Securities Law & Instruments

Headnote

Application to the Commission, pursuant to section 38 of the Commodity Futures Act (CFA), for a ruling that the Applicants be exempted from the dealer registration requirement in paragraph 22(1)(a) and the prohibition against trading on non-recognized exchanges in section 33 of the CFA. The Applicants will offer to certain of their clients in Ontario (Institutional Clients) the ability to trade in futures contracts that trade on exchanges located outside Canada through the Applicants. The Institutional Clients are the same as "designated institutions" as that term is defined in section 204(1) of Ont. Reg. 1015 -- General Regulation made under the Securities Act.

Application to the Director for an exemption, pursuant to section 6.1 of OSC Rule 91-502 -- Trades in Recognized Options (Rule 91-502), exempting the Applicants and their Representatives from the proficiency requirements in section 3.1 of Rule 91-502 for trades in commodity futures options.

Statutes Cited

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 22, 33, 38.

Rules Cited

Ontario Securities Commission Rule 91-502 Trades in Recognized Options, ss. 3.1, 6.1.

IN THE MATTER OF

THE COMMODITY FUTURES ACT,

R.S.O. 1990, CHAPTER C.20, AS AMENDED

(the CFA)

AND

IN THE MATTER OF

THE SECURITIES ACT,

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

(the OSA)

AND

IN THE MATTER OF

MORGAN STANLEY & CO. INCORPORATED

AND

MORGAN STANLEY & CO. INTERNATIONAL PLC

 

RULING & EXEMPTION

(Section 38 of the CFA and Section 6.1 of Rule 91-502)

UPON the application (the Application) of Morgan Stanley & Co. Incorporated (MS Incorporated) and Morgan Stanley & Co. International PLC (MS International and, together with MS Incorporated, the Applicants) to the Ontario Securities Commission (the Commission) for:

(a) a ruling of the Commission, pursuant to section 38 of the CFA, that the Applicants be exempted from the dealer registration requirements in the CFA (as defined below) and the trading restrictions in the CFA (as defined below) in connection with trades (Futures Trades) in contracts (as defined below) for the Applicants' own account and by certain of the Applicants' clients who are institutional clients (as defined below); and

(b) an exemption of the Director, pursuant to section 6.1 of OSC Rule 91-502 -- Trades in Recognized Options (Rule 91-502), exempting the Applicants and its salespersons, directors, officers and employees (the Representatives) from section 3.1 of Rule 91-502 in connection with Futures Trades;

AND WHEREAS for the purposes of this ruling and exemption (the Decision):

(i) the following terms shall have the following meanings:

"CFTC" means the United States Commodity Futures Trading Commission;

"contract" means a commodity futures contract or a commodity futures option that trades on one or more organized exchanges located outside of Canada and cleared through one or more clearing corporations located outside of Canada;

"dealer registration requirements in the CFA" means the provisions of section 22 of the CFA that prohibit a person or company from trading in a contract unless the person or company satisfies the applicable provisions of section 22 of the CFA;

"institutional client" means a client that falls within the category of investors listed in Appendix I to the Order;

"FINRA" means the Financial Industry Regulatory Authority in the United States;

"FSA" means the United Kingdom Financial Services Authority;

"NFA" means the National Futures Association in the United States;

"SEC" means the United States Securities and Exchange Commission; and

"trading restrictions in the CFA" means the provisions of section 33 of the CFA that prohibit a person or company from trading in a contract unless the person or company satisfies the applicable provisions of section 33 of the CFA; and

(ii) terms used in the Decision that are defined in the OSA, and not otherwise defined in the Decision or in the CFA, shall have the same meaning as in the OSA, unless the context otherwise requires;

AND UPON considering the Application and the recommendation of staff of the Commission;

AND UPON the Applicants having represented to the Commission and the Director as follows:

MS Incorporated

1. MS Incorporated is a corporation incorporated under the laws of the State of Delaware. Its head office is located in New York, New York, United States of America.

2. MS Incorporated is a wholly-owned subsidiary of Morgan Stanley. Morgan Stanley is a bank holding company subject to the regulation and oversight of the Federal Reserve Board. Morgan Stanley was originally incorporated under the laws of the State of Delaware in 1981, and its predecessor companies date back to 1924.

3. MS Incorporated is registered with the Federal Reserve Bank of New York as a primary dealer in United States (U.S.) Government securities. MS Incorporated is a market maker for U.S. agency securities and acts as a broker for customers buying and selling equity and/or debt securities, and as a broker for futures and options on futures contracts. Its clients include financial institutions, corporations and hedge funds.

4. MS Incorporated is a registered securities broker-dealer with the SEC, and is a member of FINRA. MS Incorporated is a member of major securities exchanges, including the New York Stock Exchange.

5. MS Incorporated is a registered futures commission merchant with the CFTC, and is a member of the NFA. Pursuant to these registrations and memberships, MS Incorporated is authorized to handle customer orders and receive and hold customer margin deposits, and otherwise act as a futures broker, in the U.S. Rules of the CFTC and the NFA require MS Incorporated to maintain adequate capital levels, make and keep specified types of records relating to customer accounts and transactions, and comply with other forms of customer protection rules. In order to protect customers in the event of insolvency or financial instability of MS Incorporated, MS Incorporated is required to ensure that customer securities and monies be separately accounted for and segregated from the securities and monies of MS Incorporated. MS Incorporated is also required to obtain acknowledgements from banks and brokers holding customer funds or securities that such funds or securities are to be separately held on behalf of such customers, with no right of set-off against MS Incorporated's obligations or debts.

6. MS Incorporated is a foreign approved participant of the Montréal Exchange. MS Incorporated is also a clearing member of the Chicago Mercantile Exchange (including the Chicago Board of Trade, and the New York Mercantile Exchange), the Options Clearing Corporation and ICE Clear U.S. (as well as a member of ICE Futures U.S.), and trades through affiliated or unaffiliated member firms on all other exchanges, including exchanges in Mexico, United Kingdom, France, Italy, Greece, Spain, Germany, Austria, Japan, Korea, Singapore, Hong Kong, China, Taiwan, and Australia.

7. MS Incorporated is registered under the OSA as a dealer in the categories of international dealer and limited market dealer and as an adviser in the category of international adviser.

MS International

8. MS International is a company limited by shares incorporated under the laws of England and Wales. Its head office is located in London, United Kingdom.

9. MS International is a wholly-owned subsidiary of Morgan Stanley. Further particulars about Morgan Stanley are provided in paragraph 2 above.

10. MS International acts as a broker for customers buying and selling equity and/or debt securities, and as a broker for futures and options on futures contracts. Its clients include financial institutions, corporations and hedge funds.

11. MS International is authorized by the FSA, and is approved by the NFA as an exempt foreign firm. Pursuant to these authorizations and approvals, MS International may trade in securities and exchange contracts in the United Kingdom, and conduct brokerage activities for U.S. customers on non-U.S. futures exchanges without having to register with the CFTC as a futures commission merchant. In order to protect customers in the event of insolvency or financial instability of MS International, MS International is required to ensure that customer securities and monies be separately accounted for and segregated from the securities and monies of MS International. MS International is subject to the FSA's Client Money Rules which impose a general duty to segregate client money and require MS International to place client money exclusively with approved depositories.

12. MS International is also a clearing member of LCH.Clearnet, Eurex, Euronext Liffe, ICE Futures Europe, the London Metal Exchange and a trading or clearing member of other international securities and futures exchanges.

13. MS International is registered under the OSA as a dealer in the category of international dealer.

14. In addition to the Applicants, Morgan Stanley has the following wholly-owned subsidiaries which are registered under the OSA: Morgan Stanley Canada Limited (Morgan Stanley Canada) which is registered as a broker and investment dealer in Ontario; Morgan Stanley Investment Management Inc. (MSIM) which is registered as an international adviser in Ontario; and Morgan Stanley & Co. Limited (MS Limited) which is registered as an international dealer in Ontario. None of Morgan Stanley Canada, MSIM or MS Limited are registered as a dealer under the CFA or acts as a broker for Futures Trades.

Activities in Ontario

15. The Applicants will (a) trade in contracts for their own account, (b) offer institutional clients in Ontario the ability to trade in contracts through the Applicants, and (c) conduct execution and clearing services with respect to contracts for institutional clients resident in Ontario.

16. The Applicants will solicit business in Ontario only from persons in Ontario who qualify as institutional clients.

17. The Applicants will only offer institutional clients in Ontario the ability to trade contracts that trade on exchanges located outside Canada (the Recognized Exchanges), unless such Futures Trades in contracts are routed through an agent that is a dealer registered in Ontario under the CFA.

18. Clients in Ontario will be able to execute Futures Trades in contracts through the Applicants by contacting the particular Applicant's exchange floor staff or global execution desk. Clients in Ontario may also be able to self-execute Futures Trades in contracts electronically via an independent service vendor and/or other electronic trading routing.

19. The Applicants may execute a client's order on the relevant Recognized Exchange in accordance with the rules and customary practices of the exchange, or engage another broker to assist in the execution of orders. The Applicants will remain responsible for the execution of each such order.

20. The Applicants may perform both execution and clearing functions for Futures Trades in contracts or may direct that a trade executed by the Applicants be cleared through a carrying broker if the particular Applicant is not a member of the Recognized Exchange or clearing house on which the trade is executed and cleared. Alternatively, the client will be able to direct that Futures Trades in contracts executed by an Applicant be cleared through clearing brokers not affiliated with the Applicants (each, a Non-MS Clearing Broker). In addition, each of the Applicants may, from time to time, act as a clearing broker under give-up arrangements entered into with futures brokers that will execute Futures Trades of contracts for an Applicant's client on a Recognized Exchange.

21. If an Applicant performs only the execution of a client's contract order and "gives up" the transaction for clearance to a Non-MS Clearing Broker, such clearing broker will also be required to comply with the rules of the exchanges and clearing houses of which it is a member and any relevant regulatory requirements, including requirements under any applicable legislation. Each such Non-MS Clearing Broker will represent to that Applicant in a give-up agreement that it will perform its obligations in accordance with applicable laws, governmental, regulatory, self-regulatory, exchange and clearing house rules and the customs and usages of the exchange or clearing house on which the relevant client's contract orders will be executed and cleared. The Applicants will not enter into a give-up agreement with any Non-MS Clearing Broker located in the U.S. unless such clearing broker is registered with the CFTC and/or the SEC, as applicable.

22. Clients that direct an Applicant to give-up transactions in contracts for clearance and settlement by Non-MS Clearing Brokers will execute the give-up agreements described above.

23. Clients will pay commissions for trades to the Applicants or the Non-MS Clearing Broker or such commissions may be shared by the Applicants with the Non-MS Clearing Broker.

24. The trading restrictions in the CFA apply unless, among other things, a contract is traded on a recognized or registered commodity futures exchange and the form of the contract is approved by the Director. To date, there are no foreign commodity futures exchanges which are recognized or registered by the Commission under the CFA.

25. If the Applicants are exempted from the dealer registration requirements in the CFA, the Applicants will be precluded from relying upon the statutory exemptions from the trading restrictions in the CFA that the Commission has granted to date.

26. Section 3.1 of Rule 91-502 requires any person who trades in respect of a recognized option to have successfully completed the Canadian Options Course.

27. All Representatives who trade options in the United States have passed the futures and options proficiency examination (i.e., the National Commodity Futures Examination (Series 3)) administered by FINRA. All Representatives who trade options in the United Kingdom have passed the requisite FSA qualifications and proficiency standard (i.e., the Fit and Proper test) and are registered in the capacity of an FSA Approved Person (Customer Function 30 Status).

AND UPON the Commission and the Director being satisfied that it would not be prejudicial to the public interest to grant the order requested;

IT IS ORDERED pursuant to section 38 of the CFA, that the Applicants be exempted from the dealer registration requirements in the CFA and the trading restrictions in the CFA in connection with Futures Trades in contracts for the Applicants' own account and by certain of the Applicants' clients who are institutional clients, provided that:

(a) at the relevant time that trading activity is engaged in:

(i) MS Incorporated is registered with the SEC as a securities broker-dealer and with the CFTC as a futures commission merchant and is a member of FINRA and the NFA in good standing;

(ii) MS International is authorized by the FSA to trade in securities and exchange contracts and is approved by the NFA as an exempt foreign firm; and

(iii) the Applicants are either registered as international dealers under the OSA or are exempted from registration as international dealers under the OSA in accordance with applicable Ontario securities law;

(b) each client in Ontario effecting Futures Trades in contracts is an institutional client and, if using a Non-MS Clearing Broker, has represented and covenanted that the broker is or will be appropriately registered or exempt from registration under applicable legislation;

(c) the Applicants only execute Futures Trades in contracts for Ontario clients on exchanges located outside Canada, unless such Futures Trades in contracts are routed through an agent that is a dealer registered in Ontario under the CFA; and

(d) each client in Ontario effecting Futures Trades in contracts receives disclosure upon entering into the agreement by which it establishes an account with an Applicant that includes:

(i) a statement that there may be difficulty in enforcing any legal rights against the Applicant or any of its directors, officers or employees because they are resident outside of Canada and all or substantially all of their assets are situated outside of Canada; and

(ii) a statement that the Applicant is not registered under Ontario commodities futures legislation and, accordingly, the protection available to clients of a dealer registered under such commodities futures legislation will not be available to clients of the Applicant.

February 24, 2009

"Suresh Thakrar"
Commissioner
Ontario Securities Commission
 
"Paul K. Bates"
Commissioner
Ontario Securities Commission

IT IS THE DECISION of the Director, pursuant to section 6.1 of Rule 91-502, that section 3.1 of Rule 91-502 does not apply to the Applicants and their Representatives in respect of Futures Trades, provided that the Applicants and their Representatives maintain their respective registrations with the CFTC, SEC and FSA which permit them to trade commodity futures options in the United States and the United Kingdom, as the case may be.

February 24, 2009

"Susan Silma"
Director, Compliance and Registrant Regulation
Ontario Securities Commission

 

Appendix 1

INSTITUTIONAL CLIENTS

In this Order, "Institutional Client" means:

(a) a financial intermediary;

(b) the Federal Business Development Bank;

(c) a subsidiary of any company referred to in clause (a) or (b), where the company beneficially owns all of the voting securities of the subsidiary;

(d) the Government of Canada or any province or territory of Canada;

(e) any municipal corporation or public board or commission in Canada;

(f) a mutual fund, other than a private mutual fund, having net assets of at least $5,000,000;

(g) a trusteed pension plan or fund sponsored by an employer for the benefit of its employees and having net assets of at least $5,000,000;

(h) a registered dealer;

(i) a company or person, other than an individual, that is an "accredited investor" as defined in section 1.1 of National Instrument 45-106 -- Prospectus and Registration Exemptions; and

(j) a person or company deemed to be a "designated institution" under subsection 204(2) of Ontario Regulation 1015 -- General Regulation made under the Securities Act (Ontario).