Application for an order, pursuant to pursuant to section 80 of the Commodity Futures Act (CFA) granting relief from sections 42, 43, 44 and 45 of the CFA which contain the requirement to deliver certain confirmations and statements of trade to customers in respect of trades in commodity futures contracts and commodity futures options in the context of trade "give-ups".
Commodity Futures Act, R.S.O. 1990, c. C.20, ss. 42, 43, 44, 45, 80.
IN THE MATTER OF
THE COMMODITY FUTURES ACT
R.S.O 1990, CHAPTER C.20, AS AMENDED
IN THE MATTER OF
MERRILL LYNCH CANADA INC.
(Section 80 of the CFA)
UPON the application (the Application) by Merrill Lynch Canada Inc. (the Applicant) to the Ontario Securities Commission (the Commission) for an order pursuant to section 80 of the CFA granting relief from sections 42, 43, 44 and 45 of the CFA, which contain the requirements to deliver certain confirmations and statements of trade to customers in respect of trades in commodity futures contracts and commodity futures options in the context of trade "give-ups" where the Applicant acts as executing broker;
AND UPON considering the Application and the recommendation of staff of the Commission;
AND UPON the Applicant having represented to the Commission that:
1. The Applicant is a corporation continued under the laws of Canada.
2. The head office of the Applicant is located in Toronto, Ontario.
3. The Applicant is a dealer member of the Investment Industry Regulatory Organization of Canada (IIROC). The Applicant is registered as an investment dealer in Alberta, British Columbia, Manitoba, New Brunswick, the Northwest Territories, Nova Scotia, Prince Edward Island, Saskatchewan and Yukon, an investment dealer and a futures commission merchant in Ontario, an investment dealer and a portfolio manager in Newfoundland and Labrador and an investment dealer and derivatives dealer in Quebec. The Applicant is a participating organization or member of the Toronto Stock Exchange (TSX), TSX Venture Exchange and Montreal Exchange and other electronic markets. The Applicant is a member of the Canadian Derivatives Clearing Corporation.
4. The Applicant acts as executing broker in give-up transactions involving commodity futures contracts and commodity futures options. The Applicant also acts as a clearing broker for customers.
5. The Applicant only provides trading services to "institutional customers" as defined in IIROC Dealer Member Rule 1.1. (the Customers).
6. In the typical give-up transaction, a customer has an existing relationship with its clearing broker, and has signed account documentation with such clearing broker, but desires to utilize one or several other executing brokers for purposes of executing on one or more markets, whether domestic or global. In such an instance, the executing broker will execute trades as directed by the customer and "give-up" such trades to the clearing broker via various futures exchange mechanisms that allow for and govern this procedure, as more fully explained below. The customer does not sign account documentation with the executing broker, nor does the executing broker receive monies, securities, margin or collateral from the customer. The customer is a customer of the clearing broker and the executing broker is merely providing a limited execution transaction service. The executing broker is responsible for its own record keeping, bookkeeping, custody, and other requirements with respect to its customers, but is not responsible for most of these requirements with respect to an execution only customer, as that customer is on the books of the clearing broker.
7. Each give-up trade executed by the Applicant is captured in the Applicant's books and records and accounting system. A daily control performed by the Applicant's back-office identifies commodity futures contracts and commodity futures options positions held by the Applicant and not allocated to any of its customers' accounts. Each such position is investigated and is either (i) sent to the clearing broker as a trade that was executed under a give-up agreement, or (ii) upon receipt of new instructions allocated to a customer's account. For each customer a monthly invoice detailing all give-up trades for a given month is sent to the clearing broker. After reconciliation with the clearing broker's own records, the clearing broker pays the invoice sent by the Applicant. Consequently, upon payment of any invoice sent by the Applicant to the clearing broker, the Applicant considers the invoice as evidence of trade reconciliation between its internal accounting and the client.
8. The Applicant is not in default of securities, futures or derivatives legislation in any jurisdiction.
9. Section 42 of the CFA requires that a registered dealer that has acted as an agent in connection with a trade in a commodity futures contract promptly send customers a written confirmation of trade.
10. Section 43 of the CFA requires that a registered dealer that has acted as an agent in connection with a liquidating trade in a commodity futures contract promptly send customers a written statement of purchase and sale.
11. Section 44 of the CFA requires that registered dealers send customers a written monthly statement.
12. Section 45 of the CFA requires that a registered dealer that has acted as an agent in connection with a trade in a commodity futures option send customers a written confirmation of a trade.
13. The clearing broker has the primary relationship with the Customers and is contractually responsible for trade and risk monitoring as well as reporting, trade confirmations and sending out monthly statements.
14. Without the requested relief, the Customers will receive multiple copies of trade confirmations and monthly statements which is confusing and unnecessary.
AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest to grant the exemption requested;
IT IS ORDERED, pursuant to section 80 of the CFA that the Applicant is exempt from the requirements of sections 42, 43, 44 and 45 of the CFA for the purposes of the Applicant acting as executing broker for give-up transactions where the clearing broker provides Customers a written confirmation of the trades, provided that the Applicant enters into a give-up agreement with the clearing broker and the Customer.
April 20, 2010