment fund as a sub-custodian of the investment fund in respect of portfolio assets held outside Canada, and the Filer would provide Prime Services to an investment fund in compliance with the securities law applicable to the investment fund, including Part 6 of NI 81-102 and the custody requirements set out in NI 31-103.

8.             Prime Services Clients seek Prime Services from the Filer to enable the separation of the execution of a trade from the clearing, settlement, custody and financing of a trade. This allows the Prime Services Client to use many executing brokers, without maintaining an active, ongoing custody account with each executing broker. It also allows the Prime Services Client to consolidate settlement, clearing, custody and financing of securities in an account with the Filer.

9.             The Filer’s Prime Services Clients directly select their executing brokers. The Filer does not require their Prime Services Clients to use specific executing brokers through which Prime Services Clients must execute trades. Prime Services Clients send trade orders to the executing broker who carries out the trade. The executing broker will be an appropriately registered dealer or a person or company relying on an exemption from dealer registration that permits such executing broker to execute the trade for Prime Services Clients.

10.          The Filer provides the Prime Services after the execution of the trade, but any commitment to provide financing or to lend or borrow securities in relation to a trade may be made prior to the execution of the trade. The executing broker will communicate the trade details to a Prime Services Client and the Filer or the Filer’s clearing agent, as applicable. A Prime Services Client will also communicate the trade details to the Filer. For trades executed on a Canadian marketplace, the Filer will typically need to clear and settle the trades through a participant of the Canadian depository, clearing and settlement hub, CDS Clearing and Depository Services Inc.

11.          The Filer exchanges money or securities and holds the money or securities in an account for each Prime Services Client. If the Filer is clearing and settling the trade through a clearing agent, the Filer’s clearing agent exchanges money or securities and holds the money or securities in an omnibus account for the Filer, which in turn maintains a record of the position held for the Prime Services Client on its books and records.

12.          On or following settlement, the Filer provides the other Prime Services as set out in paragraph 5.

13.          The Filer enters into written agreements with all of its Prime Services Clients for the provision of Prime Services.

14.          On September 2, 2011, in CSA Staff Notice 31-327 Broker-Dealer Registration in the Exempt Market Dealer Category, the Canadian Securities Administrators (CSA) stated that they had concerns with firms applying for registration in and with firms registered in the category of exempt market dealer (EMD) who were carrying on brokerage activities, including trading listed securities. In light of these regulatory concerns, firms applying for registration were instead registered in the restricted dealer category with terms and conditions. The interim restricted dealer registrations were time limited and were intended to allow applicants to engage in limited activities while the CSA reviewed the activities of firms registered in the category of EMD and restricted dealer.

15.          On February 7, 2013, in CSA Staff Notice 31-333 Follow-up to Broker-Dealer Registration in the Exempt Market Dealer Category, the CSA stated that they would be publishing amendments to NI 31-103 that would prohibit exempt market dealers from trading in a security if the security is listed, quoted or traded on a marketplace and if the trade in the security does not require reliance on a further exemption from the prospectus requirement (the Rule Amendments). The CSA stated that restricted dealers conducting brokerage activities in accordance with the terms and conditions of their registration would have their registration and any related exemptive relief extended to the date the Rule Amendments came into effect.

16.          The Rule Amendments came into effect on July 11, 2015. Since the implementation of the Rule Amendments, only investment dealers that are dealer members of the Investment Industry Regulatory Organization of Canada (IIROC) or firms relying on an applicable exemption from the dealer registration requirement are permitted to engage in trading in a security if the security is listed, quoted or traded on a marketplace and if the trade in the security does not require reliance on a further exemption from the prospectus requirement in the Jurisdictions.

17.          The Filer is relying on the “international dealer exemption” under section 8.18 [International dealer] of NI 31-103 in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Québec and Saskatchewan.

18.          The Filer is not registered under NI 31-103, is in the business of trading in securities, and in the absence of the Exemption Sought, would not be able to provide the full range of Prime Services in the Jurisdictions in respect of securities of Canadian issuers without registration, except as permitted under section 8.5 [Trades through or to a registered dealer], under the exemptions found in paragraphs (a), (b) and (f) of subsection 8.18(2) [International dealer], and under section 8.21 [Specified debt] of NI 31-103.

19.          The Filer is subject to regulatory capital requirements under the European Union Capital Requirements Directive and Regulation and PRA capital rules, which implement Basel III (UK Capital Requirements).

20.          The UK Capital Requirements require that the Filer account for any guarantee of a debt of a third party through the credit risk element of its capital calculations. Broadly, the exposure value of a guarantee of a debt of a third party will be its accounting value remaining after certain adjustments are made as set out in the UK Capital Requirements. Where a guarantee is an off-balance sheet item, the UK Capital Requirements also specify how the exposure value of that guarantee is to be calculated.

21.          The UK Capital Requirements are designed to provide protections that are substantially similar to the protections provided by the capital formula requirements and specifically risk adjusted capital to which dealer members of IIROC are subject. If the Filer’s net capital declines below the minimum amount required, the Filer is required to notify the PRA under Rule 2.4 of the PRA’s “General Notification Requirements” Rulebook chapter. The Filer’s capital ratios exceed the minimum standards imposed by the UK Capital Requirements.

22.          The Filer is required to prepare and submit capital solvency, leverage and large exposures data to the PRA on a quarterly basis. The disclosures are made in compliance with the Common Reporting (COREP) framework and are ultimately remitted to the European Banking Authority. The COREP framework provides a more comprehensive description of the business activities of the Filer, and more accurately reflects those activities including client lending activity, than would be provided by Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1). The COREP reports cover the capital requirements and own funds reporting of a credit institution including, amongst other elements, capital adequacy, leverage, liquidity coverage, large exposures, stable funding and asset encumbrance. In contrast, the Form 31-103F1 is a calculation of excess working capital, which is a computation based primarily on the current assets and current liabilities on the books and records of the dealer. The Filer is up-to-date in its submissions of COREP reporting.

23.          When carrying out the financing activities set out in the definition of Prime Services in paragraph 5, above, the Filer is subject to regulations of both the PRA and the FCA. These regulations are designed to provide protections that are substantially similar to the protections provided by the requirements regarding the lending of money, extension of credit and provision of margin to clients to which dealer members of IIROC are subject.

24.          The Filer holds customer assets in accordance with the FCA’s Client Assets Sourcebook (CASS Rules). CASS Rules require the Filer to segregate and keep segregated all custody assets of its clients from its proprietary assets. The requirement to maintain segregated securities is designed to ensure that the Filer has sufficient assets to cover all net equity claims of its customers and provide protections that are substantially similar to the protections provided by the requirements applicable to dealer members of IIROC. The Filer is in material compliance with the possession and control requirements of the CASS Rules.

25.          The deposit insurance organization in the U.K. is the Financial Services Compensation Scheme, and the existing compensation limit on deposits is £85,000 per person per firm and on investments is £50,000 per person per firm, in both cases available to eligible claimants.

26.          The Filer is in compliance in all material respects with U.K. securities laws. The Filer is not in default of securities legislation in any jurisdiction in Canada.

27.          The Filer submits that the Exemption Sought would not be prejudicial to the public interest because:

(a)           the Filer is a regulated firm under the securities legislation of the U.K. and is subject to the requirements listed in paragraphs 19 to 25,

(b)           the availability of and access to Prime Services is important to Canadian institutional investors who are active participants in the international marketplace,

(c)           the Filer will provide Prime Services in the Jurisdictions only to Institutional Permitted Clients, and

(d)           the OSC has entered into a memorandum of understanding with the FCA regarding mutual assistance in the supervision and oversight of regulated entities that operate on a cross-border basis in the U.K. and Canada.

28.          At the request of the Alberta Securities Commission, the Filer will not rely on subsection 4.7(1) of MI 11-102 to passport this decision into Alberta.

29.          The Filer is a “market participant” as defined under subsection 1(1) of the Act. As a market participant, among other requirements, the Filer is required to comply with the record keeping and provision of information provisions under section 19 of the Act, which include the requirement to keep such books, records and other documents as are necessary for the proper recording of business transactions and financial affairs and the transactions executed on behalf of others, and to deliver such records to the OSC if required.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted so long as the Filer:

(a)           has its head office or principal place of business in the U.K.;

(b)           is authorised by the PRA and regulated by the PRA and the FCA in the U.K. and permitted to deal with eligible counterparties, professional and retail clients with respect to its permitted activities;

(c)           engages in the business of clearing securities and exchange-traded derivatives in the U.K. and, as permitted by the passport regime set out in the second Markets in Financial Instruments Directive (and any other successor legislation) in the EEA;

(d)           is subject to requirements over regulatory capital, lending of money, extension of credit and provision of margin, financial reporting to the PRA and/or the FCA, and segregation and custody of assets which provide protections that are substantially similar to the protections provided by the rules to which dealer members of IIROC are subject;

(e)           limits its provision of Prime Services in the Jurisdictions in respect of securities of Canadian issuers to Institutional Permitted Clients;

(f)            does not execute trades in securities of Canadian issuers with or for Prime Services Clients, except as permitted under applicable Canadian securities laws;

(g)           does not require its Prime Services Clients to use specific executing brokers through which Prime Services Clients must execute trades;

(h)           notifies the Commission of any regulatory action initiated after the date of this ruling in respect of the Filer, or any predecessors or specified affiliates of the Filer, by completing and filing with the Commission Appendix “B” hereto within ten days of the commencement of such action; provided that the Filer may also satisfy this condition by filing with the Commission within ten days of the date of this Decision a notice making reference to and incorporating by reference the disclosure made relating to the Filer pursuant to U.S. federal securities laws, and any updates to such disclosure that may be made from time to time, and by providing a copy, in a manner reasonably acceptable to the Director, of any Form BD “Regulatory Action Disclosure Reporting Page” relating to the Filer;

(i)            submits audited financial statements to the OSC on an annual basis, within 90 days of the Filer’s financial year end;

(j)            submits to the OSC immediately a copy of any notice filed with the PRA in relation to the Filer’s capital ratios having breached the minimum standards imposed by the U.K. Capital Requirements;

(k)           complies with the filing and fee payment requirements applicable to a registrant under OSC Rule 13-502 Fees;

(l)            files in an electronic and searchable format with the OSC such reports as to any or all of its trading activities in Canada as the OSC may, upon notice, require from time to time; and

(m)          pays the increased compliance and case assessment costs of the principal regulator due to the Filer’s location outside Ontario, including, as required, the reasonable cost of hiring a third party to perform a compliance review on behalf of the principal regulator.

This decision shall expire five years after the date hereof.

This decision may be amended by the OSC from time to time upon prior written notice to the Filer.

“Grant Vingoe”
Vice-Chair
Ontario Securities Commission

“Tim Moseley”
Vice-Chair
Ontario Securities Commission

 


APPENDIX “A”

NOTICE OF REGULATORY ACTION

1.             Has the firm, or any predecessors or specified affiliates of the firm entered into a settlement agreement with any financial services regulator, securities or derivatives exchange, SRO or similar agreement with any financial services regulator, securities or derivatives exchange, SRO or similar organization?

Yes _____ No _____

If yes, provide the following information for each settlement agreement:

Name of entity

Regulator/organization

Date of settlement (yyyy/mm/dd)

Details of settlement

Jurisdiction



2.             Has any financial services regulator, securities or derivatives exchange, SRO or similar organization:

 

Yes

No

a)            Determined that the firm, or any predecessors or specified affiliates of the firm violated any securities regulations or any rules of a securities or derivatives exchange, SRO or similar organization?

___

___

(b)           Determined that the firm, or any predecessors or specified affiliates of the firm made a false statement or omission?

___

___

(c)           Issued a warning or requested an undertaking by the firm, or any predecessors or specified affiliates of the firm?

___

___

(d)           Suspended or terminated any registration, licensing or membership of the firm, or any predecessors or specified affiliates of the firm?

___

___

(e)           Imposed terms or conditions on any registration or membership of the firm, or predecessors or specified affiliates of the firm?

___

___

(f)            Conducted a proceeding or investigation involving the firm, or any predecessors or specified affiliates of the firm?

___

___

(g)           Issued an order (other than an exemption order) or a sanction to the firm, or any predecessors or specified affiliates of the firm for securities or derivatives-related activity (e.g. cease trade order)?

___

___



If yes, provide the following information for each action:

Name of entity

Type of action

Regulator/organization

Date of action (yyyy/mm/dd)

Reason for action

Jurisdiction


 

3.             Is the firm aware of any ongoing investigation of which the firm or any of its specified affiliates is the subject?

Yes _____ No _____

If yes, provide the following information for each investigation:

Name of entity

Reason or purpose of investigation

Regulator/organization

Date investigation commenced (yyyy/mm/dd)

Jurisdiction

Name of firm:

Name of firm’s authorized signing officer or partner

Title of firm’s authorized signing officer or partner

Signature

Date (yyyy/mm/dd)

Witness

The witness must be a lawyer, notary public or commissioner of oaths.

Name of witness

Title of witness

Signature

Date (yyyy/mm/dd)

This form is to be submitted through the Ontario Securities Commission’s Electronic Filing Portal:

https://www.osc.gov.on.ca/filings


      In this Appendix, the term "specified affiliate" has the meaning ascribed to that term in Form 33-109F6 to National Instrument 33-109 Registration Information.