Securities Law & Instruments

Headnote

Application to the Commission, pursuant to section 38 of the Commodity Futures Act (CFA), for a ruling that the Applicant 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 Applicant will offer to certain of its clients in Ontario (Institutional Clients) the ability to trade in commodity futures contracts and commodity futures options that trade on exchanges located outside Canada through the Applicant. 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 Applicant and its 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

RBC CAPITAL MARKETS CORPORATION

 

RULING & EXEMPTION

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

UPON the application (the Application) of RBC Capital Markets Corporation (the Applicant) to the Ontario Securities Commission (the Commission) for:

(a) a ruling of the Commission, pursuant to section 38 of the CFA, that the Applicant 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 Applicant's own account and by certain of the Applicant's 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;

"commodity futures contract" and "commodity futures option" have the meanings ascribed to those terms in the CFA;

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

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

"Institutional Client" means a client that falls within the category of investors listed in the Appendix to the Decision;

"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 Applicant having represented to the Commission and the Director as follows:

1. The Applicant is a corporation incorporated under the laws of the State of Minnesota, U.S.A. Its head office is located at One Liberty Plaza, 165 Broadway, New York, NY 10006-1404.

2. The Applicant is a subsidiary of RBC Capital Markets Holdings (USA) Inc., which is organized under the laws of Delaware and which is an indirect subsidiary of Royal Bank of Canada.

3. The Applicant is registered as a broker-dealer with the SEC and a futures commission merchant with the CFTC and is a member of FINRA, the NFA, the Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange and other U.S. and other non-Canadian exchanges. Under its registrations and memberships, the Applicant is authorized to handle customer orders and receive and hold customer margin deposits, and otherwise act as a futures broker, in the United States. Rules of the CFTC and the NFA require the Applicant 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 the Applicant, the Applicant is required to ensure that customer securities and monies are separately accounted for and segregated from the securities and monies of the Applicant. The Applicant 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 the Applicant's obligations or debts.

4. The Applicant is a market maker for U.S. agency securities and acts as 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, hedge funds and a small number of high net worth individuals.

5. The Applicant is registered under the OSA as a dealer in the category of international dealer.

6. The Applicant proposes to (a) trade in contracts for its own account, (b) offer certain of its Institutional Clients in Ontario the ability to trade in contracts through the Applicant, and (c) conduct execution and clearing services with respect to contracts for Institutional Clients resident in Ontario.

7. The Applicant will solicit business only from persons in Ontario who qualify as Institutional Clients.

8. The Applicant will only offer Institutional Clients in Ontario the ability to trade contracts that trade on exchanges based 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.

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

10. The Applicant 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 Applicant will remain responsible for the execution of each such order.

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

12. If the Applicant performs only the execution of a client's order for a Futures Trade and "gives-up" the transaction for clearance to a Non-RBC 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 under any applicable legislation. Each such Non-RBC Clearing Broker will represent to the 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 orders for Futures Trades will be executed and cleared. The Applicant will not enter into a give-up agreement with any Non-RBC Clearing Broker located in the United States unless such clearing broker is registered with the CFTC and/or the SEC, as applicable.

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

14. Clients will pay commissions for trades to the Applicant or the Non-RBC Clearing Broker or such commissions may be shared with the Non-RBC Clearing Broker.

15. 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, no foreign commodity futures exchanges have been recognized or registered under the CFA.

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

17. Section 3.1 of Rule 91-502 states that any person who trades as agent in, or gives advice in respect of, a recognized option is required to successfully complete the Canadian Options Course (which has been replaced by the Derivatives Fundamentals Course and the Options Licensing Course).

18. 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.

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 Applicant be exempted from the dealer registration requirements in the CFA and the trading restrictions in the CFA in connection with Futures Trades for its own account and by certain of its clients who are Institutional Clients, provided that:

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

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

(ii) the Applicant is either registered as an international dealer under the OSA or is exempt from registration as an international dealer in accordance with applicable Ontario securities law;

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

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

(d) each client in Ontario effecting Futures Trades receives disclosure upon entering into the agreement by which it establishes an account with the 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 protections available to clients of a dealer registered under Ontario commodities futures legislation will not be available to clients of the Applicant.

June 29, 2009

"Mary G. Condon"
Commissioner
Ontario Securities Commission
 
"Paulette L. Kennedy"
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 Applicant and its Representatives in respect of Futures Trades, provided that the Applicant and its Representatives maintain their respective registrations with the CFTC and SEC that permit them to trade commodity futures options in the United States.

June 29, 2009

"Erez Blumberger"
Manager, Registrant Regulation
Ontario Securities Commission

 

Appendix

INSTITUTIONAL CLIENTS

"Institutional Clients" include all of the following:

(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).