Section 74(1) of the Securities Act (Ontario) -- Application for relief from prospectus requirements that may otherwise be applicable to certain trades in over-the-counter (OTC) derivatives made by either Applicant to Ontario-registered investment dealers or by Ontario-registered investment dealers to either Applicant, subject to certain terms and conditions.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53(1), 74(1).
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5,
IN THE MATTER OF
FOREX CAPITAL MARKETS, LLC (FXCM US)
FXCM SECURITIES LIMITED (FXCM SECURITIES)
FXCM CAPITAL MARKETS, LIMITED (FXCM UK)
(Subsection 74(1) of the Act)
UPON the application (the Application) of FXCM US, FXCM Securities and FXCM UK (collectively, the Applicants) to the Ontario Securities Commission (the Commission) for an order, pursuant to subsection 74(1) of the Act, that the Applicants be exempt from the prospectus requirement in respect of the distribution to registered dealers in Ontario of contracts for difference (CFDs) and over-the-counter (OTC) foreign exchange contracts (OTC FX Contracts) (the Requested Relief), subject to the terms and conditions below;
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON the Applicants having represented to the Commission that:
1. FXCM US is a limited liability company organized under the laws of the state of Delaware with its principal office in New York, New York.
2. FXCM US provides online trading to investors in OTC FX Contracts.
3. FXCM US is authorized and regulated by the United States Commodity Futures Trading Commission (the CFTC) and the United States National Futures Association (the NFA) and is currently registered as a Futures Commission Merchant, Retail Foreign Exchange Dealer and Swap Dealer with the CFTC.
4. Each of FXCM Securities and FXCM UK is a company organized under the laws of the United Kingdom with its principal office in London, United Kingdom.
5. Each of FXCM Securities and FXCM UK is authorized and regulated by the Financial Conduct Authority of the United Kingdom (the Financial Regulator). FXCM Securities and FXCM UK are licensed in the United Kingdom to deal directly with retail clients with respect to their permitted activities.
6. FXCM US, FXCM Securities and FXCM UK are wholly-owned subsidiaries of FXCM Holdings LLC (FXCM Holdings) a limited liability company organized under the laws of the state of Delaware. FXCM Holdings is a subsidiary of, and controlled by, FXCM Inc. FXCM Inc. is a publicly traded company on the New York Stock Exchange organized under the laws of the state of Delaware.
7. After July 11, 2012, the Applicants stopped accepting new investors in Ontario for CFDs and OTC FX Contracts. Prior to the publication of Ontario Securities Commission Staff Notice 91-702 Offerings of Contracts for Difference and Foreign Exchange Contracts to Investors in Ontario (OSC SN 91-702), the Applicants were of the view that the regulatory status of CFDs and OTC FX Contracts under the Act was uncertain. Upon reviewing OSC SN 91-702, the Applicants decided to redirect new Ontario-resident client accounts, and transfer their existing Ontario-resident client accounts, to an Ontario registered investment dealer. The transfer of accounts is expected to be completed in May 2013, and the Applicants currently do not offer CFDs, OTC FX Contracts, nor any other OTC derivatives to investors, other than Ontario-registered investment dealers, in Ontario. In the process of making these transfers, the Applicants came to understand that Ontario-registered investment dealers engaged in the trading of CFDs and OTC FX Contracts wish to minimize their risk (and offset their exposure) by entering into corresponding CFDs and OTC FX Contracts with the Applicants.
8. The Applicants wish to offer CFDs and OTC FX Contracts solely to Ontario-registered investment dealers.
9. The Applicants will be exempt from the dealer registration requirement pursuant to section 8.5 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), as Ontario-registered investment dealers will be the sole counterparties to FXCM US, FXCM Securities and/or FXCM UK for all trades in CFDs and OTC FX Contracts.
10. Each of FXCM US, FXCM Securities and FXCM UK is a "regulated entity" and an "acceptable counterparty" as defined in the rules and regulations of IIROC (the IIROC Rules).
Online Trading Platform
11. The Applicants understand that Ontario-registered investment dealers wishing to trade with retail clients in Canada must file an application with the Commission seeking an exemption from the prospectus filing requirement for the distribution of CFDs and OTC FX Contracts which, if granted, would permit the Ontario-registered investment dealer to offer CFDs and OTC FX Contracts to investors, including retail investors.
12. Ontario-registered investment dealers wishing to engage in this type of trading also wish to minimize their risk by entering into corresponding CFDs and OTC FX Contracts for the purpose of offsetting their exposure to the CFDs and OTC FX Contracts.
13. The Applicants wish to provide a means for these Ontario-registered investment dealers to offset their exposure and thereby reduce the regulatory capital risk of such investment dealers.
14. FXCM US has entered into a software license and services agreement with Friedberg Mercantile Group Ltd. (Friedberg) to provide Friedberg with online trading platform technology for CFDs and OTC FX Contracts, as described in the Commission's decision In the Matter of Friedberg Mercantile Group Ltd. (October 14, 2011).
Offering CFDs and OTC FX Contracts in Ontario
15. Consistent with OSC SN 91-702, CFDs and OTC FX Contracts, when offered to investors in Ontario, are considered "securities" under the Act. OSC SN 91-702 provides guidance with regards to the distributions of CFDs, OTC FX Contracts and similar OTC derivative products to investors in Ontario.
16. The Commission has previously recognized that the prospectus requirement may not be well suited for the distribution of certain derivative products to investors in Ontario, and that alternative requirements, including requirements based on clear and plain language risk disclosure, may be better suited for certain derivatives. In Ontario, both OSC Rule 91-502Trades in Recognized Options (OSC Rule 91-502) and OSC Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario (OSC Rule 91-503) provide for a prospectus exemption for the trading of derivative products to clients. The Requested Relief is consistent with the principles and requirements of OSC Rule 91-502, OSC Rule 91-503 and proposed OSC Rule 91-504 OTC Derivatives.
17. The Applicants will only offer CFDs and OTC FX Contracts to Ontario-registered investment dealers.
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;
IT IS ORDERED, pursuant to subsection 74(1) of the Act, that for the duration of the Interim Period (as defined below) the Requested Relief is granted, provided that:
1. the Applicants only distribute CFDs or OTC FX Contracts in Ontario to Ontario-registered investment dealers;
2. any Ontario-registered investment dealer that: (i) distributes CFDs or OTC FX Contracts to retail clients; and (ii) to whom the Applicants distribute CFDs or OTC FX Contracts, has obtained exemptive relief from the Commission from the prospectus filing requirement in respect of the Ontario-registered investment dealer's distribution of CFDs and OTC FX Contracts in Ontario;
3. the Applicants are regulated in their home jurisdictions under rules establishing a compliance regime which includes specific requirements to address market, capital and operational risks;
4. FXCM US is, and remains, regulated by the CFTC and the NFA and each of FXCM Securities and FXCM UK is, and remains, regulated by the Financial Regulator;
5. each of the Applicants is, and continues to be, a "regulated entity" and an "acceptable counterparty" as defined in the rules and regulations of IIROC;
6. each of the Applicants shall promptly inform the Commission in writing of any material change affecting it, being any change in the business, activities, operations or financial results or condition of the Applicant that may reasonably be perceived by a counterparty to a derivative to be material;
7. each of the Applicants shall promptly inform the Commission in writing if a self-regulatory organization or any other regulatory authority or organization initiates proceedings or renders a judgment related to disciplinary matters against the Applicant concerning the conduct of activities with respect to CFDs and/or OTC FX Contracts; and
8. the Requested Relief shall immediately expire upon the earliest of
(a) four years from the date that this Order is issued;
(b) the issuance of an order or decision by a court, the CFTC, the NFA, the Financial Regulator, or other similar regulatory body that suspends or terminates the ability of FXCM US to offer CFDs or OTC FX Contracts to clients in the United States or the ability of FXCM Securities or FXCM UK to offer CFDs or OTC FX Contracts to clients in the United Kingdom; and
(c) the coming into force in Ontario of legislation or a rule regarding the distribution of OTC derivatives to investors in Ontario (the Interim Period).
Dated May 3, 2013.