NP 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions -- Hybrid Application -- Filer requested relief from the trade confirmation and statement of account requirements in securities laws where Filer acts as a dealer in accepting orders for "Give-up Transactions" that involve the purchase or sale of options on equities or indexes that are listed on one or more marketplaces -- Filer then forwards the orders, either directly or through an agent, to a broker (the executing agent) for the relevant marketplace, which executing agent, will execute the Give-up Transactions in accordance with the Institutional Customer's instructions and then "give up" the Give-up Transactions to the Institutional Customer's clearing broker for clearing, settlement and/or custody -- The service provided by Filer and the executing agent limited to trade execution only -- Relief granted with respect to give-up trades for institutional customers provided that a give-up trade agreement is executed with institutional customer and clearing broker and that clearing broker agrees to provide the customers with statements which include give-up trade details.
Securities Act, R.S.O. 1990, c. S.5, as am., s. 36(1).
Multilateral Instrument 11-102 Passport System, s. 4.7(1).
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 14.14.
April 18, 2017
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO, SASKATCHEWAN, AND NEWFOUNDLAND AND LABRADOR AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF CITIGROUP GLOBAL MARKETS CANADA INC. (the Filer)
The securities regulatory authority or regulator in Ontario has received an application from the Filer for a decision under the securities legislation of the jurisdiction of the principal regulator (the Legislation) for an exemption, in the context of Give-up Transactions (as defined below), from the requirement (the Statement of Account Requirement) that a dealer must deliver a statement of account to each client at least once every three months, or at the end of a month if the client has requested statements on a monthly basis or if a transaction was effected in the client's account during the month (the Passport Exemption).
The securities regulatory authority or regulator in each of Ontario, Saskatchewan, and Newfoundland and Labrador (the Jurisdictions) (the Coordinated Exemptive Relief Decision Makers) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption, in the context of Give-up Transactions, from the requirement (the Trade Confirmation Requirement) that every registered dealer that has acted as principal or agent in connection with any purchase or sale of a security must promptly send by pre-paid mail or deliver to the client a written confirmation of the transaction (the Coordinated Exemption).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a hybrid application):
(a) the Ontario Securities Commission is the principal regulator for this application;
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon;
(c) the decision with respect to the Passport Exemption evidences the decision of the principal regulator; and
(d) the decision with respect to the Coordinated Exemption evidences the decision of each Coordinated Exemptive Relief Decision Maker.
Terms defined in MI 11-102 or National Instrument 14-101 Definitions have the same meaning if used in this decision unless otherwise defined herein.
This decision is based upon the following facts represented by the Filer:
1. The Filer is registered as an investment dealer under the securities legislation of each of the provinces and territories of Canada, and as a derivatives dealer under the Derivatives Act (Québec).
2. The Filer is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the TSX Venture Exchange and a participating organization of the Toronto Stock Exchange.
3. The head office of the Filer is located in Toronto, Ontario.
4. The Filer acts as a dealer in accepting orders for Give-up Transactions (as defined below) that involve the purchase or sale of options on equities or indexes that are listed on one or more marketplaces (Options).
5. Give-up Transactions are purchases or sales of Options by investors, each of whom is an 'institutional customer' within the meaning of IIROC Dealer Member Rule 1.1 (each, an Institutional Customer), that have an existing relationship as a client with a clearing broker but wish to use the trade execution services of one or more dealers and executing brokers for the purpose of executing such purchases or sales. Following execution of such purchases and sales, the executing brokers "give-up" the Give-up Transaction to the Institutional Customer's clearing broker for clearing, settlement and/or custody.
6. Under the circumstances contemplated by this Application, the Institutional Customer will place their Options orders with the Filer. The Filer is not a member of the relevant options marketplaces and is not in a position to execute options trades itself. In furtherance of its customer relationships, the Filer is able to provide access to options execution (options execution access services). The Filer will forward the orders, either directly or through an agent, to a broker (the executing agent) for the relevant marketplace, which executing agent, as agent for the Filer, will execute the Give-up Transactions in accordance with the Institutional Customer's instructions and then "give up" the Give-up Transactions to the Institutional Customer's clearing broker for clearing, settlement and/or custody (the Give-up Arrangement). The service provided by the Filer and the executing agent pursuant to the Give-up Arrangement is limited to trade execution only.
7. The clearing broker maintains an account for each Institutional Customer that is administered in accordance with the terms and conditions of the account documentation of the clearing broker that has been signed by the Institutional Customer.
8. For a Give-up Transaction, the Institutional Customer does not open an account with the Filer or the executing agent, and neither the Filer, nor the executing agent, receives any money, securities, margin or collateral from the Institutional Customer.
9. The Give-up Arrangement is made by agreements entered into between the Institutional Customer, the Filer, and the clearing broker and agreements with the executing agent in respect of the Give-up Arrangement.
10. Although each of the Filer and the executing agent is responsible for record-keeping, bookkeeping, custody and other administrative functions (Account Services) in respect of its own clients, it does not provide Account Services for execution-only customers in Give-up Transactions. Such Account Services remain the responsibility of those clients' clearing brokers. However, the Filer will open an account for the Institutional Customer solely for the purpose of recording the order flow through an omnibus arrangement with the Filer's agent.
11. The executing agent does, however, record all Give-up Transactions that it executes. A daily control performed by the executing agent's back-office identifies any Options positions held by the executing agent to be given up to the relevant clearing brokers on behalf of their clients based on existing Give-up Arrangements. If a clearing broker rejects a proposed allocation, the executing agent contacts the person who executed the trade to obtain clarifying instructions and then allocates the position in accordance with the instructions so received.
12. The Filer's agent prepares monthly or transaction-by-transaction invoices detailing all Give-up Transactions (including the amount of any commissions due for execution and handling thereof) that the executing agent conducted during the month for each Institutional Customer pursuant to a Give-up Arrangement. The Filer's agent delivers or causes to be delivered such invoices to the clearing broker who then reconciles the Give-up Transactions with its own records.
13. The clearing broker will have the primary relationship with the Institutional Customers and is responsible for risk monitoring, overall trade monitoring as well as reporting trade confirmations and sending out statements of account.
14. The clearing broker is subject to the Trade Confirmation Requirement and Statement of Account Requirement in respect of its Institutional Customers in Give-up Transactions.
15. In Canada, the Filer will take reasonable steps to ensure that, prior to forwarding a trade to an executing agent, the executing agent will comply with or have obtained its own relief from the Trade Confirmation Requirement and the Statement of Account Requirement in respect of these Give-up Transactions.
16. With respect to Options listed in the United States, the Filer is not an executing broker on a U.S. marketplace, so in order to execute trades in Options listed in the United States, the Filer must send those orders to a U.S. broker-dealer for execution.
17. The Filer is, in all material respects, in compliance with all IIROC requirements relating to the maintenance of records of transaction orders. The Filer is not in default of securities legislation in any jurisdiction.
18. Application of the Trade Confirmation Requirement and Statement of Account Requirement to the Filer when it provides only trade execution services in respect of Give-up Transactions:
(a) would be duplicative and confusing because delivery of the required trade confirmations and statements of account to execution-only Institutional Customers would capture only some, not all, of the information that would be contained in the trade confirmations and statements of account delivered to the same Institutional Customers by their clearing brokers; and
(b) would not be required to establish an audit trail or to facilitate reconciliation of Give-up Transactions as between an executing agent and a clearing broker.
Each of the principal regulator and the Coordinated Exemptive Relief Decision Makers is satisfied that the decision meets the test set out in the Legislation for the relevant securities regulatory authority or regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Passport Exemption is granted, and the decision of the Coordinated Exemptive Relief Decision Makers under the Legislation is that the Coordinated Exemption is granted, provided in each case that:
(a) the Filer is registered as an investment dealer and a member of IIROC;
(b) the Filer provides options execution access services or trade execution services in respect of Give-up Transactions only for Institutional Customers;
(c) the Filer enters into Give-up Agreements with the clearing broker and the Institutional Customer and agreements with the executing agent in respect of the Give-up Arrangement; and
(d) the clearing broker has agreed to provide each Institutional Customer with written trade confirmations and statements of account that include information for any Give-up Transaction.
In respect of Relief from the Trade Confirmation Requirement (The Coordinated Exemption)
And in respect of Relief from the Statement of Account Requirement (The Passport Exemption)