Application for an order, pursuant to pursuant to (i) section 80 of the Commodity Futures Act (CFA) granting relief from sections 42, 43, 44 and 45 of the CFA and (ii) section 147 of the Securities Act (OSA) granting relief from section 36 of the OSA, which contain the requirement to deliver certain confirmations and statements of trade to customers in respect of trades in commodity futures contracts and commodity futures options as well as equity options in the context of trade "give-ups".
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 36, 147.
Commodity Futures Act, R.S.O. 1990, C.20, ss. 42, 43, 44, 45, 80.
September 11, 2009
IN THE MATTER OF
THE COMMODITY FUTURES ACT,
R.S.O. 1990, CHAPTER C.20, AS AMENDED
IN THE MATTER OF
R.R.O. 1990, REGULATION 90 --
COMMODITY FUTURES ACT REGULATION,
AS AMENDED (the CFA REGULATION)
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
IN THE MATTER OF
NEWEDGE CANADA INC.
UPON the application (the Application) by Newedge Canada Inc. (the Applicant) to the Ontario Securities Commission (the Commission) for a decision pursuant to (i) section 80 of the CFA granting relief from sections 42, 43, 44 and 45 of the CFA and (ii) section 147 of the OSA granting relief from section 36 of the OSA, which contain the requirement to deliver certain confirmations and statements of trade to customers in respect of trades in commodity futures contracts and commodity futures options as well as equity options in the context of trade "give-ups".
AND WHEREAS the Applicant has represented to the Commission that:
1. The Applicant is a corporation formed under the laws of Canada.
2. The head office of the Applicant is located in Montreal, Quebec.
3. The Applicant is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and is registered with the Commission as a futures commission merchant under the CFA, and is registered in every other province of Canada to trade futures contracts. The Applicant is also registered as an investment dealer in every province of Canada. The Applicant is an approved participant of the Bourse de Montreal. The Applicant is also a Futures Commission Merchant and Clearing Participant of ICE Futures Canada; a Participating Organization of the TSX and TSX-V; a Dealer with the Canadian Trading and Quotation System Inc. and Pure Trading, a Member of Canadian Derivatives Clearing Corporation, and a Participant of Clearing and Depository Services Inc.
4. The Applicant engages in the following two, distinct types of customer trading relationships:
(a) the Applicant acts as executing and introducing broker for customers; and
(b) the Applicant acts solely as executing broker in give-up transactions.
5. The Applicant only provides trading services to "institutional customers" as defined in IIROC Rule 2700.
6. In a typical give-up situation, a customer has an existing relationship with its clearing broker, and has signed account documentation with such clearing broker, but desires to utilize one or several other executing brokers for purposes of executing on one or more markets, whether domestic or global. In such an instance, the executing broker will execute trades as directed by the customer and "give-up" such trades to the clearing broker via various futures exchange mechanisms that allow for and govern this procedure, as more fully explained below. The customer does not sign account documentation with the executing broker, nor does the executing broker receive monies, securities, margin or collateral from the customer. The customer is a customer of the clearing broker and the executing broker is merely providing a limited execution transaction service. The executing broker is responsible for its own record keeping, bookkeeping, custody, and other requirements with respect to its customers, but is not responsible for most of these requirements with respect to an execution only customer, as that customer is on the books of the clearing broker.
7. Each give-up trade executed by Applicant is captured in the Applicant's books and records and accounting system. A daily control performed by Applicant's back-office identifies equity options, commodity futures contracts and commodity futures options positions held by the Applicant and not allocated to any of its customers' accounts. Each such position is investigated and is either i) sent to the clearing broker as a trade that was executed under a give-up agreement, or ii) upon receipt of new instructions allocated to a customer's account. For each customer a monthly invoice detailing all give-up trades for a given month is sent to the clearing broker. After reconciliation with the clearing broker's own records, the clearing broker pays the invoice sent by Applicant. Consequently, upon payment of any invoice sent by Applicant to the clearing broker, the Applicant considers the invoice as evidence of trade reconciliation between its internal accounting and the client.
8. The Applicant is in compliance with IIROC requirements relating to the maintenance of records of executed transactions.
9. Section 42 of the CFA requires that a registered dealer that has acted as an agent in connection with a trade in a commodity futures contract promptly send customers a written confirmation of trade.
10. Section 43 of the CFA requires that a registered dealer that has acted as an agent in connection with a liquidating trade in a commodity futures contract promptly send customers a written statement of purchase and sale.
11. Section 44 of the CFA requires that registered dealers send customers a written monthly statement.
12. Section 45 of the CFA requires that a registered dealer that has acted as an agent in connection with a trade in a commodity futures option send customers a written confirmation of a trade.
13. Section 36 of the OSA requires that a registered dealer that has acted as principal or agent in connection with any trade in a security promptly send customers a written confirmation of the trade.
14. The Applicant is seeking a decision from the Commission pursuant to section 80 of the CFA that it be exempt from the sections 42, 43, 44 and 45 of the CFA and section 36 of the OSA with respect to give-up arrangements because the imposition of those requirements is unnecessary, duplicative and not industry practice globally in the futures market.
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;
THE DECISION of the Commission is that the Applicant is exempt from the requirements of sections 42, 43, 44 and 45 of the CFA and section 36 of the OSA for the purposes of the Applicant acting as executing broker for give-up transactions where the clearing broker provides customers a written confirmation of the trades, provided that the Applicant enters into a give-up agreement with the clearing broker and the customer.