Securities Law & Instruments

Headnote

Application under section 144 of the Securities Act (Ontario) (OSA) to vary and restate the interim order of The Options Clearing Corporation (OCC) to extend its interim exemption, which exempts OCC under section 147 of the OSA on an interim basis 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 and 144

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, c. S.5, AS AMENDED

(the Act)

AND

IN THE MATTER OF

THE OPTIONS CLEARING CORPORATION (OCC)

VARIATION TO THE INTERIM ORDER

(Section 144 of the Act)

WHEREAS the Ontario Securities Commission (Commission) issued an interim order dated March 1, 2011 pursuant to section 147 of the Act exempting OCC from the requirement to be recognized as a clearing agency under section 21.2(0.1) of the Act (Interim Order);

AND WHEREAS OCC filed an application received on August 4, 2011 (Application) with the Commission pursuant to section 144 of the Act requesting that the Commission vary and restate the Interim Order to extend OCC's interim exemption from the requirement to be recognized as a clearing agency pursuant to section 21.2(0.1) of the Act;

AND WHEREAS the Commission has received certain representations from OCC in connection with their Application to vary and restate the Interim Order;

AND WHEREAS the Commission has determined that it is not prejudicial to the public interest to issue this order that varies and restates the Interim Order to extend OCC's interim exemption from the requirement to be recognized as a clearing agency pursuant to section 21.2(0.1) of the Act and to include information sharing requirements;

IT IS ORDERED, pursuant to section 144 of the Act, that the Interim Order be varied and restated as follows:

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, C. S.5, AS AMENDED

(the Act)

AND

IN THE MATTER OF

THE OPTIONS CLEARING CORPORATION (OCC)

ORDER

(Section 147 of the Act)

WHEREAS OCC filed an application dated January 10, 2011 (January Application) with the Ontario Securities Commission (Commission) pursuant to section 147 of the Act requesting an interim order exempting OCC from the requirement to be recognized as a clearing agency under section 21.2(0.1) of the Act;

AND WHEREAS the Commission granted such order dated March 1, 2011 (Interim Order);

AND WHEREAS the Interim Order will terminate on the earlier of (i) September 1, 2011 and (ii) the effective date of a subsequent order recognizing OCC as a clearing agency under subsection 21.2(0.1) of the Act or exempting it from the requirement to be recognized as a clearing agency under section 147 of the Act;

AND WHEREAS OCC has filed an application received on August 4, 2011 (August Application) with the Commission pursuant to section 144 of the Act requesting that the Commission vary and restate the Interim Order to extend OCC's interim exemption from the requirement to be recognized as a clearing agency pursuant to section 21.2(0.1) of the Act (Order);

AND WHEREAS OCC has represented to the Commission that:

1.1 OCC is a corporation organized under the laws of the state of Delaware;

1.2 Founded in 1973, OCC is the world's largest equity derivatives clearing organization;

1.3 OCC is registered as a securities clearing agency under Section 17A of the U.S. Securities Exchange Act of 1934 (Exchange Act) and registered as a derivatives clearing organization (DCO) under Section 5b of the Commodity Exchange Act;

1.4 In the United States, OCC operates under the jurisdiction of both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Under the SEC's jurisdiction, OCC clears or is qualified to clear transactions in "standardized options," as defined in SEC regulations. These include options on common stocks and other equity issues, stock indices (including volatility, variance, and strategy-based indices), foreign currencies, interest rate composites, and credit default options. Under SEC jurisdiction, OCC also clears futures on single equity issues and narrow-based stock indices (security futures), which were authorized to be traded pursuant to the Commodity Futures Modernization Act of 2000. As a DCO under CFTC jurisdiction, OCC offers clearing and settlement services for transactions in commodity futures (i.e., futures other than security futures) and options on commodity futures and is qualified to clear options on commodities;

1.5 The derivatives contracts traded on U.S. exchanges of which OCC is also the nominal "issuer" are sold by regulated foreign market participants worldwide. The Applicant is primarily regulated by the SEC and CFTC in the United States. The Applicant is not subject to regulatory oversight by any other foreign securities or futures regulatory authority in any jurisdiction outside the United States, including in the United Kingdom, Continental Europe, Australia, or by any other Canadian provincial or territorial securities regulatory authority except the Autorité des marchés financiers in Quebec. In Quebec, the Applicant has received an exemption from certain requirements of the Derivatives Act (Quebec) subject to conditions;

1.6 OCC is currently equally owned by the following five participant securities exchanges that trade options, all of which are currently registered with the SEC:

(i) NYSE Amex;

(ii) Chicago Board Options Exchange;

(iii) International Securities Exchange;

(iv) NYSE Arca; and

(v) NASDAQ OMX PHLX (formerly the Philadelphia Stock Exchange);

1.7 OCC also serves other exchange constituents. OCC currently clears options traded on a total of nine U.S. securities exchanges (including those named in paragraph 1.6), security futures traded on OneChicago, and commodity futures and in some cases futures options traded on four U.S. futures exchanges. OCC also clears stock loan transactions executed on a broker-to-broker basis and on AQS, an electronic trading platform regulated by the SEC as an alternative trading system;

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

1.9 OCC currently clears the following products:

(i) Options on equity securities (including exchange-traded funds);

(ii) Options on stock indices (including volatility indices);

(iii) Foreign currency options;

(iv) Interest rate options (cash settled options on the yields of U.S. Treasury securities);

(v) Security futures, including single stock futures and narrow-based stock index futures; and

(vi) Broad-based stock index, volatility and variance futures (collectively, Products);

1.10 OCC has approximately 130 clearing members representing the largest U.S. broker-dealers and futures commission merchants and a small number of regulated Canadian securities firms;

1.11 OCC initiates no direct contact with Canadian clients of Canadian securities firms for which it provides clearing services;

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

1.13 OCC currently has six Ontario-resident investment dealers that are direct OCC clearing members and one Ontario-resident approved clearing bank (collectively, Ontario Participants);

1.14 The new section 21.2 of the Act, that became effective on March 1, 2011, prohibits clearing agencies from carrying on business in Ontario unless they are recognized by the Commission as a clearing agency;

1.15 On June 3, 2011, OCC submitted an application to the Commission for permanent relief pursuant to section 147 of the Act exempting OCC from the requirement to be recognized as a clearing agency pursuant to section 21.2(0.1) of the Act and such application explains how OCC meets the relevant criteria for recognition and exemption for clearing agencies (Subsequent Order); and

1.16 Commission staff is currently reviewing OCC's application for the Subsequent Order. OCC understands that the standard process for review of the Subsequent Order can not be completed by September 1, 2011;

AND WHEREAS based on the January Application and the August Application, and the representations OCC 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, OCC is exempt on an interim basis from recognition as a clearing agency under section 21.2(0.1);

PROVIDED THAT:

1. This Order shall terminate the earlier of (i) September 1, 2012 and (ii) the effective date of the Subsequent Order;

2. OCC shall:

(a) continue to be registered as a clearing agency under Section 17A of the Exchange Act and registered as a DCO under Section 5b of the Commodity Exchange Act;

(b) promptly notify staff of the Commission of:

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

(ii) any material problems with the clearance and settlement of transactions in Products cleared by OCC that could materially affect the financial viability of OCC; and

(iii) any new Ontario Participants;

3. OCC shall provide such information as may be requested from time to time by, and otherwise cooperate with, the Commission or its staff; and

4. OCC shall share information and otherwise cooperate with other recognized and exempt clearing agencies, as appropriate.

DATED March 1, 2011, as varied on August 19, 2011.

"Edward P. Kerwin"
 
"Vern Krishna"