Section 147 of the Securities Act (OSA) and sections 38 and 80 of the Commodity Futures Act (CFA) -- exemption from section 21(1) of the OSA requiring ICE Futures to be recognized as a stock exchange; exemption from section 15 of the CFA requiring ICE Futures to be registered as a commodity futures exchange; exemption from section 33 of the CFA for trades in contracts on ICE Futures by registered futures commission merchants; and exemption from the registration requirement in section 22 of the CFA for trades in contracts on ICE Futures by "hedgers", as defined in the CFA. Relief from section 33 of the CFA granted as the relief specified in the deemed rule In The Matter of Trading In Commodity Futures Contracts and Commodity Futures Options Entered Into On Commodity Futures Exchanges Situate Outside Canada Other Than Commodity Futures Exchanges in The United States of America is for trades "by and with registered futures commission merchants" which is possibly too restrictive for trades made on ICE Futures. Relief granted for trades in contracts on ICE Futures by registered futures commission merchants.
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21, 147
Commodity Futures Act, R.S.O. 1990, c. 20, as am., ss. 15, 22, 33, 38, 80
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 O.S.C.B. 1739
September 1, 2006
IN THE MATTER OF
THE SECURITIES ACT, R.S.O. 1990, CHAPTER S.5,
AS AMENDED (OSA)
IN THE MATTER OF
THE COMMODITY FUTURES ACT, R.S.O. 1990, CHAPTER C.20,
AS AMENDED (CFA)
IN THE MATTER OF
(Section 147 of the OSA and sections 38 and 80 of the CFA)
WHEREAS ICE Futures has filed an application dated June 7, 2006 (Application) with the Ontario Securities Commission (Commission) requesting:
(a) an order pursuant to section 147 of the OSA exempting ICE Futures from the requirement to be recognized as a stock exchange under section 21 of the OSA;
(b) an order pursuant to section 80 of the CFA exempting ICE Futures from the requirement to be registered as a commodity futures exchange under section 15 of the CFA;
(c) an order pursuant to section 38 of the CFA exempting trades in contracts on ICE Futures by registered futures commission merchants (FCMs) from the requirements of section 33 of the CFA; and
(d) an order pursuant to section 38 of the CFA exempting trades in contracts on ICE Futures by "hedgers" from the registration requirement under section 22 of the CFA (Hedger Relief);
AND WHEREAS the term "hedger" has the meaning ascribed to it in section 1(1) of the CFA (Hedger);
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 commodity futures exchanges not registered with or recognized by the Commission under the CFA from sections 25 and 53 of the OSA;
AND WHEREAS ICE Futures has represented to the Commission that:
1. ICE Futures is a private company governed by the laws of the United Kingdom (U.K.) and is an indirect, wholly-owned subsidiary of Intercontinental Exchange, Inc. (ICE Inc.), a public company governed by the laws of the State of Delaware and listed on the New York Stock Exchange,
2. ICE Futures is recognized by Her Majesty's Treasury as a Recognized Investment Exchange (RIE) under the U.K.'s Financial Services and Markets Act 2000 (FSMA) and is subject to supervision by the U.K. Financial Services Authority (FSA) pursuant to the FSMA,
3. As an RIE, ICE Futures offers a variety of energy commodity derivatives contracts including commodity futures contracts and commodity futures options (collectively, ICE Futures Contracts) which are traded electronically on a platform (known as the ICE Platform) owned and operated by ICE Inc.,
4. As part of its regulatory oversight of ICE Futures, the FSA reviews, assesses and enforces on-going compliance with the recognition requirements under the FSMA relating to financial resources, fitness and properness, systems and controls, maintenance of an orderly market, investor protection, rule-making and other matters including ICE Futures' regulations, procedures and practices (collectively, ICE Futures Regulations),
5. ICE Futures is required under its regulations to provide to the FSA on request access to all records and to cooperate with any other regulatory authority, including making arrangements for information-sharing,
6. All ICE Futures Contracts are cleared and settled by LCH.Clearnet Limited (LCH.Clearnet), which is a recognized clearing house (RCH) under the FSMA and which acts as counterparty and guarantor to each ICE Futures Contract traded on the ICE Platform,
7. The FSA discharges its regulatory oversight over RCHs such as LCH.Clearnet by conducting an ongoing assessment of the RCH's regulations, procedures and practices to confirm that they provide the proper protection of investors and include satisfactory arrangements for the settlement of transactions,
8. ICE Futures proposes to offer direct electronic access to trading in ICE Futures Contracts through the ICE Platform to market participants in Ontario, either by way of membership in ICE Futures to entities that meet its eligibility criteria or through order-routing arrangements,
9. ICE Futures Contracts fall under the definitions of "commodity futures contract" or "commodity futures option" set out in Section 1 of the CFA. ICE Futures 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,
10. ICE Futures seeks to provide Ontario market participants with direct, electronic access to trading in ICE Futures Contracts and as a result, is considered to be "carrying on business as a commodity futures exchange" in Ontario,
11. ICE Futures is not registered with or recognized by the Commission as a commodity futures exchange under the CFA and no ICE Futures Contracts have been accepted by the Director (as defined in the OSA) under the CFA, therefore, ICE Futures Contracts are considered "securities" under paragraph (p) of the definition of "security" set out in Section 1(1) of the OSA and ICE Futures 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,
12. As above, since ICE Futures seeks to provide Ontario market participants with direct, electronic access to trading in ICE Futures Contracts it is considered to be "carrying on business as a stock exchange" in Ontario,
13. ICE Futures expects that its potential members and order-routing clients in Ontario will be (i) dealers that are engaged in the business of trading commodity futures in Ontario, (ii) utilities and other commercial enterprises that are exposed to risks attendant upon fluctuations in the price of a commodity and, to the extent applicable, (iii) institutional investors and proprietary trading firms,
14. ICE Futures maintains rigorous membership criteria that all applicants must satisfy before their applications are considered by its Authorization, Rules and Conduct Committee, including, among others: fitness criteria; suitable qualifications and experience; adequate training and supervision; proper authorizations, or exemptions to trade; and suitable financial standing,
15. ICE Futures applies its membership criteria by subjecting each applicant to an intensive due diligence process, which includes: review of constituent documentation and financial statements; verification of regulatory authorization in the applicant's home jurisdiction; confirmation of qualifications; conducting searches of relevant international and domestic financial services information databases; and conducting other know-your-client and anti-fraud procedures,
16. Each applicant for ICE Futures membership that intends to rely on the Hedger Relief will be required, as part of the application documentation to:
(a) represent that it is a Hedger;
(b) acknowledge that ICE Futures deems the Hedger representation to be repeated by the applicant each time it enters an order for an ICE Futures Contract, and that the applicant must be a Hedger for the purposes of each trade resulting from such an order; and
(c) agree to notify ICE Futures if the applicant ceases to be a Hedger,
17. With respect to order-routing access, ICE Futures will ensure that the guidance that it circulates to its members (ICE Futures Members) respecting Ontario participation (Ontario Guidance) indicates that an ICE Futures Member is permitted to grant access to ICE Futures to a client in Ontario provided that (i) the client is a registered FCM under the CFA, (ii) the ICE Futures Member is a registered FCM under the CFA, or (iii) the ICE Futures Member is regulated as a dealer in its home jurisdiction and the client is a Hedger or is able to rely on another exemption from registration under the CFA,
18. Based on the facts set out in the Application, ICE Futures satisfies the criteria set out in Schedule "A" to this order;
AND WHEREAS based on the Application and the representations ICE Futures has made to the Commission, the Commission has determined that ICE Futures satisfies the criteria set out in Schedule "A" and that the granting of exemptions from recognition and registration to ICE Futures would not be prejudicial to the public interest;
IT IS HEREBY ORDERED by the Commission that pursuant to section 147 of the OSA, ICE Futures is exempt from recognition as a stock exchange under section 21 of the OSA, and pursuant to section 80 of the CFA, ICE Futures is exempt from registration as a commodity futures exchange under section 15 of the CFA;
AND IT IS FURTHER ORDERED by the Commission that, pursuant to section 38 of the CFA, trades in contracts on ICE Futures by FCMs are exempt from the requirements of section 33 of the CFA;
AND IT IS FURTHER ORDERED by the Commission that, pursuant to section 38 of the CFA, trades in ICE Futures Contracts by Hedgers who are ICE Futures Members are exempt from the registration requirement under section 22 of the CFA;
PROVIDED THAT ICE Futures complies with the terms and conditions attached hereto as Schedule "B".
Criteria for Exemption from Recognition/Registration as an Exchange
PART 1 REGULATION AND OVERSIGHT OF THE EXCHANGE
1.1 Regulation of the Exchange
The Exchange is regulated in an appropriate manner in another jurisdiction by a Foreign Regulator. The regulatory scheme of the Foreign Regulator is transparent and generally comparable to that in Ontario.
1.2 Authority of the Foreign Regulator
The Foreign Regulator has the appropriate authority and procedures for oversight of the Exchange. This oversight includes regular, periodic regulatory examinations of the Exchange by the Foreign Regulator.
PART 2 CORPORATE GOVERNANCE
2.1 Fair Representation
The governance structure of the Exchange provides for:
(i) appropriate, fair and meaningful representation on its Board and any committee thereof; and
(ii) appropriate representation by independent directors on the Board and any committee thereof.
2.2 Appropriate Provisions for Directors and Officers
There are appropriate qualifications, remuneration, limitation of liability and indemnity provisions for directors and officers.
The Exchange takes reasonable steps to ensure that each officer and director is a fit and proper person and 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.
2.4 Conflicts of Interest
The Exchange has appropriate conflict of interest provisions for all directors, officers and employees.
PART 3 FEES
The Exchange's process for setting fees is fair, transparent and appropriate. Any and all fees imposed by the Exchange on its participants are equitably allocated, do not have the effect of creating barriers to access and are balanced with the criteria that the Exchange has sufficient revenues to satisfy its responsibilities.
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 normal commercial business practices for the trade in the product.
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
The requirements of the Exchange relating to access to the facilities of the Exchange, the imposition of limitations or conditions on access and denial of access are approved by the Foreign Regulator and are fair and reasonable, including in respect of notice, an opportunity to be heard or make representations, the keeping of records, the giving of reasons and the provisions for appeals.
5.2 Details of Access Criteria
In particular, the Exchange
i. has written standards for granting access to trading on its facilities to ensure users have appropriate integrity and fitness;
ii. has and enforces financial integrity standards for those persons who enter orders for execution on the system, including, but not limited to, credit or position limits and clearing membership;
iii. does not unreasonably prohibit or limit access by a person or company to services offered by it.
iv. keeps records of each grant and each denial or limitation of access, including reasons for granting, denying or limiting access; and
v. restricts access to adequately trained system users who have demonstrated competence in the functions that they perform.
5.3 Access for Ontario Persons
The Exchange provides direct access, either through terminals, data feeds or third party provided interfaces, to only those Ontario persons that are duly registered or licensed under Ontario.
PART 6 RULEMAKING
6.1 Purpose of Rules
The Exchange maintains rules, policies and other similar instruments as are necessary or appropriate to govern and regulate all aspects of its business and affairs and such rules are designed to, in particular,
i. ensure compliance with the rules of the Exchange and securities legislation;
ii. prevent fraudulent and manipulative acts and practices;
iii. promote just and equitable principles of trade;
iv. foster cooperation and coordination with persons or companies engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in, the products trade on the Exchange;
v. provide for appropriate discipline;
vi. ensure a fair and orderly market; and
vii. ensure that the Exchange business is conducted in a manner so as to afford protection to investors.
6.2 No Discrimination or Burden on Competition
The rules of the Exchange do not
i. permit unreasonable discrimination among issuers, if applicable, and participants; or
ii. impose any burden on competition that is not reasonably necessary or appropriate.
PART 7 SYSTEMS AND TECHNOLOGY
7.1 System Capability/Scalability
For each of its systems that support order entry, order routing, execution, data feeds, trade reporting and trade comparison, capacity and integrity requirements, the Exchange:
i. makes reasonable current and future capacity estimates;
ii. conducts capacity stress tests of critical systems to determine the ability of those systems to process transactions in an accurate, timely and efficient manner;
iii. reviews the vulnerability of those systems and data centre computer operations to internal and external threats, including physical hazards and natural disasters;
iv. ensures that safeguards which protect a system against unauthorized access, internal failures, human errors, attacks and natural catastrophes that might cause improper disclosures, modification, destruction or denial of service are subject to an independent and ongoing audit which should include the physical environment, system capacity, operating system testing, documentation, internal controls and contingency plans;
v. ensures that the configuration of the system has been reviewed to identify potential points of failure, lack of back-up and redundant capabilities;
vi. maintains reasonable procedures to review and keep current the development and testing methodology of those systems; and
vii. maintains reasonable back-up, contingency and business continuity plans, disaster recovery plans and internal controls.
7.2 Information Technology Risk Management Procedures
Procedures are in place that:
i. handle trading errors, trading halts and circuit breakers;
ii. ensure the competence, integrity and authority of system users;
iii. ensure that the system users are adequately supervised; and
iv. ensure the competence, integrity and authority of system users, to ensure that system users are adequately supervised.
PART 8 FINANCIAL VIABILITY
8.1 Financial Viability
The Exchange has sufficient financial resources for the proper performance of its functions.
PART 9 CLEARING AND SETTLEMENT
9.1 Relationship with Clearing House
The Exchange has a clearing relationship with an established clearing house and all transactions executed on the Exchange are cleared through the Clearing House.
9.2 Regulation of the Clearing House
The Clearing House and direct clearing members are subject to acceptable regulation.
9.3 Authority of the Foreign Regulator
The Foreign Regulator has the appropriate authority and procedures for oversight of the Clearing House. This oversight includes regular, periodic regulatory examinations of the Clearing House by the Foreign Regulator.
9.4 Restrictions on Access to a Foreign Member
Any restrictions on access to the clearing system by a foreign member are adequately disclosed and justified by the legislation of the home jurisdiction, are not anti-competitive and do not unreasonably impose barriers to access.
9.5 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.
9.6 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 10 TRADING PRACTICES
10.1 Trading Practices
Trading practices are fair, properly supervised and not contrary to the public interest.
10.2 Market Making Provisions
Market making provisions and other provisions to ensure market liquidity, if any, are fair and equitable to all market participants.
Rules pertaining to order size and limits are fair and equitable to all market participants and the system for accepting and distinguishing between and executing different types of orders is fair, equitable and transparent.
Adequate provision has been made to record and publish details of pricing and trading.
10.5 Market Limits
Market limits have been established as to ensure the integrity of the Exchange during times of volatility.
PART 11 COMPLIANCE, SURVEILLANCE AND ENFORCEMENT
The Exchange or the Foreign Regulator has the jurisdiction to perform member and market regulation, including the ability to set rules, conduct compliance reviews and perform surveillance and enforcement.
11.2 Member and Market Regulation
The Exchange or its Foreign Regulator maintains appropriate systems, resources and procedures for evaluating compliance with Exchange and legislative requirements and disciplining participants.
11.3 Record Keeping
The Exchange maintains adequate provisions for keeping books and records, including operations of the exchange, audit trail information on all trades and compliance and/or violations of Exchange requirements and securities legislation.
11.4 Availability of Information to Regulator
The Exchange has mechanisms in place to ensure that the information necessary to conduct adequate surveillance of the system for supervisory and enforcement purposes is available to the relevant regulatory authorities on a timely basis.
PART 12 INFORMATION SHARING AND OVERSIGHT ARRANGEMENTS
12.1 Information Sharing and Oversight Agreement
Satisfactory information sharing and oversight agreements exist among the OSC and the Foreign Regulator.
PART 13 IOSCO PRINCIPLES
13.1 IOSCO Principles
The Exchange adheres to the IOSCO principles to the extent consistent with the law of the foreign jurisdiction.
Terms and Conditions
REGULATION OF ICE FUTURES
1. ICE Futures will maintain its recognition by Her Majesty's Treasury and will continue to be subject to the supervision of the FSA, or any successor regulatory body, as an RIE, or any successor category of recognition.
2. ICE Futures will continue to comply with its ongoing compliance requirements set out in the FSMA (Recognition Requirements), or any successor compliance requirements.
3. ICE Futures will continue to meet the criteria for exemption from registration as an exchange, as set out in Schedule "A".
4. ICE Futures will not provide direct access to Ontario participants unless they are appropriately registered to trade in ICE Futures Contracts or operating pursuant to an exemption from registration; ICE Futures may reasonably rely on a written representation from each ICE Futures Member in Ontario (Ontario Member) in making this determination and will notify such Ontario Member that this representation is deemed to be repeated each time it enters an order for an ICE Futures Contract.
5. Each applicant for ICE Futures membership that intends to rely on the Hedger Relief will be required, as part of the application documentation to:
(a) represent that it is a Hedger;
(b) acknowledge that ICE Futures deems the Hedger representation to be repeated by the applicant each time it enters an order for an ICE Futures Contract and that the applicant must be a Hedger for the purposes of each trade resulting from such an order; and
(c) agree to notify ICE Futures if the applicant ceases to be a Hedger,
6. All orders for ICE Futures Contracts transmitted to the ICE Platform by a Hedger that is operating pursuant to the Hedger Relief will be solely for their own account.
7. ICE Futures will require Ontario Members to notify ICE Futures if their registration or exemption from registration has been revoked, suspended or amended by the Commission and, following notice from the Ontario Member or the Commission and subject to applicable laws, ICE Futures will promptly restrict access to ICE Futures if the Ontario Member is no longer appropriately registered with or exempted by the Commission.
8. With respect to order-routing access, ICE Futures will ensure that the Ontario Guidance indicates that an ICE Futures Member is permitted to grant access to ICE Futures to a client in Ontario provided that (i) the client is a registered FCM under the CFA; (ii) the ICE Futures Member is a registered FCM under the CFA or (iii) the ICE Futures Member is regulated as a dealer in its home jurisdiction and the client is a Hedger or is able to rely on another exemption from registration under the CFA.
9. ICE Futures makes available to ICE Futures Members appropriate training for each person who has access to trade in ICE Futures Contracts on the ICE Platform.
10. ICE Futures will require each Ontario Member that is not registered with the Commission as an FCM to file with ICE Futures a written representation, executed by a person with the authority to bind the Ontario Member, stating that as long as it operates pursuant to the Hedger Relief provided herein, the Ontario Member (a) agrees to and submits to the jurisdiction of the Commission with respect to activities conducted pursuant to the Hedger Relief, and (b) will provide, upon the request of the Commission, prompt access to the books and records of the Ontario Member. ICE Futures will make such representations available to the Commission upon the request of staff of the Commission.
SUBMISSION TO JURISDICTION AND AGENT FOR SERVICE
11. ICE Futures 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 ICE Futures in Ontario.
12. ICE Futures 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 ICE Futures' activities in Ontario.
13. ICE Futures will provide to all Ontario Members, and also require ICE Futures Members that are registered FCMs under the CFA to distribute to Ontario clients, prior to the first trade by each client that is executed through the facilities of ICE Futures, disclosure that states that:
(a) rights and remedies against ICE Futures may only be governed by the laws of the U.K., rather than the laws of Ontario and may be required to be pursued in the U.K rather than in Ontario;
(b) the rules applicable to trading on ICE Futures may be governed by the laws of the U.K., rather than the laws of Ontario; and
(c) ICE Futures is regulated by the FSA, rather than the OSC.
14. ICE Futures will promptly notify staff of the Commission of any of the following:
(a) any material change to the information provided in the Application, including, but not limited to:
(i) changes to the regulatory oversight by the FSA,
(ii) the corporate governance structure of ICE Futures,
(iii) the access model, including eligibility criteria, for Ontario participants,
(iv) systems and technology, and
(v) the clearing and settlement arrangements for ICE Futures;
(b) any change in the ICE Futures Regulations or the laws, rules and regulations in the U.K. relevant to futures and options on futures where such change may materially affect the ability of ICE Futures to meet the criteria set out in Schedule "A" to this order;
(c) any known investigations of, or disciplinary action against, ICE Futures by the FSA or any other regulatory authority to which ICE Futures is subject;
(d) any matter known to ICE Futures that may affect the financial or operational viability of ICE Futures, including, but not limited to, any significant system failure or interruption;
(e) any default, insolvency or bankruptcy of any ICE Futures Member known to ICE Futures or its representatives that may have a material, adverse impact upon ICE Futures, the ICE Futures clearing system or any Ontario Member.
15. ICE Futures 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 Members;
(b) a list of all Ontario Members against whom disciplinary action has been taken in the last quarter by ICE Futures or the FSA with respect to activities on ICE Futures;
(c) a list of all investigations by ICE Futures relating to Ontario Members;
(d) a list of all Ontario applicants who have been denied membership to ICE Futures;
(e) for each ICE Futures Contract, the total trading volume originating from Ontario Members and the proportion of worldwide trading volume on ICE Futures conducted by Ontario Members.
16. ICE Futures will arrange to have the annual SAS 70 for ICE, Inc. filed with the Commission.
17. ICE Futures will file with the Commission all annual financial statements required to be filed with the FSA, within the same timeframes as required by the FSA.
18. ICE Futures will, subject to applicable laws, share any and all information within the care and control of ICE Futures and otherwise co-operate wherever reasonable with the Commission or its staff.