Securities Law & Instruments

Headnote

Subsection 74(1) of the Act -- relief granted from the prospectus requirements in connection with certain over-the-counter derivatives transactions.

Ontario Statutes

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53 and 74(1)

Rules Cited

Proposed Rule 91-504 -- Over-The-Counter Derivatives (2000), 23 OSCB 5

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, c. S. 5, AS AMENDED (the Act)

AND

IN THE MATTER OF

BRITISH COLUMBIA INVESTMENT MANAGEMENT CORPORATION

 

ORDER

(Subsection 74(1) of the Act)

UPON the application of the British Columbia Investment Management Corporation (bcIMC) to the Ontario Securities Commission (the Commission) for a ruling under subsection 74(1) of the Act that certain over-the-counter (OTC) derivatives transactions entered into between bcIMC and certain counterparties are not subject to sections 25 and 53 of the Act;

AND UPON considering the application and the recommendation of the staff of the Commission;

AND UPON bcIMC having represented to the Commission that:

1. bcIMC was established on November 1, 1999 as a corporation pursuant to the Public Sector Pension Plans Act S.B.C. 1999, c. 44 (the Pension Plans Act);

2. Pursuant to the Pension Plans Act, the sole shareholder of bcIMC is the Minister of Finance for the Province of British Columbia who holds such share on behalf of the Government of the Province of British Columbia;

3. The purposes of the formation of bcIMC was, as of January 1, 2000 to carry out the duties previously undertaken by the Office of the Chief Investment Officer (Ministry of Finance and Corporate Relations) for the Province of British Columbia which were then being exercised pursuant to the Financial Administration Act R.S.B.C. 1966, c. 138 (the Financial Administration Act);

4. bcIMC has been established to provide, among other things, funds management services to certain persons as set out in the Pension Plans Act;

5. Pursuant to section 16 of the Pension Plans Act, bcIMC is deemed to be an agent of the Government of British Columbia;

6. In order to carry out its duties under the Pension Plans Act, bcIMC would like to be able to trade in OTC Derivatives (as defined in Appendix 2 to this Ruling) with certain counterparties who are Qualified Parties (as defined in Appendix 1 to this Ruling) in the Province of Ontario;

7. When relying upon this Ruling bcIMC will only trade in OTC Derivatives with parties in Ontario that meet the definition of "Qualified Party";

AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS RULED, pursuant to subsection 74(1) of the Act, that OTC Derivatives transactions entered into between bcIMC and certain counterparties in Ontario as contemplated by paragraph 6 of this Ruling shall be exempt from sections 25 and 53 of the Act, provided that:

(i) each transaction is between bcIMC and a Qualified Party acting as principal, or a Qualified Party not acting as principal in accordance with section 4 of Appendix 1 to this Order; and

(ii) no settlement of an OTC Derivative transaction is made by way of the physical delivery of securities that are not Freely Tradeable, as defined in Appendix 2 to this Ruling.

THIS ORDER shall terminate six months after the coming into force of a rule or other regulation under the Act that specifically concerns trades in OTC Derivatives.

October 8, 2004.

"Paul M. Moore"
"Susan Wolburgh Jenah"

 

APPENDIX 1

OVER-THE-COUNTER DERIVATIVES QUALIFIED PARTIES

Interpretation

(1) The terms "subsidiary" and "holding body corporate" used in paragraphs (w), (x) and (y) of subsection (3) of this Appendix 1 have the same meaning as they have in the Business Corporations Act (Ontario).

(2) All requirements contained in this Appendix 1 that are based on the amounts shown on the balance sheet of an entity apply to the consolidated balance sheet of the entity.

Qualified Parties Acting as Principal

(3) The following are Qualified Parties for all OTC Derivatives transactions, if acting as principal:

Banks

(a) a bank listed in Schedule I or II to the Bank Act (Canada);

(b) the Business Development Bank of Canada incorporated under the Business Development Bank of Canada Act (Canada);

(c) a bank subject to the regulatory regime of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules set out in the Basel Accord, if the bank has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency;

Credit Unions and Caisses Populaires

(d) a credit union central, federation of caisses populaires, credit union or regional caisse populaire, located, in each case, in Canada;

Loan and Trust Companies

(e) a loan corporation or trust corporation registered under the Loan and Trust Corporations Act (Ontario) or under the Trust and Loan Companies Act (Canada), or under comparable legislation in any other province or territory of Canada;

(f) a loan company or trust company subject to the regulatory regime of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules set out in the Basel Accord, if the loan company or trust company has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency;

Insurance Companies

(g) an insurance company licensed to do business in Canada or a province or territory of Canada;

(h) an insurance company subject to the regulatory regime of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules set out in the Basel Accord, if the insurance company has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency;

Sophisticated Entities

(i) a person or company that, together with its affiliates,

(i) has entered into one or more transactions involving OTC Derivatives with counterparties that are not its affiliates, if

(A) the transactions had a total gross dollar value of or equivalent to at least $1 billion in notional principal amount; and

(B) any of the contracts relating to one of these transactions was outstanding on any day during the previous 15-month period; or

(ii) had total gross marked-to-market positions of or equivalent to at least $100 million aggregated across counterparties, with counterparties that are not its affiliates in one or more transactions involving OTC Derivatives on any day during the previous 15-month period,

Individuals

(j) an individual who either alone or jointly with the individual's spouse, has a net worth of at least $5 million, or its equivalent in another currency, excluding the value of his or her principal residence;

Governments/Agencies

(k) Her Majesty in Right of Canada or any province or territory of Canada and each crown corporation, instrumentality and agency of a Canadian federal, provincial or territorial government;

(l) a national government of a country that is a member of the Basel Accord, or that has adopted the banking and supervisory rules set out in the Basel Accord, and each instrumentality and agency of that government or corporation wholly-owned by that government;

Municipalities

(m) any Canadian municipality with a population in excess of 50,000 and any Canadian provincial or territorial capital city;

Corporations and other Entities

(n) a company, partnership, unincorporated association or organization or trust, other than an entity referred to in paragraph (a), (b), (c), (d), (e), (f), (g) or (h), with total revenues or assets in excess of $25 billion or its equivalent in another currency, as shown on its last financial statements to be audited only if otherwise required;

Pension Plan or Fund

(o) a pension fund that is regulated by either the Office of the Superintendent of Financial Institutions (Canada) or a provincial pension commission, if the pension fund has total net assets, as shown on its last audited balance sheet, in excess of $25 million, provided that, in determining net assets, the liability of a fund for future pension payments shall not be included;

Mutual Funds and Investment Funds

(p) a mutual fund or non-redeemable investment fund if each investor in the fund is a Qualified Party;

(q) a mutual fund that distributes its securities in Ontario, if the portfolio adviser of the fund is registered as an adviser, other than a securities adviser, under the Act or securities legislation elsewhere in Canada;

(r) a non-redeemable investment fund that distributes its securities in Ontario, if the portfolio manager of the fund is registered as an adviser, other than a securities adviser, under the Act or securities legislation elsewhere in Canada;

Brokers/Investment Dealers

(s) a person or company registered under the Act or securities legislation elsewhere in Canada as a broker or an investment dealer or both;

(t) a person or company registered under the Act as an international dealer if the person or company has total assets, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency;

Futures Commission Merchants

(u) a person or company registered under the Commodity Futures Act (Ontario) as a dealer in the category of futures commission merchant, or in an equivalent capacity elsewhere in Canada;

Charities

(v) a registered charity under the Income Tax Act (Canada) with assets not used directly in charitable activities or administration, as shown on its last audited balance sheet, of at least $5 million or its equivalent in another currency;

Affiliates

(w) a wholly-owned subsidiary of any of the organizations described in paragraph (a), (b), (c), (d), (e), (f), (g), (h), (n), (o), (s), (t) or (u);

(x) a holding body corporate of which any of the organizations described in paragraph (w) is a wholly-owned subsidiary;

(y) a wholly-owned subsidiary of a holding body corporate described in paragraph (x);

(z) a firm, partnership, joint venture or other form of unincorporated association in which one or more of the organizations described in paragraph (w), (x) or (y) have a direct or indirect controlling interest;

Guaranteed Party

(aa) a party whose obligations in respect of the OTC Derivatives transaction for which the determination is made is fully guaranteed by another Qualified Party.

Qualified Party Not Acting as Principal

(4) The following are qualified parties, in respect of all OTC Derivative Transactions:

Managed Accounts

(1) Accounts of a person, company, pension fund or pooled fund trust that are fully managed by a portfolio manager or financial intermediary referred to in paragraph (a), (d), (e), (g), (s), (t), (u) or (w) of subsection (3) or a broker or investment dealer acting as trustee or agent for the person, company, pension fund or pooled trust under section 148 of the Regulations.

Subsequent Failure to Qualify

(5) A party is a Qualified Party for the purpose of any OTC Derivatives transaction if it, he or she is a Qualified Party at the time it, he or she enters into the transaction.

 

APPENDIX 2

DEFINITIONS

"Clearing Corporation" means an association or organization through which Options or futures contracts are cleared and settled.

"Contract for Differences" means an agreement, other than an Option, a Forward Contract, a spot currency contract or a conventional floating rate debt security, that provides for:

(a) an exchange of principal amounts; or

(b) the obligation or right to make or receive a cash payment based upon the value, level or price, or on relative changes or movements of the value, level or price of, an Underlying Interest.

"Forward Contract" means an agreement, not entered into or traded on or through an organized market, stock exchange or futures exchange and cleared by a clearing corporation, to do one or more of the following on terms or at a price established by or determinable by reference to the agreement and at or by a time established by or determinable by reference to the agreement:

(a) make or take delivery of the Underlying Interest of the agreement; or

(b) settle in cash instead of delivery.

"Freely Tradeable" means, in respect of securities, that:

(a) the securities are not non-transferable;

(b) the securities are not subject to any escrow requirements;

(c) the securities do not form part of the holdings of any person or company or combination of person or companies referred to in paragraph (c) of the definition of "distribution" in the Act;

(d) the securities are not subject to any cease trade order imposed by a Canadian securities regulatory authority;

(e) all hold periods imposed by Canadian securities legislation before the securities can be traded without a prospectus or in reliance on a prospectus exemption have expired; and

(f) any period of time for which the issuer has to have been a reporting issuer before the securities can be traded without a prospectus or in reliance on a prospectus exemption has passed.

"Option" means an agreement that provides the holder with the right, but not the obligation, to do one or more of the following on terms or at a price determinable by reference to the agreement at or by a time established by the agreement:

(a) receive an amount of cash determinable by reference to a specified quantity of the Underlying Interest of the Option.

(b) purchase a specified quantity of the Underlying Interest of the Option.

(c) sell a specified quantity of the Underlying Interest of the Option.

"OTC Derivative" means an Option, a Forward Contract, or a Contract for Differences of a type commonly considered to be a derivative, in which

(a) the agreement relating to the Option, Forward Contract or Contract for Differences is not part of a fungible class of agreements that are standardized as to their material economic terms;

(b) the creditworthiness of a party having an obligation under the agreement would be a material consideration in entering into or determining the terms of the agreement; and

(c) the agreement is not entered into or traded on or through an organized market, stock exchange or futures exchange and cleared by a clearing corporation.

"Underlying Interest" means, for a derivative, the security, commodity, financial instrument, currency, interest rate, foreign exchange rate, economic indicator, index, basket, agreement or reit, and, if applicable, the relationship between any of the foregoing, from or on which the market price, value or payment obligations of the derivative are derived or based.