Securities Law & Instruments

Headnote

Application under section 147 of the Securities Act (Ontario) (OSA) to exempt on an interim basis Chicago Mercantile Exchange Inc. 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.

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, CHAPTER S. 5,

AS AMENDED (THE OSA)

AND

IN THE MATTER OF

CHICAGO MERCANTILE EXCHANGE INC.

ORDER

(Section 147 of the OSA)

WHEREAS Chicago Mercantile Exchange Inc. (CME) has filed an application dated June 8, 2012 (Application) with the Ontario Securities Commission (Commission) pursuant to section 147 of the OSA requesting an interim order exempting CME from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the OSA (Order);

AND WHEREAS CME has represented to the Commission that:

1.1 CME is a corporation organized under the laws of the State of Delaware in the United States (US) and is a wholly owned subsidiary of the CME Group Inc. (CME Group), a publicly traded for-profit corporation organized under the laws of Delaware and listed for trading on the NASDAQ National Market;

1.2 CME is a derivatives clearing organization (DCO) within the meaning of that term under the US Commodity Exchange Act (CEA). CME is subject to regulatory supervision by the US Commodity Futures Trading Commission (CFTC), a US federal regulatory agency, and is obligated under the CEA to give the CFTC access to all records unless prohibited by law or such records are subject to solicitor-client privilege. The CFTC reviews, assesses and enforces a DCO's adherence to the CEA and the regulations thereunder on an ongoing basis, including but not limited to, the DCO core principles relating to compliance with the core principles, financial resources, participant and product eligibility, risk management, settlement procedures, treatment of funds, default rules and procedures, rule enforcement and system safeguards;

1.3 CME provides clearing and settlement services for exchange-traded futures and options on futures, as well as for OTC derivatives transactions. The OTC derivatives products relate to the following asset classes: agricultural commodities; credit; energy; environmental commodities; equities; foreign exchange (FX); interest rates; and metals. CME also clears agricultural swaps, credit default swaps (CDS), FX contracts, and interest rate swaps (IRS);

1.4 CME's clearing members consist of banks, securities houses/investment banks, commodity brokers and traders and, to a very limited extent, industrial companies;

1.5 CME does not have any offices or maintain other physical installations in Ontario or any other Canadian province or territory, except for a CME Group marketing office in Calgary, Alberta, whose activities are limited to marketing and development of energy products;

1.6 A clearing firm may become eligible to clear OTC derivatives products by becoming a clearing member of CME to clear only OTC derivatives products, including CDS and IRS, but not any exchange-traded futures and/or options on futures, on its own behalf, and on behalf of its branches and affiliated companies (OTC Derivatives Clearing Member);

1.7 All OTC Derivatives Clearing Members must complete an application for membership and make deposits into a CME guaranty fund;

1.8 CME implements and maintains a system of financial safeguards designed to anticipate potential market exposures and ensure sufficient resources are available to cover future obligations;

1.9 To become an OTC Derivatives Clearing Member, a clearing firm must deposit a US$5,000,000 membership deposit with CME and meet any other requirements for clearing OTC derivatives;

1.10 All OTC Derivatives Clearing Members, including those that are incorporated/domiciled in non-US jurisdictions, must be subject to a legal and insolvency regime acceptable to CME. CME has sought Canadian legal advice in respect of obtaining an analysis of Canada's legal and insolvency regime in accordance with CFTC requirements. Additionally, clearing members from non-US-jurisdictions must generally use the US branch of CME's settlement banks for performance bond deposits and variation margin. CME also accepts in certain circumstances, among other things, gold, foreign currency and foreign sovereign debt for performance bond deposits and variation margin, which may be held by CME outside of the US;

1.11 CME ClearPort is a web-based graphical user interface owned, maintained and operated by CME to view and submit bilaterally negotiated transactions (e.g., OTC derivatives products) into CME for clearing and settlement services by clearing firms and their customers in the US;

1.12 CME proposes to offer direct clearing access in Ontario for purposes of submission for clearing IRS, CDS, and other OTC derivatives products (collectively, the Clearing Products), via CME ClearPort, to certain Canadian financial institutions (within the meaning of such term in subsection 1.1(3) of National Instrument 14-101 Definitions) that have a head office or principal place of business in Ontario (the Ontario Clearing Members);

1.13 CME will file a full application to the Commission for a subsequent order recognizing CME as a clearing agency under subsection 21.2(0.1) of the OSA or exempting it from the requirement to be recognized as a clearing agency under section 147 of the OSA (Subsequent Order).

AND WHEREAS based on the Application and the representations CME 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 OSA, CME is exempt on an interim basis from recognition as a clearing agency under subsection 21.2(0.1) of the OSA;

PROVIDED THAT:

1. This Order shall terminate on the earlier of (i) June 30, 2013 and (ii) the effective date of the Subsequent Order;

2. CME's clearing agency activities in Ontario are limited to the clearing of Clearing Products for Ontario Clearing Members;

3. CME shall continue to be registered with the CFTC as a DCO under the CEA;

4. CME shall promptly notify staff of the Commission of:

(a) any material change or proposed material change in its regulatory oversight by the CFTC;

(b) any material problems with the clearance and settlement of transactions that could materially affect the safety and efficiency of CME;

(c) any new OTC service or product cleared by CME that CME would like to offer to Ontario Clearing Members; and

(d) the admission of any Ontario Clearing Members;

5. Upon the commencement of clearing of OTC derivatives trades by CME on behalf of Ontario Clearing Members, CME shall maintain and submit the following information to the Commission on a quarterly basis, or promptly upon request of Commission staff in respect of each cleared Clearing Product:

(a) the average daily volume and value of trades cleared during the previous quarter, for each Ontario Clearing Member; and

(b) the portion of total volume and value of trades cleared during the previous quarter for all clearing members that represents the total volume and value of trades cleared during the previous quarter for each Ontario Clearing Member;

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

7. CME shall file with the Commission no later than August 31, 2012, a complete application with accurate information and relevant supporting documents for the Subsequent Order. If the August 31, 2012 deadline is not met, the Commission may terminate the interim order without further notice to CME;

8. CME shall submit 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 CME in Ontario; and

9. CME shall 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 the activities in Ontario.

DATED June 8, 2012.

"James Carnwath"
 
"Christopher Portner"