Securities Law & Instruments


Application under section 147 of the Securities Act (Ontario) (OSA) to exempt on an interim basis Eurex Clearing AG from recognition as a clearing agency under subsection 21.2(0.1) of the OSA.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21.2(0.1), 147.


ORDER (Section 147 of the OSA)

WHEREAS Eurex Clearing AG (Eurex Clearing) has filed an application (Application) with the Ontario Securities Commission (Commission) pursuant to section 147 of the OSA requesting an interim order exempting Eurex Clearing from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the OSA (Interim Order);

AND WHEREAS Eurex Clearing has represented to the Commission that:

1.1 Eurex Clearing is a stock corporation (Aktiengesellschaft) incorporated under German law and is a wholly owned subsidiary of Eurex Frankfurt AG and an indirect wholly owned subsidiary of Deutsche Börse AG, a publicly traded company listed on the Frankfurt Stock Exchange.

1.2 Eurex Clearing is of the opinion that it fully observes the international standards applicable to financial market infrastructures described in the April 2012 report Principles for financial market infrastructures (PFMIs), having prepared a detailed assessment of its compliance against the PFMIs and the associated disclosure framework as of February 2015, which was reviewed and validated by KPMG as an independent outside auditor.

1.3 Eurex Clearing qualifies as a central counterparty (CCP) pursuant to Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR), which sets out clearing and bilateral risk-management requirements for over-the-counter derivative contracts, reporting requirements for derivative contracts, and uniform requirements for the performance of activities of CCPs and trade repositories. It was granted authorization as a CCP under EMIR effective from April 10, 2014.

1.4 Eurex Clearing is subject to regulatory supervision by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (BaFin) and the German Central Bank.

1.5 Eurex Clearing is required to deliver to the German Central Bank monthly returns showing its liquidity and capital adequacy. The German Central Bank forwards these returns to BaFin, together with its comments. In addition, Eurex Clearing delivers its audited annual report and timely reports on specified types of organizational changes (e.g., new members of its executive board, departure of executive board members, establishment of subsidiaries, and opening of branches). The German Central Bank reviews Eurex Clearing's annual financial statements and auditors' reports and does an annual risk classification of Eurex Clearing, including an assessment of the adequacy of Eurex Clearing's capital and risk management procedures. The German Central Bank shares its findings with BaFin.

1.6 Eurex Clearing is a registered derivatives clearing organization (DCO) with the U.S. Commodity Futures Trading Commission (CFTC), and is thus subject to and complies with the CFTC's DCO Core Principles.

1.7 Eurex Clearing functions as the clearing agency for Eurex Frankfurt AG and Eurex Zürich AG. Eurex Clearing also acts as the clearing agency for EurexOTC Clear, Eurex Bonds, Eurex Repo, the securities lending market, the European Energy Exchange, the Frankfurt Stock Exchange, the Xetra® order book of the Deutsche Börse and the Irish Stock Exchange, and GMEX IRS Constant Maturity Futures, and it has a link with the Korea Exchange for the trading of KOSPI 200 Options. Products cleared by Eurex Clearing (Clearing Products) include derivatives, equities, bonds, secured funding, securities financing and energy transactions.

1.8 A Clearing Member is a member of Eurex Clearing that holds a clearing license and may be either a General Clearing Member (GCM) or a Direct Clearing Member (DCM and, together with GCMs, Clearing Members). Participation as a GCM or DCM requires the granting of the appropriate license, for which specific requirements must be fulfilled. Companies may apply for one or more Clearing Licenses, including Eurex Derivatives Clearing License, Eurex Bonds Clearing License, Eurex Repo Clearing License, FWB® Equity Clearing License, and EEX Clearing License. A customer of a Clearing Member that is disclosed to Eurex Clearing and enters into a tripartite Clearing Agreement with Eurex Clearing and its Clearing Member qualifies as either a Non-Clearing Member (NCM) or a Registered Customer (RC). An NCM qualifies as a market participant without holding any clearing licenses. An RC does not qualify as a market participant by virtue of acting in that capacity. A DCM may act as clearer for an NCM or RC only if the DCM and NCM or RC are 100% affiliated. A GCM may act as clearer for any NCM or RC. An NCM may have a relationship with a maximum of three different Clearing Members. Clearing Members may clear their own trades as well as those executed on behalf of their customers and the trades of NCMs with which they have signed a Clearing Agreement.

1.9 Eurex Clearing also offers a Specific Lender License to participants in the securities lending market (Specific Lenders). The Specific Lender License accepts beneficial owners that lend securities as direct participants without requiring them to post margin or to contribute to its clearing fund. Specific Lenders do not create a risk position for Eurex Clearing because loaned securities are irrevocably delivered by Specific Lenders at the commencement of lending transactions and all collateral delivered for the benefit of Specific Lenders consists of pledged collateral that remains under the custody of approved tri-party collateral agents.

1.10 An applicant to become a Clearing Member is required to have sufficient financial resources and operational capacity to meet the obligations arising from participation in Eurex Clearing.

1.11 Eurex Clearing's clearing fund serves to protect against unusual price movements not covered by the margin calculation in case of a member default. Each Clearing Member has to contribute to the clearing fund. It consists of Clearing Members' direct deposited capital. It is used, up to a specific percentage, for securing the counterparty risk not covered by margin deposits. The clearing fund serves as a safeguard for the viability of the clearing system against Clearing Member defaults. Every Clearing Member is required to contribute to Eurex Clearing's clearing fund, which is separated into clearing fund segments (CFSs), whereby each liquidation group is assigned to a particular CFS. The size of each CFS depends on the exposure of the Clearing Members active in the liquidation group relative to the overall exposure of all Clearing Members.

1.12 In order to enhance the protection of customer assets in the event of a Clearing Member default, Eurex Clearing offers an Individual Segregated Account (ISA) structure for customers of Clearing Members, which provides full physical segregation of a customer's collateral supporting its cleared positions.

1.13 Eurex Clearing's ISA clearing model complies with the EMIR segregation and portability requirements of a CCP.

1.14 Eurex Clearing does not have any offices or maintain other physical installations in Ontario or any other Canadian province or territory.

1.15 Eurex Clearing has been advised that:

1.15.1 an Ontario-based bank listed in Schedule I to the Bank Act (Canada) (Ontario Participant), currently clears through a non-Canadian GCM (Foreign GCM) equity derivatives for which Eurex Clearing is the exclusive CCP;

1.15.2 in order to support its equity derivatives positions, the Ontario Participant places assets as collateral (Ontario Assets) with Eurex Clearing through the Foreign GCM in a standard customer Omnibus Segregated Account (OA) at Eurex Clearing, which the Foreign GCM uses to clear its customers' trades through Eurex Clearing; and

1.15.3 the Ontario Participant wishes to be able to transfer the Ontario Assets, currently in the OA, to an ISA as soon as possible in order to quickly and effectively address the risk exposure of the Ontario Assets to the default of the Foreign GCM with which it holds those assets (together with those of other customers of the Foreign GCM).

1.16 The identities of customers of the Clearing Members, whose collateral assets are held in OAs, generally would not be disclosed to Eurex Clearing.

1.17 As a result of placing the Ontario Assets in an ISA at Eurex Clearing, the Ontario Assets would be protected in the event of the default of the Foreign GCM (including a default caused by the default of any of the Foreign GCM's other customers), and, in such event, the Ontario Assets could be ported very quickly to a replacement Clearing Member.

1.18 In order to transfer the Ontario Assets to an ISA, the Ontario Participant would enter into a tripartite Clearing Agreement with the Foreign GCM and Eurex Clearing, whereby the Ontario Participant would become an RC, which, in Eurex Clearing's view, would constitute Eurex Clearing carrying on business as a clearing agency in Ontario.

1.19 Eurex Clearing will file a full application as soon as practicable with the Commission for a subsequent order exempting it from the requirement to be recognized as a clearing agency under section 147 of the OSA (Subsequent Order).

AND WHEREAS, based on Eurex Clearing's representations above, the Ontario Participant wishes to move its collateral assets as soon as possible from an OA, and place them in an ISA maintained by Eurex Clearing;

AND WHEREAS the Commission recognizes the value to the Ontario Participant, as a customer of a Clearing Member, of using the ISA structure to reduce its risk exposure to any potential loss of assets used as collateral to support the Ontario Participant's cleared positions at Eurex Clearing if the Foreign GCM were to default on its obligations to Eurex Clearing;

AND WHEREAS, the requested relief is temporary, limited and conditional;

AND WHEREAS Eurex Clearing has acknowledged to the Commission that the scope of the Interim Order and the terms and conditions imposed by the Commission set out below may change as a result of the Commission's monitoring of developments in international and domestic capital markets or Eurex Clearing's activities, or as a result of any changes to the laws in Ontario affecting trading in derivatives or securities;

AND WHEREAS based on the Application and the representations Eurex Clearing has made to the Commission, in the Commission's opinion the granting of the Interim Order to exempt Eurex Clearing 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, Eurex Clearing 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) April 20, 2017 and (ii) the effective date of the Subsequent Order;

2. Except as permitted by the Commission, Eurex Clearing's clearing agency activities in Ontario (that require Eurex Clearing to be recognized as a clearing agency in Ontario or be exempt from recognition as a clearing agency) during the term of the Interim Order are limited to the clearing of Clearing Products for the Ontario Participant through an ISA opened for the Ontario Participant;

3. Eurex Clearing shall continue to be subject to regulation of BaFin and CFTC;

4. Eurex Clearing shall promptly notify staff of the Commission of:

(a) any material change or proposed material change in its regulatory oversight by BaFin or CFTC;

(b) any problems with the clearance and settlement of transactions that could materially affect the safety and efficiency of Eurex Clearing; and

(c) its receipt of a request from any other Ontario-based bank listed in Schedule I to the Bank Act (Canada) or other Ontario-based market participant to become a Clearing Member, NCM, RC or Specific Lender, provided that the Commission will maintain the confidentiality of the identity of such entity, unless (i) required by a court of competent jurisdiction, law, regulation or memorandum of understanding with a regulatory authority to release such identity, (ii) disclosure is permitted or consistent with the purposes of the OSA, or (iii) such identity is publicly available;

5. Eurex Clearing shall promptly provide such information as may be requested from time to time by, and otherwise cooperate with, the Commission or its staff, subject to any applicable privacy or other laws (including solicitor-client privilege) governing the sharing of information and the protection of personal information;

6. Eurex Clearing shall file with the Commission, no later than 60 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, such that if this deadline for filing a complete final application is not met, the Commission may terminate the Interim Order without further notice to Eurex Clearing;

7. 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 Eurex Clearing's activities in Ontario, Eurex Clearing shall submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario; and

8. Eurex Clearing 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, related to or concerning the Commission's regulation and oversight of Eurex Clearing's activities in Ontario.

DATED this 22nd day of September, 2016.

"D. Grant Vingoe"
"Monica Kowal"