Securities Law & Instruments


Application under section 147 of the Securities Act (Ontario) (OSA) to exempt on an interim basis LCH.Clearnet Limited from recognition as a clearing agency under subsection 21.2(0.1) of the OSA.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21.2(0.1), 147.




(the Act)





(Section 147 of the Act)

WHEREAS LCH.Clearnet Limited (LCH) has filed an application dated January 13, 2011 (Application) with the Ontario Securities Commission (Commission) pursuant to section 147 of the Act requesting an interim order exempting LCH from the requirement to be recognized as a clearing agency under section 21.2(0.1) of the Act (Order).

AND WHEREAS LCH has represented to the Commission that:

1.1 LCH is a clearing house incorporated under the laws of England and Wales;

1.2 LCH is a Recognised Clearing House (RCH) in the United Kingdom (UK) under the UK's Financial Services and Markets Act 2000 (FSMA) and, as such, is approved by the UK Financial Services Authority (FSA) to clear a broad range of asset classes including: securities, exchange traded derivatives, energy, freight, interest rate swaps and euro and sterling denominated bonds and repurchase transactions;

1.3 As of May 25, 2010, LCH.Clearnet Group Ltd., the parent company of LCH, is owned 83 percent by users (clearing members) and 17 percent by exchanges;

1.4 LCH operates as an industry utility and receives most of its revenue from clearing fees charged to its members;

1.5 LCH works closely with market participants and exchanges to identify and develop clearing services for new asset classes;

1.6 LCH clears a broad range of asset classes including: securities, exchange traded derivatives, commodities, energy, freight, interest rate swaps, credit default swaps and euro and sterling denominated bonds and repos, More specifically, exchange-traded futures and options on futures, exchange-traded options on equity indices and individual equities, and exchange-traded cash equities. The exchange-traded futures and options on futures relate to underlyings in short-term interest rates (Euro, Sterling, Swiss Franc); government bonds (UK Gilts and Japanese Government Bonds); medium and long-term swap rates (Euro), equity indices (UK-related FTSE indices and FTSE and MSCI pan-European indices); and individual stocks (British, Dutch, French, German, Italian, Spanish and US companies); and to a broad range of commodities (non-ferrous metals -- aluminium (primary and secondary), copper, lead, nickel, tin and zinc; plastics; and 'softs' and agriculturals -- cocoa, coffee, white (refined) sugar, wheat, barley and potatoes). In addition, LCH clears cash-settled OTC freight forwards and options, OTC emissions contracts, iron and fertilizer swaps and clears cash-settled electricity futures for participants of the Nodal Exchange;

1.7 Currently, LCH provides clearing services for the following UK Recognised Investment Exchanges: NYSE Liffe Futures & Options, the London Metal Exchange and EDX London, as well as for the London Stock Exchange and in Switzerland, SIX Swiss Exchange AG;

1.8 LCH has approximately 130 members consisting of banks, securities houses/investment banks, commodity brokers and traders and, to a very limited extent, industrial companies;

1.9 LCH does not have any office or maintain other physical installations in Ontario or any other Canadian province or territory;

1.10 LCH currently intends to only offer Canadian-resident clients to access its RepoClear and SwapClear services;

1.11 RepoClear is a service clearing cash bond and repo trades across a number of European markets and is the second largest clearer of fixed income and repo products in the world;

1.12 RepoClear clears cash bond and repo trades in the following markets: Austrian, Belgian, Dutch, German, Irish, Finnish, Portuguese and UK government bonds. Additional markets served include: German Jumbo Pfandbriefe and Supranationals, Agency and Sovereign. RepoClear accepts the following types of specific bond repo trades: classic fixed rate repos with 1st leg settlement on a same day and forward start basis with a term not greater than one year;

1.13 A RepoClear participant has to either be a clearing member or have a clearing arrangement with a firm that is a clearing member. A RepoClear participant who clears repos is a RepoClear Clearing Member (RCM). A participant who has a clearing arrangement with an RCM is a RepoClear Dealer;

1.14 SwapClear was launched in 1999 and has grown to become the largest central counterparty for OTC interest rate derivatives globally. LCH anticipates clearing an expanded list of swap products and OTC derivatives on exempt commodities. Transactions cleared through SwapClear are traded by LCH members on a bilateral basis, either inter-office, or through brokers, or on automated trading systems recognized by LCH;

1.15 There are broadly two recognised participants in SwapClear: (i) members; and (ii) clients of these members. A SwapClear Clearing Member is eligible to clear trades on their own behalf, and on behalf of their branches, affiliated companies and clients. A SwapClear Dealer is an affiliate company of a SwapClear Clearing Member which is identified separately within SwapClear and whose trades clear through the affiliated SwapClear Clearing Member based on a clearing agreement between the SwapClear Clearing Member and the SwapClear Dealer;

1.16 An applicant for either RepoClear or SwapClear must enter into a Clearing Membership Agreement with LCH before it can become a member of LCH. Applicants that wish to clear trades through RepoClear or SwapClear on their own behalf or on behalf of others must enter into a Clearing Membership Agreement. RepoClear Dealers and SwapClear Dealers must clear trades through a RepoClear Clearing Member or SwapClear Clearing Member and are not considered clearing members of LCH;

1.17 To date, LCH has admitted one Ontario-resident client as a SwapClear Clearing Member;

1.18 LCH currently has two Ontario-resident clients that are RepoClear Dealers but are not RepoClear Clearing Members. These clients clear through a non-Canadian, third party RepoClear Clearing Member;

1.19 The new section 21.2 of the Act, to become effective March 1, 2011, will prohibit clearing agencies from carrying on business in Ontario unless they are recognized by the Commission as a clearing agency;

1.20 LCH is in the process of filing a full application to the Commission for a subsequent order recognizing LCH as a clearing agency under subsection 21.2(0.1) of the Act or exempting it from the requirement to be recognized as clearing agency under section 147 of the Act (Subsequent Order);

AND WHEREAS based on the Application and the representations LCH has made to the Commission, the Commission has determined that the granting of the Order would not be prejudicial to the public interest;

IT IS HEREBY ORDERED by the Commission that, pursuant to section 147 of the Act, LCH is exempt on an interim basis from recognition as a clearing agency under section 21.2(0.1);


1. This Order shall terminate on the earlier of (i) September 1, 2011 and (ii) the effective date of the Subsequent Order;

2. LCH shall:

(a) continue to be a RCH under the FSMA; and

(b) promptly notify staff of the Commission of:

(i) any material change or proposed material change in the regulatory oversight by the FSA;

(ii) any material problems with the clearance and settlement of transactions in its RepoClear or SwapClear services that could materially affect the financial viability of LCH; and

(iii) any new Ontario-resident clients of the RepoClear or SwapClear services.

DATED March 1, 2011.

"Margot C. Howard"
"Vern Krishna"