Application under section 21.2 of the Securities Act (Ontario) (Act) by Canadian Derivatives Clearing Corporation to be recognized as a clearing agency.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., s. 21.2.
IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, C. S.5, AS AMENDED ("Act") AND IN THE MATTER OF THE CANADIAN DERIVATIVES CLEARING CORPORATION
ORDER (Subsection 21.2(0.1) of the Act)
WHEREAS the Canadian Derivatives Clearing Corporation ("CDCC") has filed an application ("Application") with the Ontario Securities Commission ("Commission") requesting an order pursuant to subsection 21.2(0.1) of the Act recognizing CDCC as a clearing agency in Ontario;
AND WHEREAS on February 15, 2011, the Commission issued an order ("Temporary Exemption Order"), pursuant to section 147 of the Act, temporarily exempting CDCC from the requirement in subsection 21.2(0.1) of the Act to be recognized as a clearing agency;
AND WHEREAS on February 14, 2012, February 26, 2013, June 7, 2013, October 8, 2013 and February 11, 2014, the Commission issued orders to vary the Temporary Exemption Order, pursuant to Section 144 of the Act, to, among other things, extend the date of expiration of the Temporary Exemption Order;
AND WHEREAS the Temporary Exemption Order, as varied, provides that CDCC is exempted from the recognition requirement until the earlier of (i) the date the Commission renders a subsequent order recognizing CDCC 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 (ii) May 30, 2014, subject to the terms and conditions set forth in Schedule "A" of the Temporary Exemption Order, as varied;
AND WHEREAS the Temporary Exemption Order, as varied, will be replaced by this order and therefore be automatically revoked upon issuance of this order;
AND WHEREAS CDCC has represented the following facts to the Commission:
1. CDCC is incorporated under the Canada Business Corporations Act and has its registered office in Montréal, Québec;
2. Originating in 1975 as the clearing facility for the first Canadian equity options market, CDCC expanded its service offerings to the Canadian derivatives marketplace over time and acquired its current name in 1996;
3. CDCC currently offers central counterparty ("CCP") clearing services in Canada for:
a. financially or physically settled interest rate and equity futures and options traded on the Bourse de Montréal Inc. (the "Bourse");
b. financially or physically settled over-the-counter equity options; and
c. fixed income transactions (the "Fixed Income CCP Service");
4. CDCC is wholly-owned by the Bourse;
5. The Bourse, in turn, is an indirect wholly-owned subsidiary of TMX Group Limited, a public company, the common shares of which are listed on Toronto Stock Exchange;
6. TMX Group Limited is formerly known as Maple Group Acquisition Corporation, which completed in September 2012 a multi-step transaction (the "Maple Transactions") to acquire all of the issued and outstanding voting securities of TMX Group Inc. and other entities operating marketplaces and clearing agencies in Canada;
7. As a result of the Maple Transactions, TMX Group Limited wholly owns indirectly both CDCC and CDS Clearing and Depository Services Inc. ("CDS"), a recognized clearing agency that operates the securities settlement system and central securities depository in Canada;
8. The Fixed Income CCP Service is a clearing service that was launched by CDCC on February 21, 2012;
9. The Fixed Income CCP Service currently provides CCP clearing services for bilaterally-traded repurchase ("repo") transactions of Canadian and provincial government securities entered into among approved fixed income CDCC clearing members, and includes blind repo trades introduced by inter-dealer brokers;
10. On March 11, 2013, CDCC expanded the scope of the Fixed Income CCP Service to provide CCP clearing services for cash buy or sell trades of such government securities;
11. CDCC intends to further expand the scope of the Fixed Income CCP Service to provide CCP clearing services for so-called "general collateral" repo transactions, whereby the underlying securities of a repo transaction consists of a "basket" of acceptable government securities instead of an individual security;
12. To operate the Fixed Income CCP Service, CDCC has a link with CDS, which (i) facilitates the entering and transmission to CDCC of all necessary information relating to fixed income transactions that are to be novated and netted by CDCC and (ii) settles by book-entry on a delivery-versus-payment basis the transactions that are novated and netted by CDCC, with CDCC being on one side of all the cleared transactions in its capacity as the CCP and a participant of CDS being on the other side;
13. To manage counterparty credit risk, and protect CDCC, its clearing members and, indirectly, their clients, against extreme but plausible market events, CDCC has implemented risk management procedures, including: (i) maintaining minimum membership standards, (ii) assessing market exposure and requiring margin to cover such exposure from its clearing members, (iii) monitoring the capital margin ratio of each clearing member, (iv) collecting and holding clearing fund contributions from its clearing members, (v) accepting highly liquid assets as collateral, and (vi) having a default management process in place;
14. CDCC manages liquidity risk through a calibration of its collateral policy as well as commercial bank liquidity facilities, and regularly reviews its liquidity exposures;
15. CDCC has committed five million dollars in capital to the default management waterfall that would be applied to a suffered loss prior to applying the clearing fund assets of the non-defaulting clearing members;
16. To measure and monitor the adequacy of its financial resources and identify any shortcomings in its overall financial risk model, CDCC performs daily stress testing that simulates eighteen market events on open clearing member positions, as well as daily backtesting of open clearing member positions at both the product and portfolio levels;
17. CDCC's board of directors receives advice and non-binding recommendations with respect to CDCC risk management issues from, among others, a Risk Management Advisory Committee, whose members must have a requisite level of expertise and be familiar with the risk management objectives of clearing agencies that settle and guarantee derivative instruments;
18. CDCC has been regulated and overseen by the Autorité des marchés financiers ("AMF") in Québec since 1987, and currently is recognized by the AMF as a clearinghouse under section 12 of the Derivatives Act (Québec) ("QDA") pursuant to decision No. 2012-PDG-0078 dated May 2, 2012, as amended by decision No. 2012-PDG-0146 dated July 4, 2012, which are set out in Schedule "B" to this order (the "AMF Decisions"), and is exempt by the AMF from obtaining recognition as a clearing house under the Securities Act (Québec) ("QSA") pursuant to the AMF Decisions;
19. The Bourse is also subject to the regulatory oversight of the AMF, which acts as lead regulator of the Bourse in Canada;
20. Effective April 30, 2012, the Governor of the Bank of Canada ("BOC") designated CDCC's clearing and settlement system, the Canadian Derivatives Clearing Service ("CDCS"), pursuant to subsection 4(1) of the Payment Clearing and Settlement Act (Canada) (the "PCSA"); as a consequence of this designation, CDCS is subject to Part I -- Clearing and Settlement System Regulation -- of the PCSA and the BOC's regulatory oversight;
21. Amendments to CDCC's rules and procedures are generally:
a. subject to review by the AMF and implemented by CDCC by way of a self-certification process in accordance with the QDA regulations,
b. subject to review and prior approval by the BOC in accordance with a regulatory oversight agreement;
AND WHEREAS the Commission considers the proper operation of a clearing agency as essential to investor protection and maintaining a fair and efficient capital market, and the Commission may recognise a clearing agency, pursuant to section 21.2 of the Act, if it is satisfied that it is in the public interest to do so;
AND WHEREAS the Commission considers the operation of a clearing agency in the public interest to include, among other things, appropriate governance arrangements, fair access and services to all market participants, adequate management of risk, including systemic risk, and operational reliability, fair and non-discriminatory fees, and appropriate rules and procedures that do not impose a burden on competition in the Canadian financial markets;
AND WHEREAS the Commission considers certain aspects of CDCC's activities, particularly the Fixed-Income CCP Service and any potential expansion of CCP clearing of derivatives transactions, to be important to Ontario's capital markets, and therefore proposes to recognize CDCC and regulate it in coordination and cooperation with the regulatory oversight undertaken by the BOC and AMF;
AND WHEREAS the Bourse has been exempted by the Commission since 2004 from the requirement to be recognized as an exchange under section 21 of the Act and from registration as a commodity futures exchange under section 15 of the Commodity Futures Act (Ontario) ("CFA"), subject to certain terms and conditions;
AND WHEREAS the current terms and conditions of the Commission's exemption order granted to the Bourse include requirements that, to the extent that CDCC is recognized by the Commission as a clearing agency under the Act or a clearing house under the CFA, or is exempted from any requirement to be recognized, the Bourse shall cause CDCC to:
(a) carry out its activities as a clearing agency recognized or exempted from recognition under section 21.2 of the Act and in compliance with Ontario securities law, as and where applicable, and
(b) comply with any terms and conditions imposed on CDCC through any order recognizing it as a clearing agency, or exempting it from recognition as a clearing agency, under section 21.2 of the Act;
AND WHEREAS the Commission considers that reliance on the AMF's regulatory oversight of CDCC's activities relating to the clearing of trades in Bourse listed or traded products would generally be appropriate;
AND WHEREAS CDCC has agreed to the respective terms and conditions as set out in Schedule "C" to this order;
AND WHEREAS based on the Application and the representations that CDCC has made to the Commission, the Commission has determined that:
(a) CDCC satisfies the applicable criteria for recognition set out in Schedule "A" to this order; and
(b) it is in the public interest to recognize CDCC as a clearing agency pursuant to section 21.2 of the Act, subject to terms and conditions that are set out in Schedule "C" to this order;
AND WHEREAS the Commission will monitor developments in international and domestic capital markets and CDCC's activities on an ongoing basis to determine whether the terms and conditions in this order continue to be appropriate;
IT IS HEREBY ORDERED that pursuant to subsection 21.2(0.1) of the Act, CDCC is recognized as a clearing agency, provided CDCC complies with the terms and conditions set out in Schedule "C".
DATED this 8th day of April, 2014 and effective immediately.
SCHEDULE "A" -- CRITERIA FOR RECOGNITION
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 participants' 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 paragraph 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 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.
SCHEDULE "B" -- AMF DECISIONS
[Note from Bulletin Editor: The AMF Decisions are not reproduced in the Bulletin. Both the official French version and translated English version of the AMF Decisions are accessible from the OSC's Website at www.osc.gov.on.ca. The AMF Decisions are also accessible from the AMF's Website at www.lautorite.qc.ca.]
SCHEDULE "C" -- TERMS AND CONDITIONS
Part I -- Definitions
For the purposes of this Schedule "C":
"financial risk model" means the mechanisms adopted by CDCC to manage the risk of potential loss in the provision of clearing services for securities and derivatives transactions due to the failure of a Clearing Member to fulfill its obligations, and for greater certainty:
(i) includes margin and clearing fund calculation models, stress and backtesting policies and procedures for determining the adequacy of CDCC's total financial resources, collateral and treasury management policies and procedures, and other tools to manage CDCC's credit and liquidity risk, but
(ii) does not include mechanisms to manage business or operational risk;
"FMI Principles" means the international standards for financial market infrastructures established by the Committee on Payment and Settlement Systems (CPSS) and Technical Committee of the International Organization of Securities Commissions (IOSCO) in their April 2012 report Principles for financial market infrastructures;
"IT Systems" means CDCC's information technology systems supporting the services or the business operations of CDCC;
"Clearing Member" means a clearing member that uses the services offered by CDCC which are governed by the CDCC's Rules;
"Ontario securities law" has the meaning ascribed to it in subsection 1(1) of the Act; and
"Rule" has the meaning ascribed to it in section 2 of the Rule Protocol at Appendix "A" to this schedule.
Unless the context otherwise requires, other terms used in this Schedule "C" have the meanings ascribed to them in Ontario securities law (including terms defined elsewhere in this recognition order).
Part 2-Terms and Conditions
1 REGULATION OF CDCC
1.1 CDCC shall continue to be a recognized clearinghouse under the QDA and an exempt clearing house under the QSA and be subject to the AMF's regulatory oversight.
1.2 CDCC shall continue to meet the terms and conditions set out in Part IV of the AMF Decisions (except terms and condition II(b)(iv), III and IV thereof).
1.3 CDCS shall continue to be designated by the BOC under the PCSA and be subject to the BOC's regulatory oversight.
1.4 CDCC shall inform the Commission in writing, promptly upon becoming aware, of any proposed change to the AMF's recognition of CDCC or the BOC's designation of the CDCS, including any proposed change to the terms and conditions of recognition as a clearinghouse under the QDA or exemption from recognition as a clearing house under the QSA and to the respective regulatory oversight of the AMF and BOC.
1.5 CDCC shall continue to meet the criteria for recognition in Schedule "A" to this order, as applicable.
2 OWNERSHIP OF CDCC
2.1 CDCC shall inform the Commission in writing, promptly upon becoming aware, of any (i) change in ownership of its share capital or (ii) agreement governing the exercise of voting rights attached to any class or series of its voting shares.
3 PUBLIC INTEREST RESPONSIBILITY
3.1 CDCC's board of directors shall provide a written report to the Commission at least annually, or as required by the Commission, describing how CDCC is meeting its public interest responsibility.
4.1 CDCC shall promote within CDCC a governance structure that minimizes the potential for any conflict of interest between CDCC and its shareholder(s) that could adversely affect the clearing of products cleared by CDCC or the effectiveness of CDCC's risk management policies, controls and standards.
5.1 With respect to the Fixed Income CCP Service or any other CCP service for transactions in the cash markets and only for as long as CDCC offers such services:
(a) CDCC shall allow any person or company, including other third party post-trade service providers, that meets CDCC's minimum operational requirements, to interface or connect to any of its services or systems on a commercially reasonable basis;
(b) the Rules or any other arrangements between CDCC and its Clearing Members or between CDCC and a cash marketplace shall:
(i) be designed to foster cooperation and coordination with persons engaged in the clearance and settlement of securities transactions and to remove impediments to the prompt and accurate clearance and settlement of securities transactions;
(ii) not unreasonably create an impediment to competition including in respect of securities trades that are executed on marketplaces, or processed by third party post-trade service providers, not owned or controlled by TMX Group Limited; and
(iii) without limiting the generality of the foregoing, not unreasonably prohibit, limit or impede, directly or indirectly, the ability of Clearing Members to engage other third party post-trade service providers or use the provision of their services.
6.1 CDCC shall provide timely notice to its Clearing Members, the public and its regulators of any changes to fees charged by CDCC for its services.
6.2 CDCC shall file concurrently with the Commission all the reports filed with other regulatory authorities regarding the review of the fees and fee models related to clearing or other services of CDCC and any of its affiliates.
6.3 If the Commission considers that it would be in the public interest, it may, within 10 business days of receipt of the filing under paragraph 6.1 of a new or changed fee, object to such new or changed fee. In the event that the Commission so objects, CDCC shall withdraw the new or changed fee.
6.4 CDCC's process for setting fees for any of its services shall provide for meaningful input from the risk and audit committee of its board of directors.
7 CPSS-IOSCO STANDARDS
7.1 CDCC shall conduct a self-assessment against the FMI Principles as and when required by CDCC's regulators, and prepare a written report on the findings, conclusions and recommendations for addressing any gaps. CDCC shall provide the report to its board of directors promptly after the report's completion and then to the Commission within 30 days of providing it to its board of directors.
8 RISK CONTROLS
8.1 CDCC's financial risk model shall be reviewed every four years, or at other times required by the Commission, by an independent qualified party, acceptable to the Commission; the independent qualified party shall prepare a written report of its review and provide the report to CDCC's board of directors promptly after the report's completion and then to the Commission within 30 days of providing it to its board of directors.
9. ACCESS TO INFORMATION AND CONFIDENTIALITY OF INFORMATION
9.1 CDCC shall make available to the Commission, on request, all the data and information in CDCC's possession and which the Commission may need (i) to evaluate CDCC's performance of its clearing activities and its compliance with the terms and conditions of this order, or (ii) generally in order to carry out its mandate. Without limiting the generality of the foregoing, CDCC shall provide the data and information described in Appendix "C" to this Schedule "C" on an ongoing basis at the intervals indicated therein.
9.2 The disclosure or sharing of information by CDCC or any of its affiliates pursuant to this order is subject to any confidentiality provisions contained in agreements entered into between CDCC and the BOC pertaining to information received from the BOC.
9.3 CDCC shall not release Clearing Members' confidential information to a person or company other than CDCC's affiliates, the Clearing Member, CDCC's regulators, other securities regulatory authorities, or regulation services providers unless:
(a) the Clearing Member has consented in writing to the release of the information;
(b) the release of the information is required by Ontario securities law or other applicable law; or
(c) the information has been publicly disclosed by another person or company, and CDCC reasonably believes that the disclosure was lawful.
9.4 CDCC shall implement reasonable safeguards and procedures to protect Clearing Members' information, including limiting access to such Clearing Member information to CDCC's affiliates and employees, or persons or companies retained by CDCC to operate the system.
9.5 CDCC shall implement adequate oversight procedures to ensure that the safeguards and procedures established under paragraph 9.4 are followed.
10.1 CDCC shall file with the Commission all Rules and amendments to Rules subject to and in accordance with the Rule Protocol attached as Appendix "A" to this Schedule, as amended from time to time.
11 FINANCIAL VIABILITY
11.1 CDCC shall file with the Commission unaudited quarterly financial statements, without notes, within 60 days of the end of quarters one through three and audited annual financial statements within 90 days of each fiscal year end, all prepared in accordance with Canadian GAAP applicable to publicly accountable enterprises. The quarterly and annual financial statements of CDCC shall be provided on a separate and consolidated basis (if CDCC has one or more subsidiaries). Any annual report provided to CDCC's shareholder(s) shall be concurrently filed by CDCC with the Commission.
11.2 CDCC shall file with the Commission its annual budget, accompanied by the underlying assumptions, approved by its board of directors. The annual and quarterly financial statements of CDCC shall include a budget analysis of the results of the relevant period, as well as a comparative analysis of the results in relation to the corresponding period of the previous fiscal year.
11.3 CDCC shall meet the financial ratios and related threshold tests that may be agreed upon from time to time between CDCC and Commission staff, and shall file on a quarterly basis the calculations of such ratios together with the financial statements required under this section.
11.4 CDCC shall promptly notify the Commission upon becoming aware that it is no longer or will no longer meet one or more of the tests described in paragraph 11.3 or otherwise be able to maintain sufficient financial or other resources it needs to ensure its financial viability and the performance of its clearing functions, in a manner that is consistent with the public interest and in accordance with the terms and conditions of this decision.
12 SYSTEMS CAPACITY, INTEGRITY AND SECURITY
12.1 CDCC shall promptly notify the Commission of any material systems failure or other major operating delay or failure affecting its IT Systems, including any communication failure with the systems.
12.2 Before implementing a significant change affecting its IT Systems, CDCC shall file a written description of the change at least 45 days in advance with the Commission.
12.3 For any change to its IT Systems other than a change contemplated in paragraph 12.2, CDCC shall file a description of the change with the Commission, within a time limit of 30 days following the end of the calendar quarter during which the change occurred.
12.4 CDCC shall provide at least 30 days prior notice to the Commission before finalizing the scope of the review required under criteria for recognition 7.2 and the Commission may request amendments to the scope. CDCC shall file the report of the review with the Commission within 30 days after the presentation of the report to CDCC's board of directors or to the board's risk and audit committee.
13 REPORTING OBLIGATIONS
13.1 CDCC shall comply with Appendix "B" and Appendix "C" to this Schedule "C" setting out the reporting obligations, as amended from time to time, regarding the reporting of information to the Commission.
Appendix "A" to Schedule "C"
RULE PROTOCOL REGARDING THE REVIEW AND, WHERE APPROPRIATE, APPROVAL AND PUBLICATION BY THE ONTARIO SECURITIES COMMISSION OF RULES OF THE CANADIAN DERIVATIVES CLEARING CORPORATION
1. Purpose of the Protocol
On April 8, 2014, the Commission issued a recognition order ("Recognition Order") with terms and conditions governing the recognition of CDCC as a clearing agency pursuant to subsection 21.2(0.1) of the Act. In accordance with the Recognition Order, CDCC will file, among other things, its Rules with the Commission for review and, where appropriate, approval and publication. This protocol ("Protocol") sets out the procedures for the submission of a Rule by CDCC for the review and, where appropriate, approval and publication of the Rule by the Commission.
(a) In addition to terms defined elsewhere in the Recognition Order, in this Protocol:
"MOU" means a memorandum of understanding among CDCC's Canadian regulators respecting the regulatory oversight of certain commonly regulated clearing and settlement systems, including CDCC, as amended from time to time, which is expected to be published by the regulators on April 10, 2014;
"Proposed Rule Implementation Date" means the date determined by CDCC pursuant to the QDA Rule Self-certification Process to be the date when a Rule is proposed to come into effect as a binding and enforceable Rule;
"QDA Regulation" means the Derivatives Regulation made in the Province of Québec under the QDA, as amended from time to time;
"QDA Rule Self-certification Process" means, in relation to a proposed Rule, the process by which the Rule is to be implemented in the Province of Québec pursuant to the QDA Regulation;
"Rule" means any provision or other requirement in CDCC's rulebook, operating procedures or manuals, user guides, or similar documents governing rights and obligations between CDCC and the Clearing Members or among the Clearing Members; and includes for the purposes of this Protocol, any proposed new Rule or amendment to or deletion of an existing Rule.
(b) Unless the context otherwise requires, other terms used in this Protocol have the respective meanings ascribed to them in:
(i) Ontario securities law, as defined in the Act; or
(ii) Ontario commodity futures law, as defined in the Commodity Futures Act (Ontario).
3. Classification of Rules
(a) Initial classification
CDCC will present a Rule change as a "Rule Change Requiring Approval in Ontario" or a "Rule Change Not Requiring Approval in Ontario" for the purposes of this Protocol.
(b) Rule Change Requiring Approval in Ontario
For the purpose of this Protocol, a Rule will be classified as a Rule Change Requiring Approval in Ontario if it meets the following two conditions:
(i) the Rule is required to be subject to public consultation under the QDA Rule Self-certification Process; and
(ii) it pertains to the Fixed Income CCP Service or any CCP service for the clearing and settlement of derivatives trades.
(c) Rule Change Not Requiring Approval in Ontario
For the purpose of this Protocol, a Rule will be classified as a Rule Change Not Requiring Approval in Ontario if it is not a Rule Change Requiring Approval in Ontario.
(d) Disagreement with Classification
Where Commission staff disagree with classification of a Rule as a Rule Change Not Requiring Approval in Ontario, the following process will apply:
(i) Commission staff will provide a written explanation to CDCC (with copy to CDCC's other regulators in accordance with the terms of the MOU) of its reasons for disagreeing with the classification of the Rule within the following timelines:
(A) within five (5) business days of receipt of CDCC's filing where CDCC has classified the Rule as a Rule Change Not Requiring Approval in Ontario because it is of the opinion that an emergency situation so requires in accordance with the QDA Regulation; and
(B) within twenty-one (21) business days of receipt of CDCC's filing in all other cases;
(ii) Commission staff will use its best efforts to coordinate and consult with CDCC's other regulators in accordance with the MOU to seek consensus as to the classification of the Rule;
(iii) following receipt of Commission staff's written explanation and confirmation that staff have consulted with CDCC's other regulators in accordance with the MOU regarding the disagreement, CDCC will suspend the operation of the Rule; CDCC may also, if it so chooses, reclassify the Rule as a Rule Requiring Approval in Ontario and resubmit it in accordance with the rule submission procedures set out in Section 4, with necessary modifications;
(iv) the operation of the Rule will be suspended until such time as the disagreement on the classification of the Rule has been resolved or the Commission approves the Rule.
(e) Power to Reclassify a New Derivative Rule
Notwithstanding any other provision of this Protocol, where a Rule pertains to a new derivative pursuant to the QDA Regulation, Commission staff may require within 30 days of receipt of CDCC's filing of the Rule that it be immediately withdrawn and re-submitted as a Rule Change Requiring Approval in Ontario if, further to analysis, Commission staff has concerns with the potential impact of such Rule on Ontario's capital markets.
4. Rule Submission Procedures for a Rule Change Requiring Approval in Ontario
Prior to implementing a Rule Change Requiring Approval in Ontario, CDCC will obtain the Commission's approval of the Rule in accordance with this Section 4.
(a) Documents to be Filed
CDCC will file with the Commission, by electronic means all the documents that it is required to file with the AMF in respect of the Rule under the QDA Rule Self-certification Process. Where public consultation is required under the QDA Rule Self-certification Process, CDCC will disclose in its notice of publication the classification of the Rule under this Protocol and the rationale for that classification, and will include a statement that the Rule is not, in CDCC's opinion, contrary to the public interest.
(b) Confirmation of Receipt
Commission staff will endeavour to send to CDCC, within five (5) business days of receipt of the documents filed under subsection (a), a confirmation of receipt of such documents.
(c) Consultation Process
Where public consultation is required under the QDA Rule Self-certification Process, Commission staff will use its best efforts to coordinate with the AMF to publish in Ontario simultaneously the notice and text of the Rule filed by CDCC under subsection (a). The notice and Rule will be subject to public comment for a period of not less than 30 days in accordance with the QDA Rule Self-certification Process. The notice will contain a statement that all comments should be sent to CDCC's counsel with a copy to the Commission.
(d) Review by Commission Staff
Commission staff will use its best efforts to conduct its review of the Rule Change Requiring Approval in Ontario and provide comments to CDCC during the public comment period or, if there is no public consultation process, within 30 days of receipt of the documents filed under subsection (a) ("Review Period"). Commission staff will concurrently provide to CDCC's other regulators copies of the Commission staff's comments provided to CDCC and any responses on such comments received from CDCC. If, at any time during the Review Period, Commission staff determines that it has further comments or requires further information from CDCC in respect of the Rule to adequately advise or prepare materials for the Commission, the Commission staff may extend the deadline for its reply by an additional period of 30 days or such other period as agreed upon by CDCC and the Commission staff, in consultation with CDCC's other regulators ("Extended Reply Deadline").
(e) CDCC Responses to Commission Staff's Comments
CDCC will respond to any comments on the Rule received from Commission staff in writing and, where applicable, provide all public comments received. In addition, CDCC will provide general responses to the key issues raised by the public comments or confirmation that it has not received public comments, as the case may be.
(f) Decision by the Commission
Commission staff will use its best efforts to prepare and submit the Rule Change Requiring Approval in Ontario for the Commission's consideration and decision prior to the Proposed Rule Implementation Date. In any event, the Commission will endeavour to render its decision in respect of the Rule within 15 days of the AMF having stated that it does not object to CDCC proceeding with self-certification of the Rule and will, in accordance with the MOU, endeavour to consult and coordinate with CDCC's other regulators in respect of the identification and resolution of any material issue arising from the proposed Rule.
(g) Publication of Notice of Decision
Commission staff will prepare and publish a short notice of the Commission's decision in respect of the Rule Change Requiring Approval in Ontario as soon as practical after notifying CDCC of the Commission's decision. Upon obtaining the Commission's approval and satisfying other regulatory requirements, as applicable, CDCC will publish a notice of coming into effect of the Rule. At a minimum, the notice of coming into effect of the Rule must contain the following information:
(i) the approved text of the Rule;
(ii) where applicable, a summary of all public comments made in the course of the consultation process and CDCC's general responses to the key issues raised by the public comments; and
(iii) if changes were made to the version published for public comment, a blacklined copy of the revised Rule.
(h) Effective Date of a Rule Change Requiring Approval in Ontario
A Rule Change Requiring Approval in Ontario will be effective as of the Proposed Rule Implementation Date (or such deferred date as may result following the Extended Reply Deadline), provided that the Commission has approved the Rule Change Requiring Approval in Ontario and all other regulatory requirements have been satisfied (including requirements under the QDA).
(i) Significant Revisions to a Rule Change Requiring Approval in Ontario
Any significant revisions to a Rule Change Requiring Approval in Ontario following its publication for comment pursuant to the QDA Rule Self-certification Process, and before its approval by regulators, will be deemed to be a new Rule for the purposes of this Protocol.
(j) Withdrawal of a Rule Change Requiring Approval in Ontario
If CDCC withdraws a Rule Change Requiring Approval in Ontario that was submitted for public comment, then it will provide a notice of withdrawal to the Commission staff. The Commission staff shall publish a notice of withdrawal as soon as practicable.
5. Rule Submission Procedures for Rule Change Not Requiring Approval in Ontario
(a) Documents to be Filed
For a Rule Change Not Requiring Approval in Ontario, CDCC will file concurrently with the Commission, by electronic means, any documents that it files with the AMF related to the Rule in accordance with the QDA Rule Self-certification Process. CDCC will also indicate the classification of the Rule for the purpose of this Protocol and the rationale for that classification, including a statement that the Rule is not, in CDCC's opinion, contrary to the public interest. Where CDCC has classified the Rule as a Rule Change Not Requiring Approval in Ontario because it pertains to a new derivative pursuant to the QDA Regulation, CDCC will provide Commission staff with a clear description of the attributes of the new product or products and their underlying interests. Where CDCC has classified the Rule as a Rule Change Not Requiring Approval in Ontario because it is being made for the purpose of harmonization or compliance with the QDA or other legislation enacted by another province or territory in Canada or by a foreign jurisdiction, CDCC will provide to Commission staff a written description or relevant extract of such legislation. Where CDCC has classified the Rule as a Rule Change Not Requiring Approval in Ontario because it is of the opinion that an emergency situation so requires in accordance with the QDA Regulation, CDCC will, no later than the business day following the effective date of the emergency rule, provide to Commission staff a written explanation of the need for the emergency rule.
(b) Confirmation of Receipt
Commission staff will endeavour to send to CDCC, within five (5) business days of receipt of the documents filed under subsection (a), a confirmation of receipt of such documents.
(c) Effective Date of Rule Change Not Requiring Approval in Ontario
The Rule will become effective on the Proposed Rule Implementation Date, provided that CDCC does not receive any communication of disagreement with the classification from Commission staff in accordance with Section 3.
6. Miscellaneous Provisions
(a) Waiving Provisions of the Protocol
Commission staff may waive any provision of this Protocol upon request from CDCC in respect of a particular Rule filed with the Commission. Such a waiver will be granted in writing by Commission staff. Any such waiver by Commission staff under this Protocol shall not be construed as a waiver of the provision itself.
This Protocol and any provision hereof may be amended at any time or times by written agreement between the Commission and CDCC.
Appendix "B" to Schedule "C"
Other reports and documents to be submitted by CDCC to the Commission
In addition to the notification, reporting and filing obligations set out in Schedule "C" to the Recognition Order, CDCC shall also comply with the reporting obligations set out below.
1. Prior Notification
1.1 CDCC shall provide to Commission staff prior notification of:
(a) any proposed change to CDCC's corporate governance structure (eg., changes to the structure of its board of directors, and changes to the structure of any of its board committees and their mandates, and changes to the structure of any of its user groups and their mandates);
(b) a decision to enter into an agreement, memorandum of understanding or other similar arrangement with any governmental or regulatory body, self-regulatory organization, clearing agency, stock exchange, other marketplace or market;
(c) a decision by CDCC to engage, either directly or through an affiliate, in a new material business activity or to cease to carry on a material business activity operated by CDCC at that time; and
(d) the establishment of any link with another clearing agency or trade repository.
2. Immediate Notification
2.1 CDCC shall inform the Commission, promptly upon becoming aware, of any event or occurrence that has caused or could reasonably be expected to cause a significant risk to; an adverse material effect on; or a significant or potential disruption to CDCC, its Clearing Members, any of its services or the Canadian financial markets, including, but not limited to, a Clearing Member being declared a "non-conforming Member" or otherwise being considered in default; fraudulent activity; or a significant breach of CDCC's rules by a Clearing Member.
2.2 CDCC shall provide to the Commission immediate notice of:
(a) the appointment of any new director or officer, including a description of the individual's employment history; and
(b) the receipt of notice of resignation from, or the resignation of a director or officer or the auditors of CDCC, including a statement of the reasons for the resignation.
2.3 CDCC shall immediately notify the Commission if it becomes:
(a) the subject of any order, directive or other similar action of a governmental or regulatory authority; or
(b) aware that it is the subject of a criminal or regulatory investigation or of a material lawsuit.
2.4 CDCC shall immediately file with the Commission copies of all notices, bulletins and similar forms of communication that CDCC sends its Clearing Members.
2.5 CDCC shall immediately file with the Commission any minutes of the board of directors, board committees, management committees and user groups promptly after their approval.
3. Quarterly Reporting
3.1 CDCC shall file quarterly with the Commission a list of the internal audit reports and risk management reports issued in the previous quarter.
4. Annual Reporting
4.1 CDCC shall provide to the Commission annually:
(a) a list of the directors and officers of CDCC;
(b) a list of the committees of the CDCC board of directors, setting out the members, mandate and responsibilities of each of the committees;
(c) a list of all Clearing Members as well as a list of Clearing Members using the Fixed Income CCP Service;
(d) CDCC's strategic plan; and
(e) CDCC's assessment of the risks it faces and the plans for addressing the risks.
Appendix "C" to Schedule "C"
Data and other information to be submitted by CDCC to the Commission
(Note: reporting requirements are considered met if the information items described below are emailed to Commission staff or are made available on CDCC's regulatory extranet system.)
1. In this Appendix "C" to Schedule "C" of the Recognition Order,
(a) "new OTC derivatives" means derivatives, within the meaning of the Act, that are not currently cleared by CDCC on the effective date of this Recognition Order; and
(b) "Ontario-based Member" means a Clearing Member that has a head office or principal place of business in Ontario.
2. CDCC 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) statistical information in respect of fixed income transactions cleared and settled through the Fixed Income CCP Service;
1) total number of transactions and net settlement value by category (blind, bilateral and cash)
2) total net settlement value of unsettled / failed CCP repo transactions divided by ISIN
3) total number and dollar value of all net settlement positions for future dated end leg transactions, separated into the following buckets:
(i) value date being less than or equal to T+1
(ii) value date greater than T+1 and less than or equal to T+7
(iii) value date greater than T+7 and less than or equal to T+29
(iv) value date greater than T+29 and less than or equal to T+90
(v) value date being after T+90
(b) aggregate volume of Bourse-traded products cleared by CDCC by asset class during the quarter for each Ontario-based Member;
(c) aggregate notional values of new OTC derivatives cleared by CDCC by asset class during the quarter, as well as total notional values of new OTC derivatives cleared by CDCC by asset class during the quarter for each Ontario-based Member;
(d) the aggregate total margin amount (initial and variation) and clearing fund contributions required by CDCC ending on the last trading day during the quarter, as well as the total margin amount (initial and variation), and clearing fund contributions for each Ontario-based Member that clears fixed income transactions and / or new OTC derivatives at CDCC;
(e) a list of Ontario-based Members who have received permission or approval by CDCC during the quarter to perform client clearing at CDCC for new OTC derivatives;
(f) to the extent CDCC becomes aware of the offering of client clearing for new OTC derivatives 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 notional value of new OTC derivatives cleared by asset class during the quarter for and on behalf of each Ontario resident;
(g) a summary of risk management analysis related to the adequacy of required margin (initial and variation) and the level of the clearing funds, including but not limited to stress testing and back testing results;
(h) any other information in relation to a new OTC derivative cleared by CDCC for Clearing Members as may be required by the Commission from time to time in order to carry out the Commission's mandate.