Securities Law & Instruments

Headnote

 

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Application by investment dealer (Canadian Filer) for relief from prospectus requirement in connection with distribution of contracts for difference (CFDs) and OTC foreign exchange contracts (collectively, OTC Contracts) to investors, subject to terms and conditions – Application by affiliates of Canadian Filer for relief from prospectus requirement in connection with distribution of OTC Contracts to Canadian Filer pursuant to offsetting transactions – Canadian Filer acts as both market intermediary and as principal or counterparty to OTC transaction with client – Canadian Filer registered as investment dealer and a member of the Investment Industry Regulatory Organization of Canada (IIROC) – Filer complies with IIROC rules and IIROC acceptable practices applicable to offerings of OTC Contracts – Canadian Filer seeking relief to permit Canadian Filer to offer OTC Contracts to investors on the basis of clear and plain language risk disclosure document rather than a prospectus – risk disclosure document contains disclosure substantially similar to risk disclosure document required for recognized options in OSC Rule 91-502 Trades in Recognized Options, the regime for OTC derivatives contemplated by former proposed OSC Rule 91-504 OTC Derivatives (which was not adopted), and the Quebec Derivatives Act – Relief consistent with relief contemplated by OSC Staff Notice 91-702 Offerings of contracts for difference and foreign exchange contracts to investors in Ontario (OSC SN 91-702) – Relief granted, subject to terms and conditions as described in OSC SN 91-702 including four-year sunset clause.

 

Applicable Legislative Provisions

 

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1).

OSC Rule 91-502 Trades in Recognized Options.

OSC Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario.

Proposed OSC Rule 91-504 OTC Derivatives (not adopted).

 

November 7, 2017

 

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

 

AND

 

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS

IN MULTIPLE JURISDICTIONS

 

AND

 

IN THE MATTER OF

GAIN CAPITAL – FOREX.COM CANADA LTD.

(the Canadian Filer)

 

 AND

 

GAIN CAPITAL HOLDINGS, INC.,

GAIN CAPITAL GROUP, LLC AND

GAIN CAPITAL – FOREX.COM UK LTD.

(each a Canadian Filer Affiliate and collectively with the Canadian Filer, the Filers)

 

DECISION

 

Background

 

The principal regulator in the Jurisdiction has received an application (the Application) for a decision under the securities legislation of the Jurisdiction (the Legislation) that:

 

(a)           the Canadian Filer and its respective officers, directors and representatives be exempt from the prospectus requirement in respect of the distribution of contracts for difference (CFDs), over-the-counter (OTC) foreign exchange contracts and other similar OTC contracts (collectively, OTC Contracts) to investors resident in the Applicable Jurisdictions (as defined below) (the Client Prospectus Relief) subject to the terms and conditions below; and

 

(b)           the Canadian Filer Affiliates and their respective officers, directors and representatives be exempt from the prospectus requirement in respect of the distribution of OTC Contracts to the Canadian Filer pursuant to an Off-setting Transaction, as described below (the Canadian Filer Prospectus Relief)

 

(collectively, the Requested Relief).

 

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

 

(a)           the Ontario Securities Commission is the principal regulator for this application (the Principal Regulator); and

 

(b)           the Canadian 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 each province and territory of Canada, other than the provinces of Québec and Alberta, with respect to the Client Prospectus Relief.

 

Interpretation

 

Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this Decision, unless otherwise defined.

 

Representations

 

This Decision is based on the following facts represented by the Filers:

 

The Canadian Filer

 

1.             The Canadian Filer is a corporation incorporated under the Canada Business Corporations Act, with its registered corporate head office located in Toronto, Ontario.

 

2.             The Canadian Filer is registered as a dealer in the category of investment dealer in each of the provinces and territories of Canada, as a derivatives dealer in Québec, and is a dealer member of the Investment Industry Regulatory Organization of Canada (IIROC).

 

3.             The Canadian Filer does not have any securities listed or quoted on an exchange or marketplace in any jurisdiction inside or outside of Canada.

 

4.             The Canadian Filer currently offers OTC Contracts to “accredited investors” as defined in National Instrument 45-106 Prospectus Exemptions and to retail investors in compliance with the terms and conditions set out in In the Matter of GAIN Capital – Forex.com Canada Ltd., GAIN Capital Holdings, Inc., GAIN Capital Group, LLC and GAIN Capital – Forex.com UK Ltd. dated May 29, 2012 (the Existing Relief), except as explained in the following paragraph.

 

5.             The Canadian Filer is not in default of any requirements of securities or derivatives legislation in Canada or the IIROC Rules or the IIROC Acceptable Practices (each, as defined below), except with respect to the fact that the Existing Relief has lapsed and was not renewed on a timely basis. The Canadian Filer has at all times since the Existing Relief lapsed acted in full compliance with the terms and conditions set out in such relief, except for the four year sunset clause.

 

The GAIN Capital Group

 

6.             The Canadian Filer is an indirect, wholly owned subsidiary of GAIN Capital Holdings, Inc. and is part of the GAIN Capital Group of companies.

 

7.             The Filers are all related companies within the GAIN Capital Group of companies. GAIN Capital Holdings, Inc. is the parent company of the Filers and is a publicly listed company with its common shares listed for trading on the New York Stock Exchange under the symbol “GCAP”.

 

8.             Operating under the global brand “Forex.com” the Canadian Filer Affiliates are each well-established leading providers of 24-hour online self-directed OTC trading services offering CFDs and spot forex contracts and servicing retail and institutional customers from more than 140 countries around the globe. The Filers offer these services to investors in Canada through the Canadian Filer.

 

9.             GAIN Capital Group, LLC (Forex.com US), an indirect wholly owned subsidiary of GAIN Capital Holdings, Inc., is authorized and registered as a Retail Foreign Exchange Dealer with the United States National Futures Association and is registered as a Futures Commission Merchant with the United States Commodity Futures Trading Commission.

 

10.          GAIN Capital – Forex.com UK Ltd. (Forex.com UK), an indirect wholly owned subsidiary of GAIN Capital Holdings, Inc., is authorized and regulated by the Financial Services Authority (the FSA) in the United Kingdom (U.K.) as a BIPRU 730k firm. Forex.com UK is licensed in the U.K., among other things, to act as principal to its clients in the products it offers and may deal with all categories of clients, including directly with retail clients. Furthermore, Forex.com UK is regulated on a consolidated basis in the U.K. by the FSA.

 

Offerings

 

11.          The Canadian Filer offers OTC Contracts to investors in each of the provinces and territories of Canada, except Québec and Alberta, (each an Applicable Jurisdiction) in accordance with the representations, terms and conditions described in the Existing Relief and wants to continue to do so in accordance with the representations, terms and conditions set out in this Decision. During the Interim Period (as defined below), the Canadian Filer will rely on the Client Prospectus Relief in connection with the offering of OTC Contracts to investors in the Jurisdiction and intends to rely on this Decision and the “Passport System” described in MI 11-102 to offer OTC Contracts in the other Applicable Jurisdictions.

 

12.          In Québec, the Canadian Filer is qualified by the Autorité des marchés financiers (AMF) pursuant to sections 82 and 83 of the Derivatives Act (Québec) (the QDA) and authorized to market certain forward contracts and CFDs offered to the public, subject to the terms and conditions of its qualification decision and related provisions of the QDA.

 

13.          The Canadian Filer understands that staff of the Alberta Securities Commission have public interest concerns with CFD trading by retail clients and, accordingly, the Filers do not offer OTC Contracts to retail investors in Alberta. The Canadian Filer undertakes not to give notice that subsection 4.7(1) of MI 11-102 is intended to be relied upon in Alberta.

 

IIROC Rules and Acceptable Practices

 

14.          As a member of IIROC, the Canadian Filer is only permitted to enter into OTC Contracts pursuant to the rules and regulations of IIROC (the IIROC Rules).

 

15.          In addition, IIROC has communicated to its members certain additional expectations as to acceptable business practices (IIROC Acceptable Practices) as articulated in IIROC’s paper “Regulatory Analysis of Contracts for Differences (CFDs)” published by IIROC on June 6, 2007, as amended on September 12, 2007, for any IIROC member proposing to offer OTC foreign exchange contracts or other types of CFDs to investors. To the best of its knowledge, the Canadian Filer is in compliance with IIROC Acceptable Practices in offering OTC Contracts. The Canadian Filer will continue to offer OTC Contracts in accordance with IIROC Acceptable Practices as may be established from time to time.

 

16.          The Canadian Filer is required by IIROC to maintain a certain level of capital to address the business risks associated with its activities. The capital reporting required by IIROC (as per the calculation in the Form 1 and the Monthly Financial Reports to IIROC) is based predominantly on the generation of financial statements and calculations so as to ensure capital adequacy. The Canadian Filer, as an IIROC member, is required to have a specified minimum capital which includes having any additional capital required with regards to margin requirements and other risks. This risk calculation is summarized as a risk adjusted capital calculation which is submitted in the Canadian Filer’s Form 1 and required to be kept positive at all times.

 

Online Trading Platform

 

17.          The Canadian Filer has established an execution-only division to offer OTC Contracts whereby clients can self-direct trades in OTC Contracts through an on-line trading platform (the Trading Platform).


18.          Clients of the Canadian Filer can access the Trading Platform by utilizing a proprietary order-entry system developed by Forex.com US and licensed to the Canadian Filer, or through Metatrader, a third-party order-entry system.

 

19.          The Trading Platform is a key component in a comprehensive risk management strategy which helps the Canadian Filer’s clients and the Canadian Filer to manage the risks associated with leveraged products. This risk management system has evolved over many years with the objective of meeting the mutual interests of all relevant parties (including, in particular, clients). These attributes and services are described in more detail below:

 

(a)           Real-time account status and client reporting. Clients are provided with a real-time view of their account status. This includes how tick-by-tick movements affect their account balances and required margins. Clients can view this information throughout the trading day by including it on their trading screen, and can also set up alerts that instruct the trading system to automatically send an email notifying them of key identified levels being hit in the market. Clients have the ability to monitor their account and the profit/loss of their positions in real time.

 

(b)           Fully automated risk management system. Clients are instructed that they must have at the time of order entry, and must maintain at all times, the required margin against their position(s). If a client's funds drop below the required margin, margin calls are regularly issued via email, alerting the client to the fact that the client is required to either deposit more funds to maintain the position or close/reduce it voluntarily. Where possible, daily telephone margin calls are provided as a supporting communication for clients. However, if a client fails to deposit more funds, where required, the client's position is liquidated. This liquidation procedure is intended to act as a mechanism to help reduce the risk of losses being greater than the amount deposited. The risk management functionality of the Trading Platform ensures that client positions are closed out when the client no longer maintains sufficient margin in their account to support the position, thereby preventing the client from being placed in a margin call situation or losing more than their stated risk capital or cumulative loss limit. This functionality also ensures that the Canadian Filer will not incur any credit risk vis-à-vis its customers in respect of OTC transactions.

 

(c)           Wide range of order types. The Trading Platform also provides risk management tools such as stops, limits, and contingent orders. These tools are designed to help clients reduce the risk of loss.

 

(d)           Training programs and Practice Accounts. Clients are provided with on-line user-friendly training programs and educational risk-free trading accounts. In addition, clients may contact Client Services via telephone, email or live chat with any questions they may have.

 

20.          The Trading Platform is similar to those developed for on-line brokerages in that the client trades without other communication with, or advice from, the dealer.

 

21.          The Trading Platform is not a “marketplace” as defined in National Instrument 21-101 Marketplace Operation since a marketplace is any facility that brings together multiple buyers and sellers by matching orders in fungible contracts in a nondiscretionary manner. The Trading Platform does not bring together multiple buyers and sellers, rather it offers clients direct access to real-time currency rates and price quotes for the OTC Contracts.

 

22.          The OTC Contracts are not transferable or fungible with other contracts or financial instruments.

 

23.          The Canadian Filer is the counterparty to trades by its clients in OTC Contracts (OTC Transactions); it will not act as an intermediary, broker or trustee in respect to the OTC Transactions. The Canadian Filer does not manage any discretionary accounts, nor does it provide any trading advice or recommendations regarding OTC Transactions.

 

24.          The Canadian Filer manages the risk in its client positions by simultaneously placing an identical off-setting OTC trade on a back-to-back basis (an Off-setting Transaction) with a Canadian Filer Affiliate. Usually, Forex.com UK will act as the counterparty to the Canadian Filer for OTC contracts.

 

25.          The Canadian Filer does not have an inherent conflict of interest with its clients since it does not profit on a position if the client loses on that position, and vice versa. Further, the Canadian Filer does not charge a trade commission; rather it is currently compensated by the “spread” between the bid and ask prices it offers. In the event the Canadian Filer wishes to introduce any other fees or charges in respect of OTC Contracts, it will provide not less than the minimum prior written notice required of IIROC member firms wishing to do so. Any additional charges shall be fully disclosed to the client prior to trading.

 

26.          Each of the Canadian Filer Affiliates is an “acceptable counterparty” or a “regulated entity” (as those terms are defined in the Form 1). Each of the Canadian Filer Affiliates relies on the exemption from dealer registration requirements set out in section 8.5 of NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) with respect to the Off-setting Transactions with the Canadian Filer.

 

27.          In order to facilitate the distribution and offering of OTC Contracts to clients of the Canadian Filer in the manner described above, the Canadian Filer seeks the Client Prospectus Relief to allow it to offer OTC Contracts to its clients without a prospectus, and the Canadian Filer Affiliates seek the Canadian Filer Prospectus Relief to allow them to offer the corresponding Off-setting Transactions without a prospectus.

 

28.          The ability to lever an investment is one of the principal features of OTC Contracts. Leverage allows clients to magnify investment returns (or losses) by reducing the initial capital outlay required to achieve the same market exposure that would be obtained by investing directly in the underlying instrument, asset or sector.

 

29.          The IIROC Rules and the IIROC Acceptable Practices set out detailed requirements and expectations relating to leverage and margin for offerings of CFDs and other OTC Contracts. The degree of leverage may be amended in accordance with the IIROC Rules and the IIROC Acceptable Practices as may be established from time to time.

 

30.          Pursuant to Section 13.12 [Restriction on lending to clients] of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, only those firms that are registered as investment dealers (a condition of which is to be a member of IIROC) may lend money, extend credit or provide margin to a client.

 

Structure of CFDs

 

31.          A CFD is a derivative product that allows clients to obtain economic exposure to the price movement of an underlying instrument, asset or sector, such as a share, index, market sector, currency pair, treasury or commodity, without the need for ownership and physical settlement of the underlying instrument or asset. Unlike certain OTC derivatives, such as forward contracts, CFDs do not require or oblige either the principal counterparty (being the Canadian Filer for the purposes of the Client Prospectus Relief) nor any agent (also being the Canadian Filer for the purposes of the Client Prospectus Relief) to deliver the underlying instrument or asset.

 

32.          The CFDs and OTC Contracts to be offered by the Canadian Filer will not confer the right or obligation to acquire or deliver the underlying security, instrument or asset itself, and will not confer any other rights of shareholders of the underlying security, instrument or asset, such as voting rights. Rather, a CFD is a derivative instrument which is represented by an agreement between a counterparty and a client to exchange the difference between the opening price of a CFD position and the price of the CFD at the closing of the position. The value of the CFD is generally reflective of the movement in prices at which the underlying instrument or asset is traded at the time of opening and closing the position in the CFD.

 

33.          CFDs allow clients to take a long or short position on an underlying instrument, asset or sector, but unlike futures contracts they have no fixed expiry date or standard contract size or an obligation for physical delivery of the underlying instrument or asset.

 

34.          CFDs allow clients to obtain exposure to markets, instruments and assets that may not be available directly, or may not be available in a cost-effective manner.

 

OTC Contracts Distributed in the Applicable Jurisdictions

 

35.          Certain types of OTC Contracts may be considered to be “securities” under the securities legislation of the Applicable Jurisdictions.

 

36.          Investors wishing to enter into an OTC Contract with the Canadian Filer must open an account with the Canadian Filer.

 

37.          Prior to a client’s first trade in an OTC Contract and as part of the account-opening process, the Canadian Filer will provide the client with a separate risk disclosure document that clearly explains, in plain language, the transaction and the risks associated with the transaction (the Risk Disclosure Document). The Risk Disclosure Document includes the required risk disclosure set forth in Schedule A to the Regulations to the QDA and the leverage risk disclosure required under the IIROC Rules. The Risk Disclosure Document contains disclosure that is substantially similar to the risk disclosure statement required for recognized options in OSC Rule 91-502 Trades in Recognized Options (which provides both registration and prospectus exemptions) (OSC Rule 91-502) and the regime for OTC derivatives contemplated by OSC SN 91-702 (as defined below) and proposed OSC Rule 91-504 OTC Derivatives (which was not adopted) (Proposed Rule 91-504). The Canadian Filer will ensure that, prior to a client’s first trade in an OTC Contract, a complete copy of the Risk Disclosure Document provided to that client has been delivered, or has previously been delivered, to the Principal Regulator.

 

38.          Prior to a client’s first OTC transaction and as part of the account opening process, the Canadian Filer will obtain a written or electronic acknowledgement from the client confirming that the client has received, read and understood the Risk Disclosure Document. Such acknowledgement will be separate and prominent from other acknowledgements provided by the client as part of the account opening process.

 

39.          As is customary in the industry, and due to the fact that this information is subject to factors beyond the control of the Canadian Filer (such as changes in the IIROC Rules), information such as the underlying instrument listing and associated margin rates will not be disclosed in the Risk Disclosure Document but will be available to the client at the time of account opening on both the Canadian Filer’s website and the Trading Platform.

 

Satisfaction of the Registration Requirement

 

40.          The role of the Canadian Filer as it relates to the offering of OTC Contracts (other than it being the principal under the OTC Contracts) is limited to acting as an execution-only dealer. In this role, the Canadian Filer, among other things, is responsible for approving all marketing, for holding all client funds and for client approval (including the review of know-your-client, due diligence and account opening suitability assessments).

 

41.          The IIROC Rules exempt member firms that provide execution-only services such as discount brokerages from the obligation to determine whether each trade is suitable for a client. However, IIROC has exercised its discretion to impose additional requirements on members proposing to trade in CFDs and OTC Contracts (namely the IIROC Acceptable Practices described in paragraph 14) which requires, among other things, that:

 

(a)           applicable risk disclosure documents and client suitability waivers provided be in a form acceptable to IIROC;

 

(b)           the firm’s policies and procedures, amongst other things, require the Canadian Filer to assess whether trading in OTC Contracts is appropriate for a client before an account is approved to be opened. This account opening suitability process includes an assessment of the client’s investment knowledge and trading experience; client identification, screening applicants and customers against lists of prohibited/blocked persons, and detecting and reporting suspicious trading and potential terrorist financing and money laundering activities to applicable enforcement authorities;

 

(c)           the Canadian Filer’s registered dealing representatives, as well as their registered supervisors who oversee the KYC and initial product suitability analysis will meet, or be exempt from, the proficiency requirements for futures trading and will be registered with IIROC as Investment Representative for retail customers in the product category of Futures Contracts and Futures Contract Options (IR). In addition, the Canadian Filer must have a fully qualified Supervisor for such products; and

 

(d)           cumulative loss limits for each client’s account will be established (this is a measure normally used by IIROC in connection with futures trading accounts).

 

42.          The OTC Contracts offered in Canada will be offered in compliance with the applicable IIROC Rules and other IIROC Acceptable Practices.

 

43.          IIROC limits the underlying instruments in respect of which a member firm may offer OTC Contracts since only certain securities are eligible for reduced margin rates. For example, underlying equity securities must be listed or quoted on certain “recognized exchanges” (as that term is defined in the IIROC Rules) such as the Toronto Stock Exchange or the New York Stock Exchange. The purpose of these limits is to ensure that OTC Contracts offered in Canada will only be available in respect of underlying instruments that are traded in well-regulated markets, in significant enough volumes and with adequate publicly available information, so that clients can form a sufficient understanding of the exposure represented by a given OTC Contract.

 

44.          The IIROC Rules prohibit the margining of OTC Contracts where the underlying instrument is a synthetic product (single U.S. sector or “mini-indices”). For example, Sector CFDs (i.e., basket of equities for the financial institutions industry) may be offered to non-Canadian clients; however, this is not permissible under the IIROC Rules.

 

45.          IIROC members seeking to trade OTC Contracts are generally precluded, by virtue of the nature of the contracts, from distributing CFDs that confer the right or obligation to acquire or deliver the underlying security, instrument or asset itself (convertible CFDs), or that confer any other rights of shareholders of the underlying security, instrument or asset, such as voting rights.

 

46.          The Requested Relief, if granted, will continue to harmonize the position of the regulators in the Applicable Jurisdictions (each a Commission) on the offering of OTC Contracts to investors in the Applicable Jurisdictions with how those products are offered to investors in Québec under the QDA. The QDA provides a legislative framework to govern derivatives activities within that province. Among other things, the QDA requires such products to be offered to investors through an IIROC member and the distribution of a standardized risk disclosure document rather than a prospectus in order to distribute such contracts to investors resident in Québec.

 

47.          The Requested Relief, if granted, is consistent with the guidelines articulated by Staff of the Principal Regulator in OSC Staff Notice 91-702 Offerings of Contracts for Difference and Foreign Exchange Contracts to Investors (OSC SN 91-702). OSC SN 91-702 provides guidance with regards to the distributions of CFDs, forex contracts and similar OTC derivative products to investors in the Jurisdiction.

 

48.          The Principal Regulator has previously recognized that the prospectus requirement may not be well suited for the distribution of certain derivative products to investors in the Jurisdiction, and that alternative requirements, including requirements based on clear and plain language risk disclosure, may be better suited for certain derivatives.

 

49.          In Ontario, both OSC Rule 91-502 and OSC Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario (OSC Rule 91-503) provide for a prospectus exemption for the trading of derivative products to clients. The Requested Relief is consistent with the principles and requirements of OSC Rule 91-502, OSC Rule 91-503 and Proposed Rule 91-504.

 

50.          The Filers submit that the Requested Relief, if granted, will harmonize the Principal Regulator’s position on the offering of OTC Contracts with certain other foreign jurisdictions that have concluded that a clear, plain language risk disclosure document is appropriate for retail clients seeking to trade in foreign exchange contracts.

 

51.          The Filers are of the view that requiring compliance with the prospectus requirement in order to enter into OTC Contracts with retail clients would not be appropriate since the disclosure of a great deal of the information required under a prospectus and under the reporting issuer regime is not material to a client seeking to enter into an OTC Contract. The information to be given to such a client should principally focus on enhancing the client’s appreciation of product risk including counterparty risk. In addition, most OTC Contracts are of short duration (positions are generally opened and closed on the same day and are in any event marked to market and cash settled daily).

 

52.          The Canadian Filer is regulated by IIROC, which has a robust compliance regime including specific requirements to address market, capital and operational risks.

 

53.          The Canadian Filer submits that the regulatory regimes developed by the AMF and IIROC for OTC Contracts adequately address issues relating to the potential risk to the clients of the Canadian Filer acting as counterparty. In view of these regulatory regimes, investors would receive little or no additional benefit from requiring the Canadian Filer to also comply with the prospectus requirement.

 

54.          The Requested Relief in respect of each Applicable Jurisdiction is conditional on the Canadian Filer being registered as an investment dealer with the Commission in such Applicable Jurisdiction and maintaining its membership with IIROC and that all OTC transactions be conducted pursuant to the IIROC Rules and in accordance with the IIROC Acceptable Practices.

 

Non-Resident Undertaking

 

55.          The Canadian Filer has been approved by IIROC specifically as a non-resident dealer member because its designated head office and principal business location for regulatory purposes is situated in Bedminster, New Jersey.

 

56.          The Canadian Filer complies with all IIROC requirements for non-resident dealer members as set out in IIROC's paper, Regulatory Analysis of Non-Resident IDA Members, dated November 10, 2005, except, with IIROC's consent, Part 2, paragraph (g), which requires a non-resident dealer member to enter into an introducing and carrying broker arrangement (IB/CB Arrangement) with a resident dealer member of IIROC in accordance with IIROC Rule 35.

 

57.          In lieu of having to enter into an IB/CB Arrangement, the Canadian Filer has provided IIROC with a non-resident undertaking (the Non-Resident Undertaking) which terms include, among other things, its agreement to:

 

(a)           maintain custody of all customer monies in Canada with a Canadian financial institution that is an Acceptable Institution (as defined by IIROC) and such customer monies will be held in trust for the customers separate and apart from its own property;

 

(b)           provide each customer with a copy in writing of its Non-Resident Disclosure (as approved by IIROC);

 

(c)           provide each customer with the names and addresses of its agents for service of process in each of the provinces and territories of Canada;


(d)           provide customers with the choice of law with respect to all contracts for securities trading and provide a waiver of its right to challenge the convenience of the forum chosen by the customer in any action brought against it;

 

(e)           pay all compliance costs associated with the travel and accommodations of IIROC staff to perform a compliance review or investigation outside of Canada; and

 

(f)            provide a facility within Ontario, through its Canadian-resident director, to make its books and records, including electronic records, readily accessible and to produce physical records for IIROC within a reasonable time if requested.

 

58.          The Canadian Filer has determined that it complies with all requirements under NI 31-103 relating to non-resident registrants, including subsections 14.5 and 14.7 of NI 31-103, since all client assets (i.e., cash) will be held by the Canadian Filer, a registered dealer that is a member of IIROC and is a member of the Canadian Investor Protection Fund, and since the Canadian Filer will hold client assets in Canada separate and apart from its own property, in trust for clients and, in the case of cash, in a designated trust account at a Canadian financial institution or Schedule III bank.

 

Decision

 

The Principal Regulator is satisfied that the test set out in the Legislation to make the Decision is met.

 

The Decision of the Principal Regulator is that the Requested Relief is granted provided that:

 

(a)           all OTC Contracts traded with residents in the Applicable Jurisdictions shall be executed through the Canadian Filer;

 

(b)           with respect to residents of an Applicable Jurisdiction, the Canadian Filer remains registered as a dealer in the category of investment dealer with the Principal Regulator and the Commission in such Applicable Jurisdiction and a dealer member of IIROC;

 

(c)           all transactions in OTC Contracts with clients resident in the Applicable Jurisdictions shall be conducted pursuant to the IIROC Rules imposed on members seeking to trade in OTC Contracts and in accordance with the IIROC Acceptable Practices, as amended from time to time, and in accordance with the Non-Resident Undertaking;

 

(d)           all transactions in OTC Contracts with clients resident in the Applicable Jurisdictions be conducted pursuant to the rules and regulations of the QDA and the AMF, as amended from time to time, unless and to the extent there is a conflict between (i) the rules and regulations of the QDA and the AMF, and (ii) the requirements of the securities laws of the Applicable Jurisdictions, the IIROC Rules and the IIROC Acceptable Practices, in which case the latter shall prevail;

 

(e)           prior to a client first entering into a transaction in an OTC Contract, the Canadian Filer has provided to the client the Risk Disclosure Document described in paragraph 37 and has delivered, or has previously delivered, a copy of the Risk Disclosure Document provided to that client to the Principal Regulator;

 

(f)            prior to the client’s first transaction in an OTC Contract and as part of the account opening process, the Canadian Filer has obtained a written or electronic acknowledgement from the client, as described in paragraph 38, confirming that the client has received, read and understood the Risk Disclosure Document;

 

(g)           the Canadian Filer has furnished to the Principal Regulator the name and principal occupation of its officers and directors, together with either the personal information form and authorization of indirect collection, use and disclosure of personal information provided for in National Instrument 41-101 General Prospectus Requirements or the registration information form for an individual provided for in Form 33-109F4 of National Instrument 33-109 Registration Information Requirements completed by any officer or director;

 

(h)           the Canadian Filer shall promptly inform the Principal Regulator in writing of any material change affecting the Canadian Filer or a Canadian Filer Affiliate, being any change in the business, activities, operations or financial results or condition of the Canadian Filer or Canadian Filer Affiliate that may reasonably be perceived by a counterparty to a derivative to be material;

 

(i)            the Canadian Filer shall promptly inform the Principal Regulator in writing if a self-regulatory organization or any other regulatory authority or organization initiates proceedings or renders a judgment related to disciplinary matters against the Canadian Filer or a Canadian Filer Affiliate concerning the conduct of activities with respect to OTC Contracts;

 

(j)            within 90 days following the end of its financial year, the Canadian Filer shall submit to IIROC, and to the Principal Regulator upon request, the audited annual financial statements of the Canadian Filer; and

 

(k)           the Requested Relief shall immediately expire upon the earliest of:

 

(i)            four years from the date that this Decision is issued;

 

(ii)           in respect of a subject Applicable Jurisdiction or Québec, the issuance of an order or decision by a court, the Commission in such Applicable Jurisdiction, the AMF (in respect of Québec) or other similar regulatory body that suspends or terminates the ability of the Canadian Filer to offer CFDs to clients in such Applicable Jurisdiction or Québec; and

 

(iii)          with respect to an Applicable Jurisdiction, the coming into force of legislation or a rule by its Commission regarding the distribution of OTC derivatives to investors in such Applicable Jurisdiction (the Interim Period).

 

“Tim Moseley”                                                                      “Garnet Fenn”

Commissioner                                                                     Commissioner

Ontario Securities Commission                                       Ontario Securities Commission