Securities Law & Instruments

Headnote

Section 147 of the Securities Act (OSA) and sections 38 and 80 of the Commodity Futures Act (CFA) -- exemption from: (1) the requirement that NGX be registered as a commodity futures exchange under section 15 of the CFA; (2) the registration requirements of section 22 of the CFA with respect to trades by NGX participants in Ontario in NGX contracts; (3) the requirements of section 33 of the CFA with respect to the trading of NGX contracts by participants in Ontario; and (4) the requirement to be recognized as a stock exchange under section 21 of the OSA.

Statutes Cited

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

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 15, 22, 33, 38, 80.

Rule Cited

Ontario Securities Commission Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario (1997), 20 OSCB 1739.

IN THE MATTER OF

THE COMMODITY FUTURES ACT,

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

AS AMENDED (CFA)

AND

IN THE MATTER OF

THE SECURITIES ACT,

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

AS AMENDED (OSA)

AND

IN THE MATTER OF

NATURAL GAS EXCHANGE INC. (NGX)

 

ORDER

(Sections 38 and 80 of the CFA and Section 147 of the OSA)

WHEREAS NGX has filed an application dated January 9, 2009 (Application) with the Ontario Securities Commission (Commission) requesting:

(a) an order pursuant to section 80 of the CFA exempting NGX from the requirement to be registered as a commodity futures exchange under section 15 of the CFA;

(b) an order pursuant to section 38 of the CFA exempting trades by NGX participants (Participants) in Ontario (Ontario Participants) in contracts on NGX (Contracts) from the registration requirement under section 22 of the CFA;

(c) an order pursuant to section 38 of the CFA exempting trades by Ontario Participants in Contracts from the requirements under section 33 of the CFA; and

(d) an order pursuant to section 147 of the OSA exempting NGX from the requirement to be recognized as a stock exchange under section 21 of the OSA.

AND WHEREAS Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario exempts trades of commodity futures contracts or commodity futures options made on a commodity futures exchange not registered with or recognized by the Commission under the CFA from sections 25 and 53 of the OSA;

AND WHEREAS NGX has represented to the Commission as follows.

1. NGX is a private company and is a wholly-owned subsidiary of TMX Group Inc., a public company governed by the laws of Ontario and listed on the Toronto Stock Exchange.

2. NGX operates an electronic trading system (Trading System) based in Calgary, Alberta, for the trading of Contracts in natural gas, electricity and heat rate products related to the gas and electricity markets, and anticipates introducing Contracts in oil and renewable energy certificates in the future.

3. NGX developed the Trading System to provide an electronic platform for trading of energy related commodities by sophisticated parties in a principal to principal market, and as such, the timing of settlement for Contracts align with standard over-the-counter market conventions for settlement.

4. NGX is recognized by the Alberta Securities Commission (ASC) under the Alberta Securities Act (ASA) as an exchange and a clearing agency by orders dated October 9, 2008 (Exchange Recognition Order and Clearing Agency Recognition Order, set out in Schedules "A" and "B", respectively) and is subject to regulatory oversight by the ASC pursuant to the ASA.

5. NGX is registered as a Derivatives Clearing Organization by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA) and is subject to oversight by the CFTC pursuant to the CEA.

6. NGX operates the Trading System as an exempt commercial market under the CEA.

7. Access to the Trading System for the purpose of trading in Contracts is restricted to Participants, each of which:

a. has entered into a Contracting Party's Agreement; and

b. has, or has a majority of its voting shares owned by one or more entities each of which has, a net worth exceeding $5,000,000 or total assets exceeding $25,000,000 (NGX Sophistication Thresholds); and

c. uses the Trading System only as principal.

8. NGX applies its qualification criteria by subjecting each applicant to a due diligence process, which includes: review of constituent documentation and financial statements, conducting searches of relevant financial services information databases and conducting other know-your-client procedures.

9. NGX is required under its regulations to provide to the ASC, on request, access to all records and to cooperate with any other regulatory authority, including making arrangements for information-sharing.

10. Contracts traded on the Trading System are either cleared and settled through NGX's central counterparty clearing house or by the Participants themselves, independent of NGX.

11. The ASC discharges its regulatory oversight over NGX as an exchange and clearing agency through ongoing reporting requirements and by conducting periodic oversight assessments of NGX's operations to confirm that NGX is in compliance with the operating and clearing principles set out in the Exchange Recognition Order and Clearing Agency Recognition Order, respectively.

12. Contracts fall under the definitions of "commodity futures contract" or "commodity futures option" set out in section 1 of the CFA. NGX is therefore considered a "commodity futures exchange" as defined in section 1 of the CFA and is prohibited from carrying on business in Ontario unless it is registered or exempt from registration as an exchange under section 15 of the CFA.

13. NGX has been, and seeks to continue, providing Ontario market participants with access to trading in Contracts and as a result, is considered to be "carrying on business as a commodity futures exchange" in Ontario.

14. NGX is not registered with or recognized by the Commission as a commodity futures exchange under the CFA and no Contracts have been accepted by the Director as contemplated under clause 33(a) the CFA, therefore, Contracts are considered "securities" under paragraph (p) of the definition of "security" in subsection 1(1) of the OSA and NGX is considered a "stock exchange" under the OSA and is prohibited from carrying on business in Ontario unless it is recognized or exempt from recognition under section 21 of the OSA.

15. NGX has been operating in Ontario pursuant to interim exemptive relief orders granted by the Commission on November 17, 2006, as extended on November 16, 2007 and May 13, 2008.

16. Ontario Participants may be (i) utilities and other commercial enterprises that are exposed to risks attendant upon fluctuations in the price of a commodity and, to the extent applicable, (ii) investment banking arms of banks and (iii) hedge funds and other proprietary trading firms.

AND WHEREAS based on the Application and the representations NGX has made to the Commission, the Commission has determined that NGX satisfies the criteria set out in Schedule "C" and that the granting of exemptions from recognition and registration to NGX would not be prejudicial to the public interest;

IT IS HEREBY ORDERED by the Commission that:

(a) pursuant to section 80 of the CFA, NGX is exempt from registration as a commodity futures exchange under section 15 of the CFA;

(b) pursuant to section 38 of the CFA, trades in Contracts by Ontario Participants are exempt from the registration requirement under section 22 of the CFA;

(c) pursuant to section 38 of the CFA, trades in Contracts by Ontario Participants are exempt from the requirements under section 33 of the CFA; and

(d) pursuant to section 147 of the OSA, NGX is exempt from recognition as a stock exchange under section 21 of the OSA;

PROVIDED THAT NGX complies with the terms and conditions attached hereto as Schedule "D".

DATED March 31, 2009.

"Kevin J. Kelly"

"Margot C. Howard"

 

SCHEDULE "A"

ALBERTA SECURITIES COMMISSION

RECOGNITION ORDER

EXCHANGE

Natural Gas Exchange Inc.

Background

1. Natural Gas Exchange Inc. (NGX) has applied to the Alberta Securities Commission (the Commission), pursuant to the Securities Act (Alberta), R.S.A. 2000, c. S-4 (the Act), for the following:

(a) recognition as an exchange for the trading of Contracts (as defined below);

(b) an exemption of NGX's form of exchange contracts;

(c) a registration exemption for the contracting parties (the Contracting Parties) who enter into NGX's standard form trading agreement with NGX (the Contracting Party's Agreement) (the Registration Relief); and

(d) revocation of the Current Decision (as defined below) in Alberta.

2. NGX has concurrently applied to the Commission for recognition as a clearing agency as it also provides clearing and settlement services to Contracting Parties.

Interpretation

3. Unless otherwise defined, terms used in this order have the same meaning as in the Act or in National Instrument 14-101 Definitions.

Representations

4. NGX represents as follows:

(a) NGX operates an electronic trading system (the Trading System) based in Calgary, Alberta, for the trading of natural gas, electricity and related contracts (the Contracts).

(b) NGX has operated the Trading System since 1993 in accordance with the terms and conditions of a series of exemptive relief orders granted by the Commission and other Canadian securities regulatory authorities, the most recent of which is MRRS decision #1662761 dated December 1, 2004 (the Current Decision).

(c) Access to the Trading System in respect of exchange contracts is restricted to Contracting Parties, each of which:

(i) has entered into a Contracting Party's Agreement; and

(ii) has, or has a majority of its voting shares owned by one or more entities each of which has, a net worth exceeding $5 000 000 or total assets exceeding $25 000 000 (the NGX Sophistication Thresholds).

(d) The Contracting Parties use the Trading System only as principals.

Undertakings

5. NGX undertakes:

(a) to comply with applicable securities legislation;

(b) to operate the Trading System in accordance with the operating principles set out in Appendix A to this order (the Operating Principles);

(c) to report to the Commission in accordance with the reporting requirements set out in Appendix B to this order (the Reporting Requirements);

(d) not to enter into any contract, agreement or arrangement that may limit its ability to comply with applicable securities legislation or this order;

(e) to take reasonable steps to ensure that each officer or director of NGX is a fit and proper person for that role and that the past conduct of each officer or director affords reasonable grounds for belief that the officer or director will perform his or her duties with integrity;

(f) to have appropriate conflict of interest provisions for all directors, officers and employees;

(g) to notify the Commission at least 10 business days in advance of entering into any agreement to outsource key Trading System functions;

(h) to notify the Commission at least 10 business days in advance of any significant change in the operation of the Trading System;

(i) to notify the Commission at least 10 business days in advance of any change in the beneficial ownership of NGX;

(j) to use its best efforts to provide the information required in paragraphs 5(g) to (i) above earlier than specified, when possible;

(k) to seek the Commission's prior approval of any significant changes to the NGX Sophistication Thresholds;

(l) to seek the Commission's acceptance of, or an exemption for, any new or revised Contract that differs significantly from the exchange contracts that have already been exempted by the Commission;

(m) to notify the Commission immediately upon NGX becoming aware that any of its representations in this order are no longer true and accurate or that it becomes unable to fulfil any of its undertakings set out in this order; and

(n) to comply with any request from the Executive Director of the Commission for electronic or any other form of access to the Trading System to assist the Commission in its oversight of NGX as an exchange.

Decision

6. Based on the above representations and undertakings the Commission, being satisfied that it would not be prejudicial to the public interest, recognizes NGX as an exchange pursuant to section 62 of the Act, exempts NGX from section 106(b), which requires the Commission's acceptance of the form of NGX's Current Contracts as exchange contracts, pursuant to section 213 and grants the Registration Relief pursuant to section 144(1) of the Act, provided that:

(a) subject to paragraph 5(m) above, the representations made by NGX remain true and accurate; and

(b) NGX fulfils the undertakings given above.

7. Pursuant to section 214 of the Act, the Current Decision is revoked in Alberta.

"original signed by"
"original signed by"
_________________________
_________________________
Glenda A. Campbell, QC
Stephen R. Murison
Alberta Securities Commission
Alberta Securities Commission

 

APPENDIX A

Operating Principles

1. Financial Resources - The exchange shall maintain adequate financial, operational and managerial resources to operate the Trading System and support its trade execution functions.

2. Operational Information Relating to Trading System and Contracts - The exchange shall provide disclosure to its participants of information about contract terms and conditions, trading conventions, mechanisms and practices, trading volume and other information relevant to participants.

3. Market Oversight - The exchange shall establish appropriate minimum standards for participants and programs for on-going monitoring of the financial status or credit-worthiness of participants; monitor trading to ensure an orderly market; maintain authority to collect or capture and retrieve all necessary information; and to intervene as necessary to ensure an orderly market.

4. Rule Enforcement - The exchange shall maintain adequate arrangements and resources for the effective monitoring and enforcement of its rules and for resolution of disputes and shall have the capacity to detect, investigate and enforce those rules (including the authority and ability to discipline, limit, suspend or terminate a participant's activities for violations of system rules).

5. System Safeguards - The exchange shall establish and maintain a program of oversight and risk analysis to ensure systems function properly and have adequate capacity and security, including emergency procedures and a plan for disaster recovery to ensure daily processing of transactions; and a program of periodic objective system testing and risk review to assess the adequacy and effectiveness of the Trading System's internal control systems, including a risk review of every new service and significant enhancement to existing services.

6. Record keeping - The exchange shall maintain records of all activities related to the Trading System's business in a form and manner acceptable to the Commission for a period of five years and provide an undertaking to make books and records available for inspection by Commission representatives on request.

7. Risk management - The exchange shall identify and manage the risks associated with exchange operations through the use of appropriate tools and procedures such as risk analysis tools and procedures.

8. Governance and Conflicts of Interest - Establish and enforce rules to minimize conflict of interest in the exchange's decision-making process and appropriate limitations on the use or disclosure of significant non-public information gained through the performance of official duties by board members, committee members or exchange employees or gained through an ownership interest in the exchange.

 

APPENDIX B

Reporting Requirements

In addition to fulfilling any reporting requirements in applicable securities legislation, the exchange will report as follows to the Commission:

Immediate Reporting

1. NGX will report immediately upon occurrence or upon becoming aware of the existence of:

(a) any event or circumstance or situation that renders, or is likely to render, NGX unable to comply with applicable securities legislation or this order;

(b) any default by NGX that affects its financial resources or its ability to meet its obligations as an exchange, including the particulars of the default and the resolution proposed. NGX shall also provide the Commission with information regarding the impact of the default on the adequacy of NGX's financial resources;

(c) any order, sanction or directive received from, or imposed by, a regulatory or government body;

(d) any investigations of NGX by a regulatory or government body;

(e) any criminal or quasi-criminal charges brought against NGX, any of its subsidiaries, or any of the officers or directors of NGX or its subsidiaries; and

(f) any civil suits brought against NGX, any of its subsidiaries, or any of the officers or directors of NGX or its subsidiaries, that would likely have a significant impact on NGX's business.

Key Event Reporting

2. NGX will report no later than 2 business days of the date of occurrence:

(a) the appointment or resignation of one or more directors of NGX's board of directors,

(b) a change to the senior management team;

(c) any significant changes to the Contracting Party's Agreement.

In the event that a default by a Contracting Party under the Contracting Party's Agreement is not resolved within 2 business days, NGX will report:

(a) such default including particulars of the default, the parties involved in the default, and the method of resolution proposed.

Quarterly Reporting

3. NGX will provide, within 60 days of the end of each fiscal quarter:

(a) an up-to-date list of Contracting Parties; and

(b) interim financial statements.

Annual Reporting

4. NGX will provide, within 90 days of the end of each fiscal year:

(a) audited financial statements; and

(b) a self-assessment of the accomplishments and the challenges faced during the year which will include, but is not limited to:

(i) a summary of NGX's business activity for the year;

(ii) a report of NGX's market share throughout the year;

(iii) a summary of new products introduced and expansion plans that were implemented during the year;

(iv) a report detailing the testing undertaken to ensure the adequacy of system safeguards, including, but not limited to, risk management methodologies, emergency procedures and disaster recovery plans, business continuity and proper functionality of backup facilities;

(v) a summary of staffing changes at NGX during the year; and

(vi) any additional information that NGX considers important.

Other

5. The Executive Director may direct the form of the reporting required and may, pursuant to applicable securities legislation, require further information from NGX.

 

SCHEDULE "B"

RECOGNITION ORDER

CLEARING AGENCY

Natural Gas Exchange Inc.

Background

1. Natural Gas Exchange Inc. (NGX) has applied to the Alberta Securities Commission (the Commission) for recognition under the Securities Act (Alberta), R.S.A. 2000, c. S-4 (the Act) as a clearing agency.

2. NGX has concurrently applied to the Commission for recognition under the Act as an exchange because it also operates an electronic trading system.

3. The definition of "clearing agency" in the Act does not contemplate an entity that is also an exchange (the Definition Limitation).

Interpretation

4. Unless otherwise defined, terms used in this order have the same meaning as in the Act or in National Instrument 14-101 Definitions.

Representations

5. NGX represents as follows:

(a) NGX operates an electronic clearing system (the Clearing System) based in Calgary, Alberta, for clearing and settlement of natural gas, electricity and related commodity contracts, certain of which constitute exchange contracts, futures contracts or options under the Act (the Contracts).

(b) NGX has operated an electronic trading system (the Trading System) since 1993 in accordance with the terms and conditions of exemptive relief granted by the Commission and other Canadian securities regulatory authorities.

(c) NGX provides clearing and settlement services for Contracts traded through the Trading System and on third party marketplaces.

(d) NGX also provides clearing services for certain over-the-counter transactions that are entered into the Clearing System.

(e) Access to the Clearing System is restricted to entities (Contracting Parties) each of which:

(i) has entered into a contractual agreement (the Contracting Party's Agreement) with NGX; and

(ii) has, or has a majority of its voting shares owned by one or more entities each of which has, a net worth exceeding $5 000 000 or total assets exceeding $25 000 000 (the NGX Sophistication Thresholds).

(f) The Contracting Parties use the Clearing System only as principals.

Undertakings

6. NGX undertakes:

(a) to comply with applicable securities legislation;

(b) to operate the Clearing System in accordance with the clearing principles set out in Appendix A to this order (the Clearing Principles);

(c) to report to the Commission in accordance with the reporting requirements set out in Appendix B to this order (the Reporting Requirements);

(d) not to enter into any contract, agreement or arrangement that may limit its ability to comply with applicable securities legislation or this order;

(e) to take reasonable steps to ensure that each officer or director of NGX is a fit and proper person for that role and that the past conduct of each officer or director affords reasonable grounds for belief that the officer or director will perform his or her duties with integrity;

(f) to notify the Commission at least 10 business days in advance of entering into any agreement to outsource key Clearing System functions;

(g) to notify the Commission at least 10 business days in advance of any significant change in the operation of the Clearing System;

(h) to notify the Commission at least 10 business days in advance of any change in the beneficial ownership of NGX;

(i) to use its best efforts to provide the information required in paragraphs 6(f) to (h) above earlier than specified, when possible;

(j) to seek the Commission's prior approval of any significant changes to the NGX Sophistication Thresholds;

(k) to notify the Commission immediately upon NGX becoming aware that any of its representations in this order are no longer true and accurate or that it becomes unable to fulfil any of its undertakings set out in this order; and

(l) to comply with any request from the Executive Director of the Commission for electronic or any other form of access to the NGX Clearing System to assist the Commission in its oversight of NGX as a clearing agency.

Decision

7. Based on the above representations and undertakings and notwithstanding the Definition Limitation, the Commission, being satisfied that it would not be prejudicial to the public interest, recognizes NGX as a clearing agency pursuant to sections 67 and 213 of the Act, provided that:

(a) subject to paragraph 6(k) above, the representations made by NGX remain true and accurate; and

(b) NGX fulfils the undertakings given above.

"original signed by"
"original signed by"
_________________________
_________________________
Glenda A. Campbell, QC
Stephen R. Murison
Alberta Securities Commission
Alberta Securities Commission

 

APPENDIX A

Clearing Principles

1. Core Principle 1: Financial Resources - The clearing agency shall demonstrate on an ongoing basis that it has adequate financial, operational, and managerial resources to discharge the responsibilities of a clearing agency.

2. Core Principle 2: Participant and Product Eligibility - The clearing agency shall maintain: (i) appropriate admission and continuing eligibility standards (including appropriate minimum financial requirements) for its members or participants; and (ii) appropriate standards for determining eligibility of products, agreements, contracts or transactions submitted to the clearing agency.

3. Core Principle 3: Risk Management - The clearing agency shall maintain the ability to manage the risks associated with discharging the responsibilities of a clearing agency through the use of appropriate tools and procedures.

4. Core Principle 4: Settlement Procedures - The clearing agency shall maintain the ability to: (i) complete settlements on a timely basis under varying circumstances; (ii) maintain an adequate record of the flow of funds associated with each transaction cleared; and (iii) comply with the terms and conditions of any permitted netting or offset arrangements with other clearing organizations.

5. Core Principle 5: Treatment of Funds - The clearing agency shall maintain standards and procedures designed to protect and ensure the safety of member or participant funds.

6. Core Principle 6: Default Rules and Procedures - The clearing agency shall maintain rules and procedures designed to allow for the efficient, fair, and safe management of events of member or participant insolvency or default by the member or participant with respect to its obligations to the clearing agency.

7. Core Principle 7: Rule Enforcement - The clearing agency shall: (i) maintain adequate arrangements and resources for the effective monitoring and enforcement of compliance with the rules of the clearing agency and for resolution of disputes; and (ii) maintain the authority and ability to discipline, limit, suspend, or terminate a member's or participant's activities for violations of rules of the clearing agency.

8. Core Principle 8: System Safeguards - The clearing agency shall: (i) maintain a program of oversight and risk analysis to ensure that the automated systems of the clearing agency function properly and have adequate capacity and security; (ii) maintain emergency procedures and a plan for disaster recovery; and (iii) ensure that its systems, including back-up facilities, are annually tested by a qualified professional, sufficient to ensure timely processing, clearing and settlement of transactions.

9. Core Principle 9: Reporting - The clearing agency shall provide to the Commission all information necessary for the Commission to conduct its oversight function of the clearing agency with respect to the activities of the clearing agency.

10. Core Principle 10: Recordkeeping - The clearing agency shall maintain records of all activities related to its business as a clearing agency, in a form and manner acceptable to the Commission, for a period of 5 years. The clearing agency shall also maintain a record of allegations or complaints it receives concerning instances of suspected fraud or manipulation in clearing activity.

11. Core Principle 11: Public Information - The clearing agency shall make information concerning the rules and operating procedures governing the clearing and settlement systems (including default procedures) available to its market participants.

12. Core Principle 12: Information Sharing - The clearing agency shall: (i) enter into and abide by the terms of all appropriate and applicable domestic and international information-sharing agreements; and (ii) use relevant information obtained from the agreements in carrying out the clearing agency's risk management program.

13. Core Principle 13: Restraint of Trade - The clearing agency shall avoid: (i) adopting any rule or taking any action that results in any unreasonable restraint of trade; or (ii) imposing any material anticompetitive burden on trading in the regulated markets.

 

APPENDIX B

Reporting Requirements

In addition to fulfilling any reporting requirements in applicable securities legislation, the clearing agency will report as follows to the Commission:

Immediate Reporting

1. NGX will report immediately upon occurrence or upon becoming aware of the existence of:

(a) any event or circumstance or situation that renders, or is likely to render, NGX unable to comply with applicable securities legislation or this order;

(b) any default by NGX that affects its financial resources or its ability to meet its obligations as a clearing agency, including the particulars of the default and the resolution proposed. NGX shall also provide the Commission with information regarding the impact of the default on the adequacy of NGX's financial resources;

(c) any order, sanction or directive received from, or imposed by, a regulatory or government body;

(d) any investigations of NGX by a regulatory or government body;

(e) any criminal or quasi-criminal charges brought against NGX, any of its subsidiaries, or any of the officers or directors of NGX or its subsidiaries; and

(f) any civil suits brought against NGX, any of its subsidiaries, or any of the officers or directors of NGX or its subsidiaries, that would likely have a significant impact on NGX's business.

Key Event Reporting

2. NGX will report no later than 2 business days of the date of occurrence:

(a) the appointment or resignation of one or more directors of NGX's board of directors;

(b) a change to the senior management team;

(c) any significant changes to the Contracting Party's Agreement.

In the event that a default by a Contracting Party under the Contracting Party's Agreement is not resolved within 2 business days, NGX will report:

(a) such default including particulars of the default, the parties involved in the default, and the method of resolution proposed.

Quarterly Reporting

3. NGX will provide, within 60 days of the end of each fiscal quarter:

(a) a description of any significant margin requirement exceptions that NGX allowed during that quarter;

(b) an up-to-date list of Contracting Parties; and

(c) interim financial statements.

Annual Reporting

4. NGX will provide, within 90 days of the end of each fiscal year:

(a) audited financial statements; and

(b) a self-assessment of the accomplishments and the challenges faced during the year, which will include, but is not limited to:

(i) a summary of NGX's business activity for the year;

(ii) a summary of new products introduced and expansion plans that were implemented during the year;

(iii) a report detailing the testing undertaken to ensure the adequacy of system safeguards including, but not limited to, risk management methodologies, emergency procedures and disaster recovery plans, business continuity and proper functionality of backup facilities;

(iv) a summary of staffing changes at NGX during the year; and

(v) any additional information that NGX considers important.

Triennial Reporting

5. Every three years NGX will provide a report of a review conducted by an independent party, assessing NGX's clearing operations risk and controls.

Other

6. The Executive Director may direct the form of the reporting required and may, pursuant to applicable securities legislation, require further information from NGX.

 

SCHEDULE "C"

Criteria for Exemption from Recognition of a Derivatives Exchange

Recognized in Another CSA Jurisdiction

PART 1 REGULATION OF THE EXCHANGE

1.1 Regulation of the Exchange

The Exchange is recognized or authorized by another securities commission or similar regulatory authority in Canada and, where applicable, is in compliance with National Instrument 21-101 -- Marketplace Operation and National Instrument 23-101 -- Trading Rules, each as amended from time to time.

PART 2 GOVERNANCE

2.1 Governance

The governance structure and governance arrangements of the Exchange ensure:

(a) effective oversight of the Exchange,

(b) the Exchange's business and regulatory decisions are in keeping with its public interest mandate,

(c) fair, meaningful and diverse representation on the governing body (Board) and any committees of the Board, including a reasonable proportion of independent directors,

(d) a proper balance among the interests of the different persons or companies accessing the facilities and/or services of the Exchange,

(e) the Exchange has policies and procedures to appropriately identify and manage conflicts of interest,

(f) each director or officer of the Exchange, and each person or company that owns or controls, directly or indirectly, more than 10 percent of the Exchange is a fit and proper person, and

(g) there are appropriate qualifications, remuneration, limitation of liability and indemnity provisions for directors and officers.

PART 3 FEES

3.1 Fees

(a) All fees imposed by the Exchange are equitably allocated and do not have the effect of creating unreasonable barriers to access.

(b) The process for setting fees is fair and appropriate, and the fee model is transparent.

PART 4 REGULATION OF PRODUCTS

4.1 Approval of Products

The products traded on the Exchange are approved by the appropriate authority.

4.2 Product Specifications

The terms and conditions of trading the products are in conformity with the usual commercial customs and practices for the trading of such products.

4.3 Risks Associated with Trading Products

The Exchange maintains adequate provisions to measure, manage and mitigate the risks associated with trading products on the Exchange including, but not limited to, margin requirements, intra-day margin calls, daily trading limits, price limits, position limits, and internal controls.

PART 5 ACCESS

5.1 Fair Access

(a) The Exchange has established appropriate written standards for access to its services including requirements to ensure

(i) participants are appropriately registered as applicable under Ontario securities laws or Ontario commodity futures laws, or exempted from these requirements,

(ii) the competence, integrity and authority of systems users, and

(iii) systems users are adequately supervised.

(b) The access standards and the process for obtaining, limiting and denying access are fair, transparent and applied reasonably.

PART 6 REGULATION OF PARTICIPANTS ON THE EXCHANGE

6.1 Regulation

The Exchange has the authority, capacity, systems and processes to undertake its regulation functions by setting requirements governing the conduct of its participants, monitoring their conduct, and appropriately disciplining them for violations of Exchange requirements.

PART 7 RULEMAKING

7.1 Purpose of Rules

(a) The Exchange's rules, policies and other similar instruments (Rules) are designed to govern the operations and activities of participants.

(b) The Rules are not contrary to the public interest and are designed to

(i) ensure compliance with securities legislation,

(ii) prevent fraudulent and manipulative acts and practices,

(iii) promote just and equitable principles of trade,

(iv) foster co-operation and co-ordination with persons or companies engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities,

(v) provide a framework for disciplinary and enforcement actions, and

(vi) ensure a fair and orderly market.

(c) The Exchange shall not

(i) permit unreasonable discrimination among participants, or

(ii) impose any burden on competition that is not reasonably necessary and appropriate.

PART 8 DUE PROCESS

8.1 Due Process

For any decision made by the Exchange that affects a participant, including a decision in relation to access, exemptions, or discipline, the Exchange ensures that:

(a) parties are given an opportunity to be heard or make representations, and

(b) the Exchange keeps a record of, gives reasons for, and provides for appeals or reviews of its decisions.

PART 9 SYSTEMS AND TECHNOLOGY

9.1 Systems and Technology

Each of the Exchange's critical systems has appropriate internal controls to ensure completeness, accuracy, integrity and security of information, and, in addition, has sufficient capacity and business continuity plans to enable the Exchange to properly carry on its business. Critical systems are those that support the following functions:

(a) order entry,

(b) order routing,

(c) execution,

(d) trade reporting,

(e) trade comparison,

(f) data feeds,

(g) market surveillance,

(h) trade clearing, and

(i) financial reporting.

9.2 Information Technology Risk Management Procedures

The Exchange has appropriate risk management procedures in place including those that handle trading errors, trading halts and circuit breakers.

PART 10 FINANCIAL VIABILITY AND REPORTING

10.1 Financial Viability

The Exchange has sufficient financial resources for the proper performance of its functions and to meet its responsibilities.

PART 11 CLEARING AND SETTLEMENT

11.1 Clearing Arrangements

The Exchange has appropriate arrangements for the clearing and settlement of transactions through a clearing house.

11.2 Regulation of the Clearing House

The clearing house is subject to acceptable regulation.

11.3 Access to the Clearing House

(a) The clearing house has established appropriate written standards for access to its services.

(b) The access standards for clearing members and the process for obtaining, limiting and denying access are fair, transparent and applied reasonably.

11.4 Sophistication of Technology of Clearing House

The Exchange has assured itself that the information technology used by the clearing house has been adequately reviewed and tested and provides at least the same level of safeguards as required of the Exchange.

11.5 Risk Management of Clearing House

The Exchange has assured itself that the clearing house has established appropriate risk management policies and procedures, contingency plans, default procedures and internal controls.

PART 12 TRANSPARENCY

12.1 Transparency

The Exchange has adequate arrangements to record and publish accurate and timely trade and order information. This information is provided to all participants on an equitable basis.

PART 13 RECORD KEEPING

13.1 Record Keeping

The Exchange has and maintains adequate systems in place for the keeping of books and records, including, but not limited to, those concerning the operations of the Exchange, audit trail information on all trades, and compliance with, and/or violations of Exchange requirements.

PART 14 OUTSOURCING

14.1 Outsourcing

Where the Exchange has outsourced any of its key functions, it has appropriate and formal arrangements and processes in place that permit it to meet its obligations and that are in accordance with industry best practices.

PART 15 INFORMATION SHARING AND REGULATORY COOPERATION

15.1 Information Sharing and Regulatory Cooperation

The Exchange has mechanisms in place to ensure that it is able to cooperate, by sharing information or otherwise, with the Commission and its staff, self-regulatory organizations, other exchanges, investor protection funds, and other appropriate regulatory bodies.

 

SCHEDULE "D"

Terms and Conditions

REGULATION OF NGX

1. NGX will maintain its recognition as an exchange and a clearing agency with the ASC and will continue to be subject to the regulatory oversight of the ASC.

2. NGX will continue to comply with its ongoing requirements set out in the ASC Exchange Recognition Order and Clearing Agency Recognition Order.

3. NGX will continue to meet the criteria for exemption from registration as an exchange, as set out in Schedule "C".

ACCESS

4. Each Participant is a sophisticated party that meets the NGX Sophistication Thresholds.

5. All orders for Contracts transmitted to the Trading System by an Ontario Participant pursuant to the relief herein will be solely as principal.

PRODUCTS

6. Contracts traded on the Trading System are only for natural gas, electricity, oil, heat rate products related to the gas and electricity markets, and renewable energy certificates.

SUBMISSION TO JURISDICTION AND AGENT FOR SERVICE

7. For greater certainty, NGX submits to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario, in a proceeding arising out of, related to or concerning or in any other manner connected with the activities of NGX in Ontario.

8. For greater certainty, NGX will file with the Commission a valid and binding appointment of an agent for service in Ontario upon whom may be served a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding arising out of or relating to or concerning the activities of NGX in Ontario.

REGULATION OF PARTICIPANTS

9. NGX will provide for adequate arrangements and resources to effectively monitor trading by Participants on the Trading System to ensure an orderly market and to enforce its rules.

FILING REQUIREMENTS

ASC Filings

10. NGX will provide to staff of the Commission, concurrently, all notices and reports it is required to provide to or file with the ASC pursuant to the undertakings given by NGX in the Exchange Recognition Order and Clearing Agency Recognition Order, except:

(a) reports on defaults by a contracting party not resolved within 2 days;

(b) with respect to the self-assessment to be provided on an annual basis;

i. the summary of NGX's business activities,

ii. the report on NGX's market share,

iii. the summary of new products and expansion plans implemented during the year, and

iv. the summary of staffing changes; and

(c) the description of significant margin exceptions.

Prompt Notice

11. NGX will promptly notify staff of the Commission of any of the following:

(a) any material change to the business or operations of NGX as provided in the Application;

(b) any change in the NGX Sophistication Thresholds;

(c) any change or proposed change to the Exchange Recognition Order or the Clearing Agency Recognition Order; and

(d) any change to the regulatory oversight of NGX by the ASC.

Quarterly Reporting

12. NGX will maintain the following updated information and submit such information to the Commission on at least a quarterly basis, and at any time promptly upon the request of staff of the Commission:

(a) a current list of all Ontario Participants;

(b) a list of all Ontario Participants against whom disciplinary action has been taken in the last quarter by NGX or the ASC with respect to activities on NGX;

(c) a list of all investigations by NGX relating to Ontario Participants; and

(d) a list of all Ontario applicants who have been denied membership to NGX.

INFORMATION SHARING

13. Upon request from staff of the Commission to the ASC, NGX will provide to staff of the Commission through the ASC, subject to applicable laws, any information within the possession or control of NGX and otherwise co-operate wherever reasonable with the Commission or its staff.