Securities Law & Instruments


Headnote

Subsection 74(1) of the Act - relief granted from the prospectus requirements in connection with certain over-the-counter derivatives transactions entered into with sophisticated or "qualified" parties, subject to conditions.

Statutes Cited

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

Rules Cited

Proposed Rule 91-504 - Over-The-Counter Derivatives (2000), 23 OSCB 51.

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, CHAPTER S.5, AS AMENDED (the "Act")

AND

IN THE MATTER OF

FRIEDBERG MERCANTILE GROUP

 

ORDER

(Section 74(1) of the Act)

UPON the Ontario Securities Commission (the "Commission") having received an application (the "Application") from Friedberg Mercantile Group ("FMG") for an order pursuant to subsection 74(1) of the Act for an exemption from the prospectus requirements with respect to trading by clients of FMG ("FMG Clients"), through FMG, in over-the-counter derivatives instruments in which the underlying interests consist entirely of currencies ("Currency Spot Contracts");

AND UPON considering the Application and the recommendations of Staff of the Commission;

AND UPON FMG having represented to the Commission that:

1. FMG is a partnership formed under the laws of the Province of Ontario which (i) is registered as a dealer under the Act in the categories of Broker and Investment Dealer, (ii) is registered under the Commodity Futures Act (Ontario) as a dealer in the category of Commodity Futures Merchant, (iii) holds analogous registration in most (but not all) of the remaining provinces of Canada and in each of the Canadian territories, (iv) is a Member firm of the Investment Dealers Association of Canada and a Participating Organization of the Toronto Stock Exchange and (v) is a member (or its equivalent) of each of the remaining exchanges (securities and commodity futures) in Canada.

2. FMG proposes to enter into arrangements whereby FMG Clients can enter into Currency Spot Contracts with Acceptable Counterparties (for such purposes, an "Acceptable Counterparty" being any of the persons or entities set out in Schedule "A" to this Decision) provided that such FMG Clients have been provided with a risk disclosure statement describing the risks involved with entering into or trading over-the-counter derivatives instruments in substantially the form delivered to the Commission.

3. Any such Acceptable Counterparty would be the counterparty (i.e. would enter into such contracts as principal) and there would be no intention of any resale of such contracts.

4. Such Currency Spot Contracts will, inter alia, include the following principal terms and attributes:

(a) The Currency Spot Contracts will involve the simultaneous buying of one currency (by the FMG Client) (the "Purchased Currency") and selling of another currency (to the Acceptable Counterparty) (the "Sold Currency").

(b) The Currency Spot Contracts will be, in effect, a form of forward contract, but with the contract being (subject to rollover of open positions as described below) for only a small fraction of the open position duration in conventional Interbank currency forward contracts.

(c) Consistent with convention in the spot foreign exchange markets, trades in the Currency Spot Contracts will be settled in two business days, or such period of time as may hereafter become the convention in such markets. In this context, "settlement" will involve a payment obligation of the Acceptable Counterparty to the subject FMG Client if the Purchased Currency has appreciated in value as compared with the Sold Currency from the time of entering into the Currency Spot Contract to the time of settlement, and will involve a payment obligation of the subject FMG Client to the Acceptable Counterparty if the opposite circumstances were to occur.

(d) It will be expected that the Acceptable Counterparty will automatically roll over all open positions in Currency Spot Contracts as at 5:00 p.m. (New York time) on the initial settlement date for a further equivalent settlement period. Rates for such rollovers of open positions will be determined based on customary practices.

AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS THE DECISION of the Commission, pursuant to subsection 74(1) of the Act, that trading in Currency Spot Contracts through FMG between FMG Clients and Acceptable Counterparties shall be exempt from the prospectus requirements under the Act.

April 15, 2003.

"Paul M. Moore"
"Theresa McLeod"

 

SCHEDULE "A"

ACCEPTABLE COUNTERPARTIES

Interpretation

The terms "subsidiary" and "holding body corporate" used in paragraphs (w), (x) and (y) of subsection (3) of this schedule are intended to have the same meaning as they have in the Business Corporations Act (Ontario).

All requirements contained in this schedule that are based on the amounts shown on the balance sheet of an entity are intended to apply to the consolidated balance sheet of the entity.

Parties Acting as Principal

The following are Acceptable Counterparties, if acting as principal:

Banks

(a) A bank listed in Schedule I or II to the Bank Act (Canada).

(b) The Business Development Bank of Canada incorporated under the Business Development Bank of Canada Act (Canada).

(c) A bank subject to the regulatory regime of a country that is a member of the Basle Accord, or that has adopted the banking and supervisory rules set out in the Basle Accord, if the bank has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency.

Credit Unions and Caisses Populaires

(d) A credit union central, federation of caisses populaires, credit union or regional caisse populaire, located, in each case, in Canada.

Loan and Trust Companies

(e) A loan corporation or trust corporation registered under the Loan and Trust Corporations Act (Ontario) or under the Trust and Loan Companies Act (Canada), or under comparable legislation in any other province or territory of Canada.

(f) A loan company or trust company subject to the regulatory regime of a country that is a member of the Basle Accord, or that has adopted the banking and supervisory rules set out in the Basle Accord, if the loan company or trust company has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency.

Insurance Companies

(g) An insurance company licensed to do business in Canada or a province or territory of Canada.

(h) An insurance company subject to the regulatory regime of a country that is a member of the Basle Accord, or that has adopted the banking and supervisory rules set out in the Basle Accord, if the insurance company has a minimum paid up capital and surplus, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency.

Sophisticated Entities

(i) A person or company that, together with its affiliates:

(i) has entered into one or more transactions involving over-the-counter ("OTC") derivatives with counterparties that are not its affiliates, if

(ii) the transactions had a total gross dollar value of or equivalent to at least $1 billion in notional principal amount; and

(iii) any of the contracts relating to one of these transactions was outstanding on any day during the previous 15-month period, or

(iv) had total gross marked-to-market positions of or equivalent to at least $100 million aggregated across counterparties, with counterparties that are not its affiliates in one or more transactions involving OTC derivatives on any day during the previous 15-month period.

Individuals

(j) An individual who, either alone or jointly with the individual's spouse, has a net worth of at least $5 million, or its equivalent in another currency, excluding the value of his or her principal residence.

Governments/Agencies

(k) Her Majesty in right of Canada or any province or territory of Canada and each crown corporation, instrumentality and agency of a Canadian federal, provincial or territorial government.

(l) A national government of a country that is a member of the Basle Accord, or that has adopted the banking and supervisory rules set out in the Basle Accord, and each instrumentality and agency of that government or corporation wholly-owned by that government.

Municipalities

(m) Any Canadian municipality with a population in excess of 50,000 and any Canadian provincial or territorial capital city.

Corporations and other Entities

(n) A company, partnership, unincorporated association or organization or trust, other than an entity referred to in paragraph (a), (b), (c), (d), (e), (f), (g) or (h), with total revenue or assets in excess of $25 million or its equivalent in another currency, as shown on its last financial statement, to be audited only if otherwise required.

Pension Plan or Fund

(o) A pension fund that is regulated by either the Office of the Superintendent of Financial Institutions (Canada) or a provincial pension commission, if the pension fund has total net assets, as shown on its last audited balance sheet, in excess of $25 million, provided that, in determining net assets, the liability of a fund for future pension payments shall not be included.

Mutual Funds and Investment Funds

(p) A mutual fund or non-redeemable investment fund if each investor in the fund is an Acceptable Counterparty.

(q) A mutual fund or non-redeemable investment fund that distributes its securities in the Province of Ontario, if the portfolio manager of the fund is registered as an adviser, other than a securities adviser, under the Securities Act (Ontario) or securities legislation elsewhere in Canada.

Brokers/Investment Dealers

(r) A person or company registered under the Securities Act (Ontario) or securities legislation elsewhere in Canada as a broker or an investment dealer or both.

(s) A person or company registered under the Securities Act (Ontario) as an international dealer if the person or company has total assets, as shown on its last audited balance sheet, in excess of $25 million or its equivalent in another currency.

(t) A member firm in good standing of the National Association of Securities Dealers in the United States.

Futures Commission Merchants

(u) A person or company registered under the Commodity Futures Act (Ontario) as a dealer in the category of futures commission merchant, or in an equivalent capacity elsewhere in Canada.

(v) A member firm in good standing of the National Futures Association in the United States.

Affiliates

(w) A wholly-owned subsidiary of any of the organizations described in paragraph (a), (b), (c), (d), (e), (f), (g), (h), (1), (n), (o), (r), (s), (t), (u) or (v).

(x) A holding body corporate of which any of the organizations described in paragraph (w) is a wholly-owned subsidiary.

(y) A wholly-owned subsidiary of a holding body corporate described in paragraph (x).

(z) A firm, partnership, joint venture or other form of unincorporated association in which one or more of the organizations described in paragraph (w), (x) or (y) have a direct or indirect controlling interest.

Guaranteed Party

(aa) A party whose obligations in respect of the OTC derivatives transaction for which the determination is made is fully guaranteed by another Acceptable Counterparty.

Party Not Acting as Principal

The accounts of a person, company, pension fund or pooled fund trust that are fully managed by a portfolio manager or financial intermediary referred to in paragraphs (a), (d), (e), (g), (r), (s), (t), (u), (v) or (w) of paragraph (3) or a broker or investment dealer acting as a trustee or agent for the person, company, pension fund or pooled fund trust under section 148 of the Ontario Regulation are Acceptable Counterparties.

Subsequent Failure to Qualify

A party is an Acceptable Counterparty if it, he or she is an Acceptable Counterparty at the time it, he or she enters into the transaction.