IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, CHAPTER S. 5, AS AMENDED (THE OSA) AND IN THE MATTER OF NODAL CLEAR, LLC
ORDER (Section 147 of the OSA)
WHEREAS Nodal Clear, LLC (Nodal Clear) has filed an application (Application) with the Ontario Securities Commission (Commission) pursuant to section 147 of the OSA requesting an interim order exempting Nodal Clear from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the OSA (Interim Order);
AND WHEREAS Nodal Clear has represented to the Commission that:
1.1 Nodal Clear is a limited liability company organized under the laws of the State of Delaware in the United States (US) and is a wholly owned subsidiary of Nodal Exchange, LLC (Nodal Exchange), a limited liability company organized under the laws of Delaware that is a designated contract market within the meaning of that term under the US Commodity Exchange Act (CEA) subject to the regulatory supervision by the US Commodity Futures Trading Commission (CFTC), a US federal regulatory agency. Nodal Exchange is exempted from recognition as an exchange and from registration as a commodity futures exchange in Ontario by Order issued by the Commission pursuant to section 147 of the OSA and sections 38 and 80 of the Commodity Futures Act, R.S.O. 1990, Chapter C.20, as amended;
1.2 Nodal Clear is a derivatives clearing organization (DCO), within the meaning of that term under the CEA, as of September 24, 2015. Nodal Clear is subject to regulatory supervision by the CFTC and is obligated under the CEA to give the CFTC access to all records unless prohibited by law or such records are subject to solicitor-client privilege. The CFTC reviews, assesses and enforces a DCO's adherence to the CEA and the regulations thereunder on an ongoing basis, including but not limited to, the DCO core principles relating to compliance with the core principles, financial resources, participant and product eligibility, risk management, settlement procedures, treatment of funds, default rules and procedures, rule enforcement and system safeguards;
1.3 Following Nodal Clear's designation as a DCO, Nodal Clear commenced clearing nodal contracts (as defined below) as a DCO upon the transfer of the existing open contracts from LCH.Clearnet Ltd, a clearing agency recognized by the Commission under section 21.2 of the OSA to Nodal Clear (the Transfer Date).
1.4 Nodal Clear provides clearing and settlement services for commodity futures contracts offered by Nodal Exchange that are based on electric power and natural gas (Nodal Contracts). Nodal Contracts are executed on a principal-to-principal basis either on Nodal Exchange, or are privately negotiated off-exchange and submitted for clearing by Nodal Clear. Nodal Exchange's customers are commercial entities comprised of both buy and sell side investors, including commercial and investment banks, corporations, money managers, proprietary trading firms, hedge funds, and other institutional customers;
1.5 Clearing members of Nodal Clear that hold customer accounts to guarantee the clearing of Nodal Contracts are registered futures commission merchants (FCM) with the CFTC, while those that solely hold proprietary accounts are not required to be registered as FCMs (collectively, Clearing Members). FCMs are regulated by the CFTC typically for the purpose of conducting customer business in the United States. Clearing Members consist of banks, financial institutions, and securities houses/investment banks.
1.6 Nodal Clear expects Ontario Clearing Members to consist of banks, financial institutions, securities houses/investment banks, and commercial entities that trade on Nodal Exchange and hold proprietary accounts (Ontario Clearing Members);
1.7 All applicants seeking to become Clearing Member must complete an application for membership and make deposits into a Nodal Clear guaranty fund;
1.8 Nodal Clear does not have any offices or maintain other physical installations in Ontario or any other Canadian province or territory;
1.9 Nodal Clear implements and maintains a system of financial safeguards designed to anticipate potential market exposures and ensure sufficient resources are available to cover future obligations;
1.10 Nodal Clear will file a full application to the Commission for a subsequent order recognizing Nodal Clear as a clearing agency under subsection 21.2 of the OSA or exempting it from the requirement to be recognized as a clearing agency under section 147 of the OSA (Subsequent Order).
AND WHEREAS based on the Application and the representations Nodal Clear has made to the Commission, in the Commission's opinion the granting of the Interim Order to exempt Nodal Clear on an interim basis from the requirement to be recognized as a clearing agency would not be prejudicial to the public interest;
IT IS HEREBY ORDERED by the Commission that, pursuant to section 147 of the OSA, Nodal Clear is exempt on an interim basis from the requirement to be recognized as a clearing agency under subsection 21.2 of the OSA;
1. This Interim Order shall terminate on the earlier of (i) nine (9) months from the effective date of this Interim Order and (ii) the effective date of the Subsequent Order;
2. Nodal Clear's clearing agency activities in Ontario are limited to the clearing of Nodal Contracts for Ontario participants on Nodal Exchange;
3. Nodal Clear shall continue to be registered with the CFTC as a DCO under the CEA;
4. Nodal Clear shall promptly notify staff of the Commission of:
(a) any material change or proposed material change in its regulatory oversight by the CFTC;
(b) any material problems with the clearance and settlement of transactions that could materially affect the safety and efficiency of Nodal Clear; and
(c) the admission of any Clearing Members in Ontario.
5. Upon the commencement of the clearing of Nodal Contracts by Nodal Clear on behalf of Ontario Clearing Members, Nodal Clear shall maintain and submit the following information to the Commission in a manner and form acceptable to the Commission on at least a quarterly basis within 30 days of the end of the quarter, and at any time promptly upon the request of staff of the Commission:
(a) a current list of all Ontario Clearing Members;
(b) a list of all Ontario Clearing Members against whom disciplinary action has been taken in the last quarter by Nodal Clear or the CFTC with respect to activities at Nodal Clear;
(c) a list of all investigations by Nodal Clear relating to Ontario Clearing Members;
(d) a list of all Ontario-resident applicants who have been denied Clearing Member status by Nodal Clear;
(e) the maximum and average daily open interest, number of transactions and notional value of Nodal Contracts cleared by type of Nodal Contract during the quarter, for each Ontario Clearing Member;
(f) the percentage of average daily open interest, number of transactions and the notional value of Nodal Contracts cleared by type of Nodal Contract during the quarter for all Clearing Members that represents the average daily open interest, total transactions and notional value of trades cleared during the quarter for each Ontario Clearing Member;
(g) the aggregate total margin amount required by Nodal Clear ending on the last trading day during the quarter for each Ontario Clearing Member;
(h) the portion of the total margin required by Nodal Clear ending on the last trading day of the quarter for all Clearing Members that represents the total margin required during the quarter for each Ontario Clearing Member;
(i) the guaranty fund contribution, for each Ontario Clearing Member on the last trading day during the quarter, and its proportion of the total guaranty fund contributions; and
(j) if client clearing is offered to Ontario participants of Nodal Exchange by a Clearing Member, the identify of such Clearing Member and the jurisdiction of incorporation (including that of its ultimate parent) that provides such client clearing services to Ontario participants of Nodal Exchange including, where known:
(i) the name and legal entity identifier (LEI) of the Ontario participant of Nodal Exchange receiving such services; and
(ii) the value and volume of Nodal Contracts cleared during the quarter for and on behalf of each Ontario participant of Nodal Exchange.
6. Nodal Clear shall promptly provide such information as may be requested from time to time by, and otherwise cooperate with, the Commission or its staff;
7. Nodal Clear shall file with the Commission no later than 90 days from the effective date of this Interim Order, a complete final application with accurate information and relevant supporting documents that are acceptable to the Commission for the Subsequent Order. If the deadline for filing a complete final application is not met, the Commission may terminate the Interim Order without further notice to Nodal Clear;
8. With respect to a proceeding brought by the Commission arising out of, related to, concerning or in any other manner connected with the Commission's regulation and oversight of Nodal Clear's activities in Ontario, Nodal Clear shall submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario; and
9. For greater certainty, Nodal Clear shall file with the Commission a valid and binding appointment of an agent for service in Ontario upon whom the Commission may serve a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding arising out of or relating to or concerning the Commission's regulation and oversight of Nodal Clear's activities in Ontario.
DATED this 9th day of October, 2015 and effective upon the Transfer Date.
"Mary G. Condon"
"Sarah B. Kavanagh"