Request for Comments - Amendments to the TSX Direct Access Rules - TSX Inc.

DIVISION 5 -- CONNECTION OF ELIGIBLE CLIENTS OF PARTICIPATING ORGANIZATIONS

2-501

Designation of Eligible Clients

2-501

Designation of Eligible Clients

The Exchange may from time to time prescribe classes of entities as eligible to transmit orders to the Exchange through a Participating Organization.

(1)

Prescribed Classes of Entities

For the purposes of Rule 2-501, the following classes of entities are prescribed as eligible to transmit orders to the Exchange through a Participating Organization:

(a)

a client that falls within the definition of "acceptable counterparties" or , "acceptable institutions", or "regulated entities" as defined in the General Notes and Definitions section of the Joint Regulatory Financial Questionnaire and Report;

(b)

a client that is registered as an investment counsellor or portfolio managera non-individual and a registrant under the Securities Act of one or more of the Provinces and Territories of Canada, and is not a Participating Organization;

(c)

a client that is a foreign broker or dealer (or the equivalent registration) registered with the appropriate regulatory body in the broker's or dealer's home jurisdiction and that is an affiliate of a Participating Organization acting for its own account, the accounts of other eligible clients or the accounts of its clients, where the home jurisdiction falls within the definition of "Basle Accord Countries" as defined in the General Notes and Definitions section of the Joint Regulatory Financial Questionnaire and Report;

(d)

a client that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the customer and falls into one of the following categories:

(i)

an insurance company as defined in section 2(13) of the U.S. Securities Act of 1933,

(ii)

an investment company registered under the U.S. Securities Act of 1933 or any business development company as defined in section 2(a)(48) of that Act,

(iii)

a small business investment company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the U.S. Small Business Investment Act of 1958,

(iv)

a plan established and maintained by a U.S. state, its political subdivisions, or any agency or instrumentality of a U.S. state or its political subdivisions, for the benefit of its employees,

(v)

an employee benefit plan within the meaning of Title I of the U.S. Employee Retirement Income Securities Act of 1974,

(vi)

a trust fund whose trustee is a bank or trust company and whose participants are exclusively plans of the types identified in (iv) or (v) above, except trust funds that include as participants individual retirement accounts or U.S. H.R. 10 plans,

(vii)

a business development company as defined in section 202(a)(22) of the U.S. Investment Advisers Act of 1940,

(viii)

an organization described in section 501©(3) of the U.S. Internal Revenue Code, corporation (other than a bank as defined in section 3(a)(2) of the U.S. Securities Act of 1933 or a savings and loan association or other institution referenced in section 3(a)(5)(A) of the U.S. Securities Act of 1933 or a foreign bank or savings and loan association or equivalent institution), partnership or Massachusetts or similar business trust, and

(ix)

an investment adviser registered under the U.S. Investment Advisers Act;

(e)

a client that is a dealer registered pursuant to section 15 of the U.S. Securities Exchange Act of 1934, acting for its own account or the accounts of other eligible clients, that in the aggregate owns and invests on a discretionary basis at least $10 million of securities of issuers that are not affiliated with the dealer, provided that securities constituting the whole or a part of an unsold allotment to or subscription by a dealer as a participant in a public offering shall not be deemed to be owned by such dealer;

(f)

a client that is an investment company registered under the U.S. Investment Company Act, acting for its own account or for the accounts of other Qualified Institutions, that is part of a family of investment companies which own in the aggregate at least $100 million in securities of issuers, other than issuers that are affiliated with the investment company or are part of such family of investment companies and, for these purposes, "family of investment companies" means any two or more investment companies registered under the U.S. Investment Company Act, except for a unit investment trust whose assets consist solely of shares of one or more registered investment companies, that have the same investment adviser (or, in the case of unit investment trusts, the same depositor), provided, for these purposes:

(i)

each series of a series company (as defined in Rule 18f-2 under the U.S. Investment Company Act) shall be deemed to be a separate investment company, and

(ii)

investment companies shall be deemed to have the same adviser (or depositor) if their advisers (or depositors) are majority-owned subsidiaries of the same parent, or if one investment company's adviser (or depositor) is a majority-owned subsidiary of the other investment company's adviser (or depositor);

(g)

a client, all of the equity owners of which are Qualified Institutions, acting for its own account or the accounts of other Qualified Institutions;

(h)

a client that is a bank as defined in section 3(a)(2) of the U.S. Securities Act of 1933, or any savings and loan institution or other institution as referenced in section 3(a)(5)(A) of the U.S. Securities Act of 1933, acting for its own account or the accounts of other Qualified Institutions, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with it and that has an audited net worth of at least $25 million;

(i)

a client that is a non-individual with total securities under administration or management exceeding $10 million, where the client is domiciled in a jurisdiction that falls within the definition of "Basle Accord Countries" as defined in the General Notes and Definitions section of the Joint Regulatory Financial Questionnaire and Report; and

(j)

(i) a client that enters an order through an Order-Execution Account.

(2)

Interpretation

For the purposes of Policy 2-501(1):

1.

In determining the aggregate amount of securities owned and invested on a discretionary basis by an entity, the following instruments and interests shall be excluded: bank deposit notes and certificates of deposit; loan participations; repurchase agreements; securities owned but subject to a repurchase agreement; and currency, interest rate and commodity swaps.

2.

The aggregate value of securities owned and invested on a discretionary basis by an entity shall be the cost of such securities, except where the entity reports its securities holdings in its financial statements on the basis of their market value and no current information with respect to the cost of those securities has been published and in the latter event, the securities may be valued at market.

In determining the aggregate amount of securities owned by an entity and invested on a discretionary basis, securities owned by subsidiaries of the entity that are consolidated with the entity in its financial statements prepared in accordance with generally accepted accounting principles may be included if the investments of such subsidiaries are managed under the discretion of the entity, except that, unless the entity is a reporting company under section 13 or 15(d) of the U.S. Securities Exchange Act, securities owned by such subsidiaries may not be included if the entity itself is a majority-owned subsidiary that would be included in the consolidated financial statements of another enterprise.

2-502

Conditions for Connections

2-502

Conditions for Connections

A Participating Organization may transmit orders received electronically from an eligible client directly to the trading system provided that the Participating Organization has:

(1)

System Requirements

For the purposes of Rule 2-502(a), the system of the Participating Organization is required to:

(a)

obtained prior written approval of the Exchange that the system of the Participating Organization meets the prescribed conditions;

(a)

support compliance with Exchange Requirements dealing with the entry and trading of orders by all eligible clients who will have direct access (for example, it must support all valid order information that may be required, including designation of short sales);

(b)

obtained prior written approval of the Exchange for a standard form of agreement containing the prescribed conditions to be entered into between the Participating Organization and an eligible client and the Participating Organization has entered into an agreement in such form with the eligible client; and

(b)

ensure security of access to the system (for example, through a password that will only enable persons at the eligible client authorized by the Participating Organization to have access to the system);

(c)

met such other conditions as prescribed.

(c)

comply with specific requirements prescribed pursuant to Rule 2-502, including a facility to receive an immediate report of the entry or execution of orders;

(d)

enable the Participating Organization to employ order parameters or filters that will route orders over a certain size or value to the Participating Organization's trading desk (which parameters can be customized for each eligible client on the system); and

(e)

enable the Participating Organization to transmit information concerning unattributed orders entered by eligible clients to the Participating Organization's compliance staff on a real time basis.

(2)

Standard Form of Agreement

For the purposes of Rule 2-502(b), the agreement between the Participating Organization and the client shall provide that:

(a)

the eligible client is authorized to connect to the Participating Organization's order routing system, eVWAP Facility, or the POSIT Call Market;;

(b)

the eligible client shall enter orders in compliance with Exchange Requirements respecting the entry and trading of orders and other applicable regulatory requirements;

(c)

specific parameters defining the orders that may be entered by the eligible client are stated, including restriction to specific securities or size of orders;

(d)

the Participating Organization has the right to reject an order for any reason;

(e)

the Participating Organization has the right to change or remove an order in the Book and has the right to cancel any trade made by the eligible client for any reason;

(f)

the Participating Organization has the right to discontinue accepting orders from the eligible client at any time without notice;

(g)

the Participating Organization agrees to train the eligible client in the Exchange Requirements dealing with the entry and trading of orders and other applicable Exchange Requirements; and

(h)

the Participating Organization accepts the responsibility to ensure that revisions and updates to Exchange Requirements relating to the entry and trading of orders are promptly communicated to the eligible client.

(3)

Additional Requirements

For the purposes of Rule 2-502(c), the following additional conditions shall apply:

1.

Any changes to the standard system interconnect agreement shall be approved by the Exchange in writing before becoming effective.

2.

If required by the terms of the agreement between the eligible client and the Participating Organization, the Participating Organization shall ensure that its eligible clients are trained in the appropriate Exchange trading rules, as well as the use of the terminal and system. Training materials regarding Exchange trading rules that the Participating Organization proposes to use must be reviewed by the Exchange prior to use.

3.

The Participating Organization shall have the ability to receive an immediate report of the entry and execution of orders. The Participating Organization shall have the capability of rejecting orders that do not fall within the designated parameters of authorized orders for a particular client.

4.

The Participating Organization shall designate a specific person as being responsible for the System Interconnect. Orders executed through System Interconnects shall be reviewed for compliance and credit purposes daily by such designated person of the Participating Organization.

5.

The Participating Organization shall have procedures in place to ensure that only eligible clients use System Interconnects and that such eligible clients can comply with Exchange Requirements and other applicable regulatory requirements. The eligibility of eligible clients using System Interconnects shall be reviewed at least annually by the Participating Organization.

6.

The Participating Organization shall make available for review by the Exchange, as required from time to time, copies of the system interconnect agreements between the Participating Organization and its eligible clients.

(4)

Order-Execution Account Requirements

If the agreement required by Rule 2-502(b) is between a Participating Organization and a client in respect of an Order-Execution Account, the agreement:

(a)

may be in written form or be in the form of a written or electronic notice acknowledged by the client prior to the entry of the initial order in respect of such Order-Execution Account; and

(b)

may omit provisions that would otherwise be required by Policy 2-502(2)(c), (g) and (h) if the order routing system of the Participating Organization:

(i)

enforces the Exchange Requirements relating to the entry of orders, or

(ii)

routes orders that do not comply with Exchange Requirements relating to the entry of orders to an Approved Trader for review prior to entry to the trading system.

(5)

eVWAP Facility Requirements

(a)

Notwithstanding Policy 2-501(1)(i), for the purposes of Rule 2-501, clients eligible to transmit orders to the Exchange's eVWAP Facility exclude:

(i)

a client that is the resident in the U.S., and

(ii)

a client entering orders through and Order-Execution Account.

(b)

If the agreement required by Rule 2-502(b) is between a designated Participating Organization and a client with respect to the eVWAP Facility, the agreement may omit provisions which may otherwise be required by Policy 2-502(1)(d), 2-502(2)(d) and (e), and 2-502(2)(3)3 if the system through which the order is transmitted:

(i)

enforces Exchange Requirements relating to the entry of orders,

(ii)

enforces the credit limits imposed by the designated Participating Organization, and

(iii)

has the ability to transmit a trade report to both the client and the designated Participating Organization.

(6)

POSIT Call Market Requirements

The agreement required by Rule 2-502(b) between a Participating Organization and a client with respect to the POSIT Call Market may omit provisions otherwise required by Policy 2-502(1)(d), 2-502(2)(d) and (e), and 2-502(3)3 if:

(a)

the agreement provides that any person, other than the Exchange, who provides software, hardware or services to the Exchange ("Third Party Provider") to support the operations of, or the services or information accessible through, the trading system which shall include without limitation, the POSIT Call Market, shall not be liable to the Participating Organization or the eligible client or any other person for any loss, damage, cost, expense or other liability or claim (including loss of business, profits, trading losses, loss of anticipated profits, business interruption, loss of business information or for indirect, special, punitive, consequential or incidental loss or damage or other pecuniary loss) of any nature arising from any use or inability to use the trading system, howsoever caused, including by the Third Party Provider's negligence or reckless or wilful act or omissions, even if the Third Party Providers are advised of such possibilities; and

(b)

a system through which the order is transmitted:

(i)

enforces Exchange Requirements relating to the entry of POSIT Orders; and

(ii)

has the ability to generate a trade report to the client and, for the purposes of disseminating the trade report to eligible clients outside of Canada, to the designated Participating Organization; and

(c)

the Participating Organization has the ability to access an eligible client's trade report through the STAMP query.

2-503

Responsibility of Participating Organizations

A Participating Organization which enters into an agreement with a client to transmit orders received from the client in accordance with Rule 2-502 shall:

(a)

be responsible for compliance with Exchange Requirements with respect to the entry and execution of orders transmitted by eligible customers through the Participating Organization; and

(b)

provide the Exchange with prior written notification of the individual appointed to be responsible for such compliance.