Securities Law & Instruments

Headnote

 

Application for an order that a multilateral trading facility authorized by the United Kingdom Financial Conduct Authority is exempt from the requirement to register as an exchange in Ontario on an interim basis – requested order granted.

 

Applicable Legislative Provisions

 

Securities Act, R.S.O. 1990, c. S.5 as am., ss. 21, 147.

 

IN THE MATTER OF

THE SECURITIES ACT,

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

(“THE ACT”),

 

AND

 

IN THE MATTER OF

THOMSON REUTERS MULTILATERAL TRADING FACILITY

 

ORDER

(Section 147 of the Act)

 

WHEREAS Reuters Transaction Services Limited (the “Applicant” or “RTSL”) has filed an application on behalf of Thomson Reuters Multilateral Trading Facility (the “Facility” or “TR MTF”) dated March 20, 2018 (“Application”) with the Ontario Securities Commission (“Commission”) pursuant to section 147 of the Act requesting an interim order exempting the Facility from the requirement to be recognized as an exchange under subsection 21(1) of the Act (“Order”);

 

AND WHEREAS the Applicant has represented to the Commission that:

 

1.             The Facility is operated by the Applicant, a member of the Thomson Reuters Group;

 

2.             Effective December 1, 2001, the U.K. Financial Services Authority (“FSA”), a financial regulatory body in the United Kingdom, authorized RTSL, under Part 4A of the UK Financial Services and Markets Act 2000, to act as the operator of an Alternative Trading System (“ATS”); on November 1, 2007, the authorization was changed to the operator of a multilateral trading facility (“MTF”) when the ATS regime was replaced by the new MiFID regulated activity of Operating a Multilateral Trading Facility and this authorization subsequently was transferred to the FSA’s successor regulatory body the Financial Conduct Authority (the “FCA”), also a financial regulatory body in the United Kingdom, on April 1, 2013. RTSL was previously authorized by the Bank of England between 1992 and 2001. The following types of investment are offered for trading on the Facility: foreign exchange FX forwards (swaps), FX forwards (outrights), FX swaps, FX non-deliverable forwards (“NDFs”) and FX options;

 

3.             On January 3, 2018, the Markets in Financial Instruments Directive (Directive 2014/65/EU of the European Parliament and of the Council) (“MiFID II”) entered into force as implemented in the United Kingdom by transposition into national law together with the Markets in Financial Instruments Regulation (Regulation (EU) No 600/2014 of the European Parliament and of the Council) (“MiFIR”) which is directly applicable in the United Kingdom, containing the amended regulatory framework for the operator of an MTF. Without the Requested Relief, participants in Ontario will be precluded from trading with EU/EEA participants on the TR MTF, a EU regulated trading venue;

 

4.             The TR MTF is comprised of two trading segments known as Forwards Matching and FXall RFQ. All trading segments are governed by the TR MTF Rule Book (“Rules”) applicable to the TR MTF as a whole. Each trading segment further has its own Rules specific to that trading segment. A client who enters into a Participant Agreement in respect of the TR MTF (a “Participant”) must comply with both the Rules applicable to the Facility as a whole, and the Rules applicable to the specific trading segment to which the Participant is authorized and wishes to access. Trading on the Facility is offered in the Financial Instruments listed in the following table:

 

Trading Segment

Financial Instrument

Forwards Matching

FX forwards (swaps)

FXall RFQ

FX forwards (outrights), FX swaps, FX NDFs, FX options

                These Financial Instruments are admitted in various currency pairs;

 

5.             The Applicant is subject to regulatory supervision by the FCA and is required to comply with the FCA’s regulatory framework set out in the FCA Handbook, which includes, among other things, rules on (i) the conduct of business (including rules regarding client categorization, communication with clients and other investor protections and client agreements), (ii) market conduct (including rules applicable to firms operating an MTF), and (iii) systems and controls (including rules on outsourcing, governance, record-keeping and conflicts of interest). The FCA requires the Applicant to comply at all times with a set of threshold conditions for authorization, including requirements that the Applicant is “fit and proper” to be authorized and that it has appropriate resources for the activities it carries on. The Applicant is subject to prudential regulation, including minimum regulatory capital requirements, and is capitalized in excess of regulatory requirements. The Applicant is required to maintain a permanent and effective compliance function. The Applicant’s Compliance Department is responsible for implementing and maintaining adequate policies and procedures designed to ensure that the Applicant (and all associated staff) comply with their obligations under the FCA rules. These policies and procedures are set forth in the RTSL Compliance Manual and associated internal policies and procedures;

 

6.             An MTF is obliged under the FCA Handbook to have requirements governing the conduct of Participants, to monitor compliance with those requirements and report to the FCA (a) significant breaches of the Facility’s Rules, (b) disorderly trading conditions, and (c) conduct that may involve market abuse. The Applicant may also notify the FCA when a Participant’s access is terminated, temporarily suspended or subject to condition(s). As required by the FCA Handbook, the Applicant has implemented a trade surveillance program. As part of the program, the Applicant’s Compliance Department conducts real-time market monitoring of trading activity on the TR MTF to identify disorderly trading and market abuse or anomalies. The trade surveillance program is designed to maintain a fair and orderly market for TR MTF participants;

 

7.             Participants may only connect to the Facility using a connection method permitted by RTSL. These connection methods are described more fully in the rules relevant to each specific trading segment. The Forwards Matching trading segment currently permits connections through a Thomson Reuters GUI application and the Matching application programming interface (“API”) for FX Forwards. Participants may allow remote-manned use of Thomson Reuters APIs if the Participant ensures that the API applications in use at the remote site are at all times monitored and managed from that remote monitoring site. The Facility offers publicly available pricing plans based on trading segment, rate engine or pricing tool selected. The rate stated is purely for the MTF transaction component and does not include any pricing for the rates engine or pricing tools used;

 

8.             Participants are responsible for ensuring the prompt exchange and processing of transaction confirmations directly with their counterparties in accordance with market practice. Failure to settle transactions will constitute a breach of the Facility Rules. Participants are also responsible for ensuring that transactions are not required to be cleared pursuant to applicable law. If Participants are required or choose to clear a transaction, they are responsible for making the necessary arrangements;

 

9.             The Applicant requires that all Participants meet the criteria of an Eligible Counterparty, either ‘Per Se’ or ‘Elective’ as defined by the FCA in the FCA’s Conduct of Business Sourcebook, Chapter 3 “Client Categorization”[1]. Each prospective participant must (i) comply and ensure that its authorized traders comply, and, in each case, continue to comply, with the Rules and applicable law (ii) have a sufficient level of trading ability, skill, competence and experience to conduct activities on the Facility; (iii) must be of adequate financial soundness; (iv) have adequate organizational arrangements commensurate with meeting their own regulatory obligations (v) have in place adequate systems and controls to ensure their on-going compliance with the Rules and management of their trading activities, and (vi) must satisfy any other criteria that RTSL may reasonably require from time to time;

 

10.          All Participants, including Participants in Ontario (“Ontario Participants”) are required to ensure they meet the necessary eligibility criteria for use of the Facility. Ontario Participants must ensure they meet all applicable Ontario regulatory requirements with respect to trading on the Facility. Ontario Participants are required to notify immediately the Applicant if they cease to meet the criteria of an Eligible Counterparty. Participants must also supply any information requested by the Facility or Applicant to enable monitoring of responsibilities with respect to eligibility and operational criteria;

 

11.          The Facility also requires information to be provided regarding the operational functions of the participants, including the qualifications required of staff in key position and pre and post-trade controls;

 

12.          Ontario Participants may include financial institutions, asset managers, dealers, government entities, pension funds and other well-capitalized entities that meet the criteria described above;

13.          The TR MTF provides certain Ontario Participants with significant access to liquidity for which, at least for certain types of transactions, there is no appropriate alternative platform, and the Ontario capital markets will be disrupted if the Order is not granted;

 

14.          Because the Facility sets requirements for the conduct of its participants and surveils the trading activity of its Participants, it is considered by the Commission to be an exchange;

 

15.          Since the Applicant seeks to provide Ontario Participants with direct access to trading on the Facility, the Facility is considered by the Commission to be “carrying on business as an exchange” in Ontario and is required to be recognized as such or exempted from recognition pursuant to section 21 of the Act;

 

16.          The Facility has no physical presence in Ontario and does not otherwise carry on business in Ontario except as described herein;

 

17.          The Applicant (or a related entity that will carry on the business of the Facility after the departure of the United Kingdom from the European Union) intends to file a full application to the Commission for a subsequent order exempting the Facility from the requirement to be recognized as an exchange under section 147 of the Act (“Subsequent Order”);

 

AND WHEREAS the products traded on the Facility are not commodity futures contracts as defined in the Commodity Futures Act (Ontario) and the Facility is not considered to be carrying on business as a commodity futures exchange in Ontario;

 

AND WHEREAS the Applicant has acknowledged to the Commission that the scope of the Exchange Relief and the terms and conditions imposed by the Commission set out in Schedule “A” to this order may change as a result of the Commission’s monitoring of developments in international and domestic capital markets or the Applicant or the Facility’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, together with the representations made by and acknowledgments of the Applicant to the Commission, the Commission has determined that the granting of the Exchange Relief would not be prejudicial to the public interest;

 

IT IS HEREBY ORDERED by the Commission that, pursuant to section 147 of the Act, the Facility is exempt on an interim basis from recognition as an exchange under subsection 21(1) of the Act,

 

PROVIDED THAT:

 

1.             This Order shall terminate on the earlier of (i) August 16, 2019 and (ii) the effective date of the Subsequent Order;

 

2.             The Applicant complies with the terms and conditions contained in Schedule “A”; and

 

3.             The Applicant (on behalf of the Facility or on behalf of a related entity that will carry on the business of the Facility) files a full application to the Commission for a Subsequent Order by November 15, 2018.

 

DATED August 17, 2018

 

“Deborah Leckman”                                                            “Philip Anisman”

 


 

Schedule A

 

Terms and Conditions

 

Regulation and Oversight of the Applicant

 

1.             The Applicant will maintain its permission to operate as a multilateral trading facility (MTF) with the U.K. Financial Conduct Authority (FCA) and will continue to be subject to the regulatory oversight of the FCA.

 

2.             The Applicant will continue to comply with the ongoing requirements applicable to it as the operator of an MTF authorized by the FCA.

 

3.             The Applicant will promptly notify the Commission if its permission to operate an MTF has been revoked, suspended, or amended by the FCA, or the basis on which its permission to operate an MTF has been granted has significantly changed.

 

4.             The Applicant must do everything within its control, which includes cooperating with the Commission as needed, to carry out its activities as an exchange exempted from recognition under subsection 21(1) of the Act in compliance with Ontario securities law.

 

Access

 

5.             The Applicant will not provide direct access to a participant in Ontario (Ontario User) unless the Ontario User is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements, and qualifies as an “eligible counterparty” (either “per se” or “elective”), as defined by the FCA in the FCA’s Conduct of Business Sourcebook, Chapter 3 “Client Categorisation.”

 

6.             For each Ontario User provided direct access to the Facility, the Applicant will require, as part of its application documentation or continued access to the Facility, the Ontario User to represent that it is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements.

 

7.             The Applicant may reasonably rely on a written representation from the Ontario User that specifies either that it is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements, provided the Applicant notifies such Ontario User that this representation is deemed to be repeated each time it enters an order, request for quote or response to a request for quote or otherwise uses the Facility.

 

8.             The Applicant will require Ontario Users to notify the Applicant if their registration as applicable under Ontario securities laws has been revoked, suspended, or amended by the Commission or if they are no longer exempt from or become subject to those requirements and, following notice from the Ontario User and subject to applicable laws, the Applicant will promptly restrict the Ontario User’s access to the Applicant if the Ontario User is no longer appropriately registered or exempt from those requirements.

 

9.             The Applicant must make available to Ontario Users appropriate training for each person who has access to trade on the Applicant’s facilities.

 

Trading by Ontario Users

 

10.          The Applicant will not provide access to an Ontario User to trading in products other than swaps, as defined in section 1a(47) of the United States Commodity Exchange Act as amended, without prior Commission approval.

 

Submission to Jurisdiction and Agent for Service

 

11.          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 the activities of the Applicant in Ontario, the Applicant will submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario.

 

12.          The Applicant will 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, concerning or in any other manner connected with the Commission’s regulation and oversight of the Applicant’s activities in Ontario.

 


 

Disclosure

 

13.          The Applicant will provide to its Ontario Users disclosure that:

 

(a)           rights and remedies against the Applicant may only be governed by the laws of the United Kingdom, rather than the laws of Ontario and may be required to be pursued in the United Kingdom rather than in Ontario; and

 

(b)           the rules applicable to trading on the Facility may be governed by the laws of the United Kingdom rather than the laws of Ontario.

 

Prompt Reporting

 

14.          The Applicant will notify staff of the Commission promptly of:

 

(a)           any material change to its business or operations or the information provided in the Application, including, but not limited to, material changes to:

 

(i)            the regulatory oversight by the FCA;

 

(ii)           the corporate governance structure of the Applicant;

 

(iii)           the access model, including eligibility criteria, for Ontario Users;

 

(iv)          systems and technology; and

 

(v)           the clearing and settlement arrangements for the Facility;

 

(b)           any condition or change in circumstances whereby the Applicant is unable or anticipates it will not be able to continue to meet any of the relevant rules and regulations of the FCA, as set forth in the FCA Handbook;

 

(c)           any known investigations of, or any disciplinary action against the Applicant by the FCA or any other regulatory authority to which it is subject;

 

(d)           any matter known to the Applicant that may materially and adversely affect its financial or operational viability, including, but not limited to, any declaration of an emergency pursuant to the Applicant’s rules;

 

(e)           any default, insolvency, or bankruptcy of a participant of the Applicant known to the Applicant or its representatives that may have a material, adverse impact upon the Applicant; and

 

(f)            any material systems outage, malfunction or delay.

 

15.          The Applicant will promptly provide staff of the Commission with the following information to the extent it is required to provide to or file such information with the FCA:

 

(a)           details of any material legal proceeding instituted against the Applicant;

 

(b)           notification that the Applicant has instituted a petition for a judgment of bankruptcy or insolvency or similar relief, or to wind up or liquidate the Applicant or has a proceeding for any such petition instituted against it; and

 

(c)           the appointment of a receiver or the making of any voluntary arrangement with creditors.

 

Quarterly Reporting

 

16.          The Applicant will maintain the following updated information and submit such information 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)           a current list of all Ontario Users and whether the Ontario User is registered under Ontario securities laws or is exempt from or not subject to registration, and, to the extent known by the Applicant, other persons or companies located in Ontario trading on the Facility as customers of participants (“Other Ontario Participants”);

 

(b)           the legal entity identifier assigned to each Ontario User, and, to the extent known by the Applicant, to Other Ontario Participants in accordance with the standards set by the Global Legal Entity Identifier System;

 

(c)           a list of all Ontario Users whom the Applicant has referred to the FCA, or, to the best of the Applicant’s knowledge, whom have been disciplined by the FCA with respect to such Ontario Users’ activities on the Facility and the aggregate number of all participants referred to the FCA in the last quarter by the Applicant;

 

(d)           a list of all active investigations during the quarter by the Applicant relating to Ontario Users and the aggregate number of active investigations during the quarter relating to all participants undertaken by the Applicant;

 

(e)           a list of all Ontario applicants for status as a participant who were denied such status or access to the Applicant during the quarter, together with the reasons for each such denial;

 

(f)            a list of all additions, deletions, or changes to the products available for trading since the prior quarter;

 

(g)           for each product,

 

(i)            the total trading volume and value on the Facility originating from Ontario Users, and, to the extent known by the Applicant, from Other Ontario Participants, presented on a per Ontario User or per Other Ontario Participant basis; and

 

(ii)           the proportion of worldwide trading volume and value on the Facility conducted by Ontario Users, and, to the extent known by the Applicant, by Other Ontario Participants, presented in the aggregate for such Ontario Users and Other Ontario Participants;

 

provided in the required format; and

 

(h)           a list outlining each material incident of a security breach, systems failure, malfunction, or delay (including cyber security breaches, systems failures, malfunctions or delays reported under section 14(f) of this Schedule) that occurred at any time during the quarter for any system relating to trading activity, including trading, routing or data, specifically identifying the date, duration and reason, to the extent known or ascertainable by the Applicant, for the failure, malfunction or delay, and noting any corrective action taken.

 

Annual Reporting

 

17.          The Applicant will file with the Commission any annual financial report or financial statements (audited or unaudited) of the Applicant provided to or filed with the FCA promptly after filing with the FCA.

 

Information Sharing

 

18.          The Applicant will 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.


 



[1] See Section 3.6 of the Sourcebook located at https://www.handbook.fca.org.uk/handbook/COBS.pdf.