Securities Law & Instruments

Headnote

 

Application under section 147 of the Securities Act (Ontario) (Act) for an order exempting Eurex Clearing AG from the requirement in subsection 21.2(0.1) of the Act to be recognized as a clearing agency.

 

Applicable Legislative Provisions

 

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

 

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, CHAPTER S. 5, AS AMENDED

(THE OSA)

 

AND

 

IN THE MATTER OF

EUREX CLEARING AG

 

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 order exempting Eurex Clearing from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the OSA (Order);

 

                AND WHEREAS on September 22, 2016, the Commission issued an order that exempted Eurex Clearing on an interim basis (Interim Order) from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the OSA, until the earlier of (i) April 20, 2017 and (ii) the effective date of a subsequent order exempting Eurex Clearing from the requirement to be recognized as a clearing agency under section 147 of the OSA;

 

                AND WHEREAS on April 10, 2017, the Commission issued an order varying the Interim Order to extend Eurex Clearing’s interim exemption from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the OSA to July 21, 2017;

 

                AND WHEREAS the Interim Order will be replaced by this 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 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 (OTC) 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.

 

1.3          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 (PFMI), having prepared a detailed assessment of its compliance against the PFMI and the associated disclosure framework as of February 2015, which was reviewed and validated by KPMG as an independent outside auditor.

 

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. In addition, BaFin may order site audits, which are also carried out by members of the German Central Bank.

 

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”. Currently, Eurex Clearing is allowed to clear proprietary interest rate swap (IRS) transactions for U.S. Clearing Members, though not customer transactions. Eurex Clearing will be allowed to clear customer IRS transactions when it can demonstrate compliance with the CFTC’s straight-through-processing requirement.

 

1.7          Eurex Clearing functions as the CCP for all transactions concluded on Eurex Deutschland, which is operated by Eurex Frankfurt AG, and Eurex Zürich, which is operated by Eurex Zürich AG. Eurex Clearing also acts as the CCP for Eurex Bonds, Eurex Repo, the Frankfurt Stock Exchange, including its Xetra® order book, and the Irish Stock Exchange. In addition, Eurex Clearing offers clearing services for OTC IRS transactions and inflation swaps as well as for securities lending transactions. Products cleared by Eurex Clearing include derivatives, equities, bonds, swaps, and secured funding and financing.

 

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 a 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 a 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          Companies may apply for one or more Clearing Licenses for the clearing of:

 

1.9.1       Transactions concluded at Eurex Deutschland and Eurex Zürich (Chapter II of Eurex Clearing’s Clearing Conditions (Clearing Conditions));

 

1.9.2       Transactions concluded at Eurex Bonds GmbH (Chapter III of the Clearing Conditions);

 

1.9.3       Transactions concluded at Eurex Repo GmbH (Chapter IV of the Clearing Conditions);

 

1.9.4       Transactions concluded at Frankfurter Wertpapierbörse (Chapter V of the Clearing Conditions);

 

1.9.5       Transactions concluded at Irish Stock Exchange (Chapter VI of the Clearing Conditions);

 

1.9.6       Securities Lending Transactions (Chapter IX of the Clearing Conditions);

 

1.9.7       OTC Interest Rate Derivative Transactions (Chapter VIII of the Clearing Conditions).

 

1.10        A Basic Clearing Member is an entity other than a Clearing Member that participates in the clearing of certain transactions under the Basic Clearing Member clearing model. Whereas Eurex Clearing’s other clearing models require the applicant to qualify as a licensed credit or financial service institution, the Basic Clearing Member clearing model aims at regulated and supervised financial service companies, investment funds, pension funds, insurance companies and reinsurance companies. Currently, Eurex Clearing only onboards such entities if the relevant entity is domiciled in the European Union or Switzerland. Basic Clearing Members are only allowed to enter into proprietary transactions and cannot clear transactions for clients. Further, Basic Clearing Members can only enter into transactions concluded on Eurex Repo and OTC interest rate derivative transactions.

 

1.11        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 of pledged collateral that remains under the custody of approved tri-party collateral agents.


1.12        Eurex Clearing also offers a Specific Repo License to participants in the repo market. The Specific Repo License accepts clients that are net cash providers as direct participants to Eurex Clearing without requiring them to post margin or contribute to its clearing fund.

 

1.13        For purposes of reporting value and volume required under paragraphs 8(e)a and 8(e)b of Schedule “A” to this order, Eurex Clearing will use the following asset classes, providing separate figures for futures and options as applicable:

 

·                     Equity Index Futures/Options

 

·                     Interest Rate Futures/Options

 

·                     Equity Futures/Options

 

·                     Exchange Traded Fund and Exchange Traded Commodity Futures/Options

 

·                     Volatility Index Futures/Options

 

·                     Dividend Futures/Options

 

·                     Commodity Futures/Options

 

·                     Property Futures/Options

 

·                     Foreign Exchange Futures/Options

 

1.14        For purposes of reporting margin required under paragraphs 8(e)c and 8(e)d of Schedule “A” to this order, Eurex Clearing will report on the Liquidation Group level. Eurex Clearing has introduced the concept of Liquidation Groups and calculates risk on this level. Cleared products that share similar risk characteristics are assigned to the same Liquidation Group. This allows for a more comprehensive portfolio risk calculation and also enables cross margining across Liquidation Groups as long as offsets can be realized during the default management process.

 

Eurex Clearing currently has the following nine Liquidation Groups:

 

·                     Listed Equity (Index) Derivatives Liquidation Group

 

·                     Listed Fixed Income Liquidation Group

 

·                     IRS and Inflation Liquidation Group

 

·                     Asian co-operations KOSPI/TAIFEX Liquidation Group

 

·                     Commodity (Index) Derivatives Liquidation Group

 

·                     Precious Metal Derivatives Liquidation Group

 

·                     Property Futures Liquidation Group

 

·                     FX Derivatives Liquidation Group

 

·                     GMEX IRS Constant Maturity Futures Liquidation Group

 

1.15        Eurex Clearing anticipates that banks, pension plans, asset managers and insurance companies that have a head office or principal place of business in Ontario may be interested in participating in its offerings listed in paragraph 1.9. Potential bank participants could be interested in becoming GCMs or DCMs. Pension plans, asset managers and insurance firms, among other institutions, could be interested in the Specific Lender License or the Specific Repo License. It is possible there could be further, other unanticipated interest.

 

1.16        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. The admission requirements are set forth in the Clearing Conditions, which are available on Eurex Clearing’s website. Eurex Clearing’s participation requirements are non-discriminatory and objective so as to ensure fair and open access. The admission requirements do not limit access on grounds other than risk (e.g., sufficient liable equity capital, compliance with technical requirements, and verification of the legal validity and enforceability of the Clearing Conditions). To become a GCM or DCM, an applicant must enter into a Clearing Agreement with Eurex Clearing. To become an NCM or RC of a Clearing Member that is disclosed to Eurex Clearing, an applicant must enter into a tripartite Clearing Agreement with Eurex Clearing and its Clearing Member.

 

1.17        Eurex Clearing’s risk model, known as Eurex Clearing Prisma, is used for all exchange-traded derivatives and OTC products. Prisma is based on the view of each member’s entire portfolio, accounting for hedging and cross-correlation effects by determining the margin requirement on a portfolio level rather than a product-by-product view. The elements of the model are selected to ensure the ability to withstand new shocks and changes to the financial markets and to flexibly adapt to changes in the risk environment. Eurex Clearing Prisma integrates both a backward looking and a forward looking margin component. The backward looking component encompasses price alignment interest, variation margin and premium margin. The forward looking component encompasses liquidity risk, market risk based on filtered historical simulation, market risk based on stress scenarios, and model error add-on. A separate Risk Based Margining Method is used for equities, bonds, repos and securities lending; however, these products will be migrated to Prisma at some point in the future.

 

1.18        Eurex Clearing’s clearing fund serves as a safeguard for the viability of the clearing system against Clearing Member defaults. Each Clearing Member has to contribute to the clearing fund. It consists of Clearing Members' direct deposited cash and securities. It is used for securing the counterparty risk in case of a default of a Clearing Member in case the provided margin deposits are not sufficient to cover all losses of Eurex Clearing. The clearing fund 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.

 

1.19        Pursuant to the Interim Order, the Commission exempted Eurex Clearing from the requirement to be recognized as a clearing agency under section 21.2 of the Act in order that a bank listed in Schedule I of the Bank Act (Canada) (Schedule I Bank) could enter into an agreement for an Individual Segregated Account.

 

1.20        Eurex Clearing would provide its services to participants in Ontario without establishing an office or having a physical presence in Ontario or elsewhere in Canada.

 

1.21        Eurex Clearing submits that it does not pose a significant risk to the Ontario capital markets and is subject to an appropriate regulatory and oversight regime in a foreign jurisdiction.

 

                AND WHEREAS Eurex Clearing has agreed to the respective terms and conditions as set out in Schedule “A” to this order;

 

                AND WHEREAS based on the Application and the representations that Eurex Clearing has made to the Commission, the Commission has determined that granting an order to exempt Eurex Clearing from the requirement to be recognized as a clearing agency would not be prejudicial to the public interest;

 

                AND WHEREAS Eurex Clearing has acknowledged to the Commission that the scope of and the terms and conditions imposed by the Commission attached hereto as Schedule “A” to this order, or the determination whether it is appropriate that Eurex Clearing continue to be exempted from the requirement to be recognized as a clearing agency, 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;

 

                IT IS HEREBY ORDERED by the Commission that, pursuant to section 147 of the OSA, Eurex Clearing is exempt from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the OSA;

 

                PROVIDED THAT Eurex Clearing complies with the terms and conditions attached hereto as Schedule “A”

 

                DATED this 14th day of July, 2017.

 

“Mark Sandler”

 

“Frances Kordyback”

 


SCHEDULE “A”

 

Terms and Conditions

 

Definitions:

 

For the purposes of this Schedule “A”:

 

“client clearing” means the ability of a Clearing Member to clear transactions on Eurex Clearing for and on behalf of a client.

 

Unless the context requires otherwise, other terms used in this Schedule “A” shall have the meanings ascribed to them in Ontario securities law (including terms defined elsewhere in this order).

 

COMPLIANCE WITH ONTARIO LAW

 

1.             Eurex Clearing will comply with Ontario securities law (as defined in the OSA) and, where applicable, Ontario commodity futures law (as defined in the Commodity Futures Act (Ontario)).

 

SCOPE OF PERMITTED CLEARING SERVICES IN ONTARIO

 

2.             Eurex Clearing’s activities in Ontario will be limited to the clearing of transactions described in subsections 1.9.1 to 1.9.6 of Eurex Clearing’s representations set out above in this order (Permitted Clearing Services); and, for greater certainty, Eurex Clearing will not be permitted to provide clearing services in Ontario with respect to transactions described in subsection 1.9.7 above or any other derivatives under OSC Rule 91-506 Derivatives: Product Determination cleared by Eurex Clearing.

 

REGULATION OF EUREX CLEARING

 

3.             Eurex Clearing will maintain its status as a CCP under EMIR and will continue to be subject to the regulatory oversight of BaFin or any successor, and, so long as Eurex Clearing remains a registered DCO with the CFTC or any successor, to the regulatory oversight of the CFTC or successor.

 

4.             Eurex Clearing will continue to comply with its ongoing regulatory requirements as a CCP under EMIR, with the ongoing regulatory requirements of BaFin and, so long as Eurex Clearing remains a registered DCO with the CFTC, with the ongoing regulatory requirements of the CFTC.

 

GOVERNANCE

 

5.             Eurex Clearing will promote within Eurex Clearing a governance structure that minimizes the potential for any conflict of interest between Eurex Clearing and its shareholders that could adversely affect the Permitted Clearing Services or the effectiveness of Eurex Clearing's risk management policies, controls and standards.

 

FILING REQUIREMENTS

 

Filings with BaFin

 

6.             Eurex Clearing will provide staff of the Commission the following information, to the extent that is required to provide to or file such information with BaFin or its successor:

 

(a)           details of any material legal proceeding instituted against Eurex Clearing;

 

(b)           notification that Eurex Clearing has failed to comply with an undisputed obligation to pay money or deliver property to a Clearing Member for a period of thirty days after receiving notice from the Clearing Member of Eurex Clearing's past due obligation;

 

(c)           notification that Eurex Clearing has instituted a petition for a judgment of bankruptcy or insolvency or similar relief, or to wind up or liquidate Eurex Clearing or has a proceeding for any such petition instituted against it;

 

(d)           notification that Eurex Clearing has initiated its recovery plan;

 

(e)           the appointment of a receiver or the making of any voluntary arrangement with creditors;

 

(f)            the entering of Eurex Clearing into any resolution regime or the placing of Eurex Clearing into resolution by a resolution authority; and

 

(g)           material changes to its bylaws and rules where such changes would impact the Permitted Clearing Services used by Ontario residents (whether as a Clearing Member or otherwise).

 

Prompt Notice

 

7.             Eurex Clearing will promptly notify staff of the Commission of any of the following:

 

(a)           any material change or proposed material change in Eurex Clearing’s status as a CCP under EMIR or in its regulatory oversight by BaFin or any successor or in its regulatory oversight by the CFTC or any successor;

 

(b)           any material problems with the clearing and settlement of transactions that could materially affect the safety and soundness of Eurex Clearing;

 

(c)           the admission of any new Clearing Member having a head office or principal place of business in Ontario (Ontario Clearing Member);

 

(d)           the participation in Permitted Clearing Services by any new NCM, RC or Basic Clearing Member having a head office or principal place of business in Ontario (Ontario Non-Clearing Member);

 

(e)           the granting of any new Specific Lender License or Specific Repo License to any participant having a head office or principal place of business in Ontario (Ontario Lender/Repo Participant, and, together with Ontario Clearing Members and Ontario Non-Clearing Members, collectively called “Ontario Participants” or individually “Ontario Participant”)

 

(f)            any event of default by, or removal from Permitted Clearing Services of, an Ontario Participant; and

 

(g)           any material system failure of a Permitted Clearing Service utilized by an Ontario Participant including cybersecurity breaches.

 

Quarterly Reporting

 

8.             Eurex Clearing will maintain and submit the following information to the Commission in a manner and form acceptable to the Commission on a quarterly basis within 30 days of the end of each calendar quarter, and at any time promptly upon the request of staff of the Commission:

 

(a)           current lists of all Ontario Clearing Members, Ontario Non-Clearing Members and Ontario Lender/Repo Participants and the legal entity identifier (LEI), if any, of each such Ontario Participant;

 

(b)           a list of all Ontario Participants against whom disciplinary or legal action has been taken in the quarter by Eurex Clearing with respect to activities at Eurex Clearing, or to the best of Eurex Clearing's knowledge, by BaFin or any other authority in Europe or the United States that has or may have jurisdiction with respect to the relevant Ontario Participant’s clearing activities at Eurex Clearing, provided that the Commission will maintain the confidentiality of the identity of any such Ontario Participant, 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;

 

(c)           a list of all investigations by Eurex Clearing in the quarter relating to Ontario Participants, provided that the Commission will maintain the confidentiality of the identity of any such Ontario Participant, 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;

 

(d)           a list of all Ontario-resident applicants who have been denied Clearing Member, NCM, RC, Basic Clearing Member, Specific Lender or Specific Repo fund provider status in the quarter by Eurex Clearing, provided that the Commission will maintain the confidentiality of the identity of such applicant, 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;

 

(e)           quantitative information in respect of the Permitted Clearing Services used by Ontario Participants for transactions in the asset classes listed in paragraph 1.13, including in particular the following:

 

a.             as at the end of the quarter, level, maximum and average daily open interest, number of transactions and notional value of transactions cleared during the quarter for each Ontario Participant;

 

b.             the percentage of end of quarter level and average daily open interest, number of transactions and the notional value cleared during the quarter for all Clearing Members that represents the end of quarter and average daily open interest, number of transactions and the notional value of transactions cleared during the quarter for each Ontario Participant;

 

c.             the aggregate initial margin amount required by Eurex Clearing ending on the last trading day during the quarter for each Ontario Participant;

 

d.             the portion of the initial margin required by Eurex Clearing ending on the last trading day of the quarter for all Clearing Members that represents the initial margin required during the quarter for each Ontario Participant; and

 

e.             the aggregate total margin amount required by Eurex Clearing ending on the last trading day during the quarter for each Ontario Participant;

 

(f)            quantitative information in respect of the Permitted Clearing Services used by Ontario Participants for transactions in cash, securities lending and repo, including in particular the following:

 

a.             as at the end of the quarter, the notional value of cash, securities lending and repo transactions for each Ontario Participant;

 

b.             where applicable, the aggregate initial margin amount required by Eurex Clearing ending on the last trading day during the quarter for each Ontario Participant; and

 

c.             where applicable, the portion of the initial margin required by Eurex Clearing 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 Participant;

 

(g)           the guaranty fund contribution, for each Ontario Clearing Member on the last trading day during the quarter, and its proportion to the total guaranty fund contributions;

 

(h)           if known to Eurex Clearing, for each Clearing Member (identified by its LEI) offering client clearing to an Ontario resident (other than a NCM or RC) that seeks to use the Permitted Clearing Services through such Clearing Member, the identity of the Ontario resident client (including LEI, if any) receiving such services, and the value and volume cleared by asset class or transaction type during the quarter for and on behalf of each Ontario resident client; and

 

(i)            a copy of all circulars published during the quarter that describe and show changes to the Clearing Conditions made during the quarter.

 

INFORMATION SHARING

 

9.             Eurex Clearing will 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 that would prevent the sharing of such information and subject to the application of solicitor-client privilege.

 

10.          Unless otherwise prohibited under applicable law, Eurex Clearing will share information relating to regulatory and enforcement matters and otherwise cooperate with other recognized and exempt clearing agencies on such matters, as appropriate.