IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S. 5, AS AMENDED
IN THE MATTER OF
CHICAGO MERCANTILE EXCHANGE INC. (CME)
(Section 147 of the Act)
WHEREAS CME has filed an application dated May 6, 2013 (Application) with the Ontario Securities Commission (Commission) pursuant to section 147 of the Act requesting an order exempting CME from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the Act (Order);
AND WHEREAS the Commission issued an interim order with effective date June 19, 2012 (Interim Order) exempting CME from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the Act, until the earlier of (i) June 30, 2013 and (ii) the effective date of a subsequent order exempting CME from the requirement to be recognized as a clearing agency under section 147 of the Act;
AND WHEREAS the Commission issued an order (Variation Order) dated August 31, 2012 varying the Interim Order by extending the deadline for CME to file a full application for the subsequent order from August 31, 2012 to September 10, 2012;
AND WHEREAS the Interim Order, as varied and restated by the Variation Order, will be replaced by this order and therefore be automatically revoked upon issuance of this 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 (U.S.) and is a wholly owned subsidiary of CME Group Inc. (CMEG), a publicly traded for-profit corporation organized under the laws of Delaware and listed for trading on the NASDAQ National Market. CMEG is the ultimate parent company of: (i) CME; (ii) Board of Trade of the City of Chicago, Inc.; (iii) Commodity Exchange, Inc. (COMEX); (iv) New York Mercantile Exchange, Inc.; and (v) Board of Trade of Kansas City, Missouri, Inc. (collectively, the CMEG Exchanges).
1.2 CMEG receives a majority of its revenue from clearing and transaction fees, which include electronic trading fees, surcharges for privately-negotiated transactions and other volume-related charges for contracts executed through CMEG's trading venues.
1.3 CME is a designated contract market (DCM) and a derivatives clearing organization (DCO) within the meanings of those terms under the U.S. Commodity Exchange Act (CEA). CME is subject to regulatory supervision by the U.S. Commodity Futures Trading Commission (CFTC), a U.S. 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 DCM and 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.
1.4 CME is deemed to be registered with the U.S. Securities and Exchange Commission (SEC) as a securities clearing agency, effective July 16, 2011, in accordance with certain provisions under Subsection 763(b) of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act), and is therefore also subject to limited regulatory supervision by the SEC in connection with its offering of clearing services for single stock and narrow-based security index products.
1.5 On July 18, 2012, CME was designated by the Financial Stability Oversight Council as a systemically important financial market utility under Title VIII of the Dodd Frank Act.
1.6 On November 21, 2012, CME became registered with the CFTC as a swap data repository (SDR) to provide SDR services supporting credit default swaps (CDS), interest rate swaps (IRS), commodities and foreign exchange (FX) asset classes through its CME Repository Service.
1.7 CME provides clearing and settlement services for exchange-traded futures and options on futures, as well as for over-the-counter (OTC) derivatives transactions. CME clears OTC derivatives in the following asset classes: agricultural commodities; credit; energy; environmental commodities; equities; FX; interest rates; and metals. The exchange-traded futures and options on futures products cleared by CME include, but are not limited to, the following: short-term interest rates (Eurodollar, Euribor, U.S. Treasury Bills); government bonds (U.S. Treasury Bonds and Notes); medium and long-term swap rates (U.S. Dollar), narrow-based equity indices (U.S.-related S&P, NASDAQ and DJIA indices and Nikkei indices); commodity index swaps (gold, crude oil, UBS commodity index); and a broad range of commodities (e.g., gold, silver, platinum, palladium, copper, steel and uranium, cocoa, coffee, corn, sugar, wheat, oats, soybeans, live cattle and butter). In addition, CME clears freight futures, forwards and options, iron futures, options and swap futures, fertilizer swaps and electricity swap futures. The full list of products cleared by CME is available on its website at www.cmegroup.com.
1.8 CME is the DCO for, and provides clearing services to, each of the CMEG Exchanges. CME also serves as the central counterparty for all trades executed on the CMEG Exchanges and all OTC trades submitted for clearing.
1.9 CME's clearing members consist of banks, securities houses/investment banks, commodity brokers and traders and, to a very limited extent, industrial companies.
1.10 CME does not have any offices or maintain other physical installations in Ontario or any other Canadian province or territory, except for a CMEG marketing office in Calgary, Alberta whose activities are limited to marketing and development of energy products.
1.11 CME currently has three clearing members that have a head office or principal place of business in Ontario and that are OTC derivatives clearing members, with privileges to clear IRS OTC derivatives products on their own behalf, and on behalf of their branches and affiliated companies. In addition, one of such clearing members is a COMEX clearing member (COMEX Exchange Clearing Member) that currently has privileges to clear COMEX exchange-listed futures and options on futures on its own behalf, and on behalf of its branches and affiliated companies. It became a COMEX Exchange Clearing Member on December 1, 1997.
1.12 CME Clearport is a web-based graphical user interface owned, maintained and operated by CME to view and submit bilaterally negotiated transactions (e.g., block trades, OTC swap futures substituted for exchange-traded futures and OTC derivatives) into CME for clearing and settlement services by clearing firms and their customers in the U.S. CME ClearPort is not a clearing system as it does not clear trades or serve as a central counterparty for trades submitted via CME ClearPort to CME in the U.S.
1.13 CME proposes to offer direct clearing access in Ontario 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 as clearing members with privileges to clear OTC derivative products (OTC Derivatives Clearing Members) and exchange-traded futures and options on futures products (described in paragraph 1.7 above) on one or more of the CMEG Exchanges (CMEG Exchange Clearing Members) (together with the clearing members referred to in paragraph 1.11 above, the Ontario Clearing Members).
1.14 CME currently carries on business in Ontario pursuant to the Interim Order, as varied and restated by the Variation Order.
1.15 CME submits that it does not pose a significant risk to the Ontario capital markets and is subject to an appropriate regulatory and oversight regime in a foreign jurisdiction.
1.16 CME maintains clearing member criteria that all applicants must satisfy before their applications are accepted, including fitness criteria, review of corporate constating documentation, financial standards, operational standards, appropriate registration qualifications with applicable statutory regulatory authorities, and CME applies a due diligence process to ensure that all applicants meet the required criteria.
1.17 CME utilizes processes to minimize systemic risk, which processes include operational and financial criteria for all clearing members, margining and financial protections, the maintenance of a clearing/guarantee fund, sound information systems, comprehensive internal controls, ongoing monitoring of clearing members, and appropriate oversight by the Board of Directors.
AND WHEREAS CME has agreed to the respective terms and conditions as set out in Schedule "B" to this order;
AND WHEREAS based on the Application and the representations CME has made to the Commission, the Commission has determined that CME satisfies the criteria set out in Schedule "A" and that the granting of the order exempting CME from the requirement to be recognized as a clearing agency under subsection 21.2(0.1) of the Act would not be prejudicial to the public interest;
AND WHEREAS the Commission will monitor developments in international and domestic capital markets and CME's activities on an ongoing basis to determine whether it is appropriate that CME continue to be exempted from the requirement to be recognized as a clearing agency and, if so, whether it is appropriate that it continue to be exempted subject to the terms and conditions in this order;
IT IS HEREBY ORDERED by the Commission that, pursuant to section 147 of the Act, CME is exempt from recognition as a clearing agency under subsection 21.2(0.1) of the Act;
PROVIDED THAT CME complies with the terms and conditions attached hereto as Schedule "B", as applicable.
DATED at Toronto, June 27, 2013.
"Edward P. Kerwin"
Criteria for Exemption from Recognition by the Ontario Securities Commission
as a Clearing Agency pursuant to section 21.1(0.1) of the Securities Act (Ontario)
PART 1. Governance
1.1 The governance structure and governance arrangements of the clearing agency ensures:
(a) effective oversight of the clearing agency;
(b) the clearing agency's activities are in keeping with its public interest mandate;
(c) fair, meaningful and diverse representation on the governing body (Board) and any committees of the Board, including a reasonable proportion of independent directors;
(d) a proper balance among the interests of the owners and the different entities seeking access (participants) to the clearing, settlement and depository services and facilities (settlement services) of the clearing agency;
(e) the clearing agency has policies and procedures to appropriately identify and manage conflicts of interest;
(f) each director or officer of the clearing agency, and each person or company that owns or controls, directly or indirectly, more than 10 percent of the clearing agency is a fit and proper person; and
(g) there are appropriate qualifications, limitation of liability and indemnity provisions for directors and officers of the clearing agency.
PART 2. Fees
2.1 All fees imposed by the clearing agency are equitably allocated. The fees do not have the effect of creating unreasonable barriers to access.
2.2 The process for setting fees is fair and appropriate, and the fee model is transparent.
PART 3. Access
3.1 The clearing agency has appropriate written standards for access to its services.
3.2 The access standards and the process for obtaining, limiting and denying access are fair and transparent. A clearing agency keeps records of
(a) each grant of access including, for each participant, the reasons for granting such access, and
(b) each denial or limitation of access, including the reasons for denying or limiting access to an applicant.
PART 4. Rules and Rulemaking
4.1 The clearing agency's rules are designed to govern all aspects of the settlement services offered by the clearing agency, and
(a) are not inconsistent with securities legislation,
(b) do not permit unreasonable discrimination among participants, and
(c) do not impose any burden on competition that is not necessary or appropriate.
4.2 The clearing agency's rules and the process for adopting new rules or amending existing rules should be transparent to participants and the general public.
4.3 The clearing agency monitors participant activities to ensure compliance with the rules.
4.4 The rules set out appropriate sanctions in the event of non-compliance by participants.
PART 5. Due Process
5.1 For any decision made by the clearing agency that affects an applicant or a participant, including a decision in relation to access, the clearing agency ensures that:
(a) an applicant or a participant is given an opportunity to be heard or make representations; and
(b) the clearing agency keeps a record of, gives reasons for, and provides for appeals or reviews of, its decisions.
PART 6. Risk Management
6.1 The clearing agency's settlement services are designed to minimize systemic risk.
6.2 The clearing agency has appropriate risk management policies and procedures and internal controls in place.
6.3 Without limiting the generality of the foregoing, the clearing agency's services or functions are designed to achieve the following objectives:
1. Where the clearing agency acts as a central counterparty, it rigorously controls the risks it assumes.
2. The clearing agency minimizes principal risk by linking securities transfers to funds transfers in a way that achieves delivery versus payment.
3. Final settlement occurs no later than the end of the settlement day. Intraday or real-time finality is provided where necessary to reduce risks.
4. Where the clearing agency extends intraday credit to participants, including a clearing agency that operates net settlement systems, it institutes risk controls that, at a minimum, ensure timely settlement in the event that the participant with the largest payment obligation is unable to settle.
5. Assets used to settle the ultimate payment obligations arising from securities transactions carry little or no credit or liquidity risk. If central bank money is not used, steps are to be taken to protect participants in settlement services from potential losses and liquidity pressures arising from the failure of the cash settlement agent whose assets are used for that purpose.
6. If the clearing agency establishes links to settle cross-border trades, it designs and operates such links to reduce effectively the risks associated with cross-border settlements.
6.4 The clearing agency engaging in activities not related to settlement services carries on such activities in a manner that prevents the spillover of risk to the clearing agency that might affect its financial viability or negatively impact any of the participants in the settlement service.
PART 7. Systems and Technology
7.1 For its settlement services systems, the clearing agency:
(a) develops and maintains,
(i) reasonable business continuity and disaster recovery plans,
(ii) an adequate system of internal control,
(iii) adequate information technology general controls, including controls relating to information systems operations, information security, change management, problem management, network support, and system software support;
(b) on a reasonably frequent basis, and in any event, at least annually, and in a manner that is consistent with prudent business practice,
(i) makes reasonable current and future capacity estimates,
(ii) conducts capacity stress tests to determine the ability of those systems to process transactions in an accurate, timely and efficient manner,
(iii) tests its business continuity and disaster recovery plans; and
(c) promptly notifies the regulator of any material systems failures.
7.2 The clearing agency annually engages a qualified party to conduct an independent systems review and prepare a report in accordance with established audit standards regarding its compliance with section 7.1(a).
PART 8. Financial Viability and Reporting
8.1 The clearing agency has sufficient financial resources for the proper performance of its functions and to meet its responsibilities and allocates sufficient financial and staff resources to carry out its functions as a clearing agency in a manner that is consistent with any regulatory requirements.
PART 9. Operational Reliability
9.1 The clearing agency has procedures and processes to ensure the provision of accurate and reliable settlement services to participants.
PART 10. Protection of Assets
10.1 The clearing agency has established accounting practices, internal controls, and safekeeping and segregation procedures to protect the assets that are held by the clearing agency.
PART 11. Outsourcing
11.1 Where the clearing agency has outsourced any of its key functions, it has appropriate and formal arrangements and processes in place that permit it to meet its obligations and that are in accordance with industry best practices. The outsourcing arrangement provides regulatory authorities with access to all data, information, and systems maintained by the third party service provider required for the purposes of regulatory oversight of the agency.
PART 12. Information Sharing and Regulatory Cooperation
12.1 For regulatory purposes, the clearing agency cooperates by sharing information or otherwise with the Commission and its staff, self-regulatory organizations, exchanges, quotation and trade reporting systems, alternative trading systems, other clearing agencies, investor protection funds, and other appropriate regulatory bodies.
Terms and Conditions
For the purposes of this Schedule "B":
"Clearing Member" means a clearing member as defined under CME's rules;
"client clearing" means the ability of a Clearing Member to clear transactions at CME for and on behalf of a client who is not a Clearing Member;
"rule" means any provision or other requirement in CME's rulebook, operating procedures or manuals, user guides, or similar documents governing rights and obligations between CME and the Clearing Members or among the Clearing Members;
"U.S. Authorities" means the CFTC, SEC and any other authority in the United States that has or may have jurisdiction over CME.
Unless the context otherwise requires, other terms used in this Schedule "B" have the meanings ascribed to them in Ontario securities law (including terms defined elsewhere in this exemption order).
REGULATION OF CME
1. CME will maintain its registration as a DCO and as a deemed-registered securities clearing agency in the United States and will continue to be subject to the regulatory oversight of the U.S. Authorities.
2. CME will continue to comply with its ongoing regulatory requirements as a DCO and as a deemed-registered securities clearing agency in the United States.
3. CME will continue to meet the criteria for exemption from recognition as a clearing agency as set out in Schedule "A".
4. CME will continue to promote a corporate governance structure that minimizes the potential for any conflicts of interest between CMEG (and its affiliates) and CME that could adversely affect the clearance and settlement of trades in contracts or the effectiveness of CME's risk management policies, controls, and standards.
Filings with U.S. Authorities
5. CME will promptly provide staff of the Commission the following information to the extent that it is required to file such information with the U.S. Authorities:
(a) the annual audited financial statements of CME;
(b) details of any material legal proceeding instituted against it;
(c) notification that CME has failed to comply with an undisputed obligation to pay money or deliver property to a Clearing Member for a period of thirty days after receiving notice from the Clearing Member of CME's past due obligation;
(d) notification that CME has instituted a petition for a judgment of bankruptcy or insolvency or similar relief, or to wind up or liquidate CME or has a proceeding for any such petition instituted against it;
(e) the appointment of a receiver or the making of any voluntary arrangement with creditors; and
(f) material changes to its bylaws and rules.
6. CME will promptly notify staff of the Commission of any of the following:
(a) any material change to its business or operations or the information as provided in the Application;
(b) any material problem with the clearance and settlement of transactions in contracts cleared by CME that could materially affect the financial viability of CME;
(c) any event of default by an Ontario Clearing Member;
(d) any material system failure of a clearing service utilized by an Ontario Clearing Member;
(e) any material change or proposed material change in CME's status as a DCO or deemed securities clearing agency or to the regulatory oversight by the U.S. Authorities; and
(f) the admission of any new Ontario Clearing Member or any other Ontario resident that has entered into a direct connection arrangement with CME for facilitating the Ontario resident's direct access to one or more CME systems.
7. CME will maintain the following updated information and submit such information to the Commission in a manner and form acceptable to the Commission on a quarterly basis (by the end of the month following the end of the calendar quarter), and at any time promptly upon the request of staff of the Commission:
(a) a current list of all Ontario Clearing Members;
(b) a list of all Ontario Clearing Members against whom disciplinary action has been taken in the quarter by CME or, to the best of CME's knowledge, by the U.S. Authorities with respect to such Ontario Clearing Members' clearing activities on CME;
(c) a list of all referrals for disciplinary action by CME relating to Ontario Clearing Members;
(d) a list of all Ontario applicants who have been denied clearing member status in CME in the quarter;
(e) the average daily volume of exchange-traded products and the notional value of trades of OTC derivatives cleared by asset class during the quarter, for each Ontario Clearing Member;
(f) the percentage of total volume of exchange-traded products along with the notional value of trades of OTC derivatives cleared by asset class during the quarter for all Clearing Members that represents the total volume and value of trades cleared during the quarter for each Ontario Clearing Member;
(g) the aggregate total margin amount required by CME ending on the last trading day during the quarter for each Ontario Clearing Member;
(h) the portion of the total margin required by CME ending on the last trading day of the quarter for all Clearing Members that represents the total margin required during the quarter for each Ontario Clearing Member;
(i) the Guaranty Fund contribution for each Ontario Clearing Member on the last trading day during the quarter for each Ontario Clearing Member and the proportion of the total Guaranty Fund contributions;
(j) a list of Ontario Clearing Members who have received permission or approval by CME during the quarter to:
1) perform client clearing at CME; or
2) clear at CME new classes of products that the Ontario Clearing Member was not otherwise permitted or approved to clear under the terms of its CME membership;
(k) a summary of risk management analysis related to the adequacy of required margin and the level of the guaranty funds, including but not limited to stress testing and back testing results;
(l) based on information available to CME, the aggregate notional value and volume of transactions cleared during the quarter by Clearing Members for and on behalf of clients that are Ontario residents; and, where CME has subsequently verified the accuracy of such aggregate client clearing information for any previous quarters, any summary that describes the results of such verification including any reconciliation of the information previously reported to the Commission;
(m) to the extent CME becomes aware of the offering of client clearing to Ontario residents by a Clearing Member, the identity of such Clearing Member and its jurisdiction of incorporation (including that of its ultimate parent) that provides such client clearing services to Ontario residents including, where known,
1) the name of each of the Ontario residents receiving such services; and
2) the value and volume of transactions cleared by asset class during the quarter for and on behalf of each Ontario resident;
(n) any other information in relation to an OTC derivative cleared by CME for Ontario Clearing Members as may be required by the Commission from time to time in order to carry out the Commission's mandate; and
(o) a copy of the bylaws and rules showing all cumulative changes to the bylaws and rules made during the quarter.
8. CME will provide such information as may be requested from time to time by, and otherwise cooperate with, the Commission or its staff, subject to any applicable privacy or other laws (including solicitor-client privilege) governing the sharing of information and the protection of personal information.
9. Unless otherwise prohibited under applicable law, CME will share information relating to regulatory and enforcement matters and otherwise cooperate with other recognized and exempt clearing agencies on such matters, as appropriate.
SUBMISSION TO JURISDICTION AND AGENT FOR SERVICE
10. With respect to a proceeding brought by the Commission arising out of, related to, concerning or in any other manner connected with the Commission's regulation and oversight of CME's activities in Ontario, CME shall submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario.
11. For greater certainty, CME shall file with the Commission a valid and binding appointment of an agent for service in Ontario upon whom the Commission may serve 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 Commission's regulation and oversight of CME's activities in Ontario.