Application by Canadian dealer (the Applicant) for relief from the prospectus requirement in connection with the distribution of over-the-counter (OTC) foreign exchange contracts to investors resident in the Applicable Jurisdictions on the terms and conditions described in the decision which is subject to a four-year sunset clause -- Applicant is registered as an investment dealer in all provinces and a member of the Investment Industry Regulatory Organization of Canada (IIROC) -- Applicant seeking relief to permit Applicant to offer OTC foreign exchange contracts to investors in Applicable Jurisdictions on a similar basis as in Québec, including relief permitting the Applicant to distribute OTC foreign exchange contracts on the basis of providing to investors a clear and plain language risk disclosure document rather than a prospectus -- risk disclosure document contains disclosure substantially similar to risk disclosure document required for recognized options in OSC Rule 91-502 Trades in Recognized Options and the regime for OTC derivatives contemplated by former proposed OSC Rule 91-504 OTC Derivatives (which was not adopted) -- Relief granted subject to conditions.
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53 74(1).
NI 45-106 Prospectus and Registration Exemptions, s. 2.3.
OSC Rule 91-502 Trades in Recognized Options.
OSC Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario.
Proposed OSC Rule 91-504 OTC Derivatives (not adopted).
August 8, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF INTERACTIVE BROKERS CANADA INC. (the Filer)
The principal regulator in the Jurisdiction has received an application (the Application) from Interactive Brokers Canada Inc. (the Filer) for a decision under the securities legislation of the Jurisdiction (the Legislation) that the Filer and its respective officers, directors and representatives be exempt from the prospectus requirement in respect of the distribution of over-the-counter (OTC) foreign exchange contracts to permit investors resident in Canada to enter into OTC foreign exchange transactions with the Filer (referred to herein as IB Forex transactions) (the Requested Relief) subject to the terms and conditions below.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this Application (the Principal Regulator); and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces of Canada, other than the provinces of Québec and Alberta, (the Non-Principal Jurisdictions, and, together with the Jurisdiction, the Applicable Jurisdictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of Canada with its principal office in Montréal, Quebec.
2. The Filer is a member of the Interactive Brokers Group (Interactive Brokers), a leading global electronic brokerage group. Interactive Brokers provides its customers with direct, high-speed access to trade in more than 80 equity and derivatives exchanges and a growing number of Electronic Communication Networks (ECNs). Interactive Brokers Group, Inc. is currently listed on NASDAQ under the symbol "IBKR".
3. The Filer is registered as a dealer in the category of investment dealer in all provinces, a futures commission merchant in Ontario and Manitoba and is a member of the Investment Industry Regulatory Organization of Canada (IIROC).
4. The Filer does not have any securities listed or quoted on an exchange or marketplace in any jurisdiction inside or outside of Canada.
5. The Filer is, to the best of its knowledge, not in default of any requirements of securities legislation in Canada or IIROC Rules or IIROC Acceptable Practices (each as defined below).
6. The Filer currently offers IB Forex transactions (a) to "accredited investors" (as defined in National Instrument 45-106 Prospectus and Registration Exemptions) in the province of Alberta (NI 45-106), (b) to retail investors resident in Ontario pursuant to In the Matter of Interactive Brokers Canada Inc. dated August 20, 2010 (the August 20, 2010 Order) and (c) pursuant to a notice filed on July 27, 2011 under section 4.7 of MI 11-102 Passport System regarding the Filer's intent to rely on the August 20, 2010 Order for comparable relief in the Non-Principal Jurisdictions.
7. The Filer wishes to offer IB Forex transactions to investors in the Applicable Jurisdictions on the terms and conditions described in this Decision. For the Interim Period (as defined below), the Filer is seeking the Requested Relief in connection with the proposed offering of IB Forex transactions in Ontario and intends to rely on this Decision and the Passport System described in MI 11-102 to offer IB Forex transactions in the Non-Principal Jurisdictions.
8. In Québec, the Filer has applied for, and has been granted, qualification under section 82 of the Derivatives Act (Québec) (the QDA) and authorization referred to in the second paragraph of section 82 or in section 83 of the QDA from the Autorité des marchés financiers (the AMF) to offer IB Forex transactions to both accredited and retail investors pursuant to the provisions of the QDA.
9. As a member of IIROC, the Filer is only permitted to enter into IB Forex transactions pursuant to the rules and regulations of IIROC (the IIROC Rules).
10. In addition, IIROC has communicated to its members certain additional expectations as to acceptable business practices (IIROC Acceptable Practices) as articulated in IIROC's "Regulatory Analysis of Contracts for Differences (CFDs)" published by IIROC on June 6, 2007, as amended on September 12, 2007, for any IIROC member proposing to offer OTC foreign exchange contracts or other types of CFDs to investors. To the best of its knowledge, the Filer is in compliance with IIROC Acceptable Practices in offering IB Forex transactions to clients. The Filer will continue to offer the IB Forex transactions to clients in accordance with IIROC Acceptable Practices as may be established from time to time.
11. The Filer is required by IIROC to maintain a certain level of capital to address the business risks associated with its activities. The capital reporting required by IIROC (as per the calculation in the Joint Regulatory Financial Questionnaire (the JRFQ) and the Monthly Financial Reports to IIROC) is based predominantly on the generation of financial statements and calculations as to ensure capital adequacy. The Filer as an IIROC member is required to have a specified minimum capital which includes having any additional capital required with regards to margin requirements and other risks. This risk calculation is summarized as a risk adjusted capital calculation which is submitted in the firm's JRFQ and required to be kept positive at all times.
12. Interactive Brokers provides two vehicles for the exchange of currencies: (i) IDEALPRO which allows a customer trade in foreign exchange and (ii) IDEAL which allows a customer to convert their balances from one currency to another (forex conversions).
13. For the purposes of this Application, IB Forex transactions include those transactions entered into on IDEALPRO and the forex conversions that are conducted through IDEAL.
14. IB Forex transactions are OTC and are not transferable.
15. The ability to lever an investment is one of the principal features of foreign exchange contracts and transactions. Leverage allows clients to magnify investment returns (or losses) by reducing the initial capital outlay required to achieve the same market exposure that would be obtained by investing directly in the underlying currency. Leverage is only permissible on the IDEALPRO network.
16. IIROC Rules and IIROC Acceptable Practices each set out detailed requirements and expectations relating to leverage and margin for offerings of foreign exchange contracts. The degree of leverage may be amended in accordance with IIROC Rules and IIROC Acceptable Practices as may be established from time to time.
17. Pursuant to Section 13.12 Restriction on lending to clients of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations which came into force as of September 28, 2009, only those firms that are registered as investment dealers (a condition of which is to be a member of IIROC) may lend money, extend credit or provide margin to a client.
Online Trading Platform
18. Interactive Brokers has developed a module of Interactive Brokers' TWS on-line trading platform to specifically allow IB Forex transactions called FXTrader® (FXTrader), that offers clients direct access to interbank prices and dealing for orders as small as 25,000 USD (or equivalent), and up to 10 million USD, or more. FXTrader provides best-execution functionality and a transparent pricing structure. The Filer offers trading in 13 currencies (USD, EUR, CHF, GBP, SEK, NOK, JPY, AUD, NZD, HKD, CAD, MXN, and a special conversion functionality in KRW) with market spreads as small as 1/2 PIP. The tight spreads and substantial liquidity are a result of combining quotation streams from 12 of the world's largest foreign exchange dealers which provide, directly or indirectly, more than half of the momentary capital available in the global interbank market.
19. FXTrader provides an optimized trading interface, with Interactive Broker-designed tools to trade the forex markets. The price display emphasizes the critical portion of the bid/ask, and conveys price movement at a glance by showing an increasing price in green and decreasing price in orange. Each currency pair occupies its own "cell," complete with market data and order information, where a client can create, transmit and cancel orders with a single click. Overall order, trade and portfolio information is displayed along the top of the currency pairs grid.
20. Key features of the FXTrader platform includes:
• Interbank-quality spreads allow clients to trade the best bid and ask from multiple liquidity providers with spreads as low as 1/2 pip;
• The ability to review order details and margin implications before a client transmits;
• Instantaneous transmission to transmit a clients orders with one click on the bid or ask;
• FXTrader supports over 15 risk-mitigation order types including trailing stop limits, brackets, limit if touched, OCA (one cancels all) and IOC (immediate or cancel);
• The functionality of the Order Book icon which appears when the small-order book has a better price available for the currency pair; and
• The ability of a client to customize the trading cell display to show position, average cost and profit and loss date.
21. Clients conduct IB Forex transactions through the Filer's on-line trading platform, FXTrader®. The Filer's on-line platform is similar to those developed for on-line brokerages and day-trading in that the client trades without other communication with, or advice from, the dealer. The FXTrader® is not a "marketplace" as defined in National Instrument 21-101 Marketplace Operation since a marketplace is any facility that brings together multiple buyers and sellers by matching orders in fungible contracts in a nondiscretionary manner. FXTrader® does not bring together multiple buyers and sellers; rather it offers clients direct access to interbank prices.
IB Forex Transactions in the Applicable Jurisdictions
22. Foreign exchange contracts and similar OTC derivative transactions, including IB Forex transactions, when offered to investors in Canada, may be considered to be "securities" under securities legislation of the Applicable Jurisdictions.
23. Investors wishing to enter into IB Forex transactions must open an account with the Filer.
24. Prior to a client's first IB Forex transaction and as part of the account opening process, the Filer will provide the client with a separate risk disclosure document that clearly explains, in plain language, the transaction and the risks associated with the transaction (the risk disclosure document). The risk disclosure document includes the required risk disclosure set forth in Schedule A to the Regulations to the QDA and leverage risk disclosure required under the IIROC Rules. The risk disclosure document contains disclosure that is substantially similar to the risk disclosure statement required for recognized options in OSC Rule 91-502 Trades in Recognized Options (OSC Rule 91-502) (which provides both registration and prospectus exemptions) and the regime for OTC derivatives contemplated by OSC Staff Notice 91-702 Offerings of Contracts for Difference and Foreign Exchange Contracts to Investors in Ontario (OSC SN 91-702) and proposed OSC Rule 91-504 OTC Derivatives (which was not adopted) (Proposed Rule 91-504). The Filer will ensure that, prior to a client's first trade in an IB Forex transaction, a complete copy of the risk disclosure document provided to that client has been delivered, or has previously been delivered, to the Principal Regulator.
25. Prior to the client's first IB Forex transaction and as part of the account opening process, the Filer will obtain a written or electronic acknowledgement from the client confirming that the client has received, read and understood the risk disclosure document. Such acknowledgment will be separate and prominent from other acknowledgements provided by the client as part of the account opening process.
26. As customary in the industry, and due to the fact that this information is subject to factors beyond the control of the Filer (such as changes in IIROC Rules), information such as the margin or leverage rates would not be disclosed in the risk disclosure document but are part of a client's account opening package and are available on both the Filer's website and on FXTrader®.
Satisfaction of the Registration Requirement
27. The role of the Filer as it relates to the IB Forex transactions will be limited to acting as an execution-only dealer. In this role, the Filer will, among other things, be responsible to approve all marketing, for holding of clients funds, and for client approval (including the review of know-your-client (KYC) due diligence and account opening suitability assessments).
28. IIROC Rules exempt member firms that provide execution-only services such as discount brokerages from the obligation to determine whether each trade is suitable for the client. However, IIROC has exercised its discretion to impose additional requirements on members proposing to trade in foreign exchange contracts and requires, among other things, that:
(a) Applicable risk disclosure documents and client suitability waivers provided must be in a form acceptable to IIROC;
(b) The firm's policies and procedures, amongst other things, require the Filer to assess the depth of investment knowledge and trading experience of the client to assess whether the product is appropriate for the client before an account is approved to be opened. This account opening suitability process includes an assessment of the client's investment knowledge and trading experience, client identification, screening applicants and customers against lists of prohibited/blocked persons, and detecting and reporting suspicious trading and potential terrorist financing and money laundering activities to applicable enforcement authorities;
(c) The Filer's registered salespersons and supervisory trading officer who conduct KYC and initial product suitability analysis will meet IIROC's proficiency requirements for futures trading and shall maintain appropriate IIROC registration; and
(d) Cumulative loss limits for each client's account must be established (this is a measure normally applied by IIROC in connection with futures trading accounts).
29. The IB Forex transactions are offered in compliance with applicable IIROC Rules and other IIROC Acceptable Practices.
30. The Requested Relief, if granted, would substantially harmonize the position of the regulators in the Applicable Jurisdictions on the offering of foreign exchange contracts to investors in the Applicable Jurisdictions with how those products are offered to investors in Quebec under the QDA. The QDA provides a legislative framework to govern derivatives activities within the province. Among other things, the QDA requires such products to be offered to investors through an IIROC member and the distribution of a standardized risk disclosure document rather than a prospectus in order to distribute foreign exchange contracts to investors resident in Quebec.
31. The Requested Relief, if granted, would be consistent with the guidelines articulated by Staff of the Principal Regulator in OSC SN 91-702. OSC SN 91-702 provides guidance with regards to the distributions of CFDs, foreign exchange contracts (forex or FX contracts) and similar OTC derivative products to investors in the Jurisdiction.
32. The Principal Regulator has previously recognized that the prospectus requirement may not be well suited for the distribution of certain derivative products to investors in the Jurisdiction, and that alternative requirements, including requirements based on clear and plain language risk disclosure, may be better suited for certain derivatives. In Ontario, both OSC Rule 91-502 and OSC Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario (OSC Rule 91-503) provide for a prospectus exemption for the trading of derivative products to clients. The Requested Relief is consistent with the principles and requirements of OSC Rule 91-502, OSC Rule 91-503 and Proposed Rule 91-504.
33. The Filer also submits that the Requested Relief, if granted, would harmonize the Principal Regulator's position on the offering of foreign exchange contracts with certain other foreign jurisdictions that have concluded that a clear, plain language risk disclosure document is appropriate for retail clients seeking to trade in foreign exchange contracts.
34. The Filer is of the view that requiring compliance with the prospectus requirement in order to enter into IB Forex transactions with clients in the Jurisdiction would not be appropriate since the disclosure of a great deal of the information required under the prospectus and under the reporting issuer regime is not material to a client seeking to enter into an IB Forex transaction. The information to be given to such a client should principally focus on enhancing the client's appreciation of product risk including counterparty risk. In addition, most IB Forex transactions are of short duration (positions are generally opened and closed on the same day and are in any event marked to market and cash settled daily).
35. The Filer is regulated by IIROC which has a robust compliance regime including specific requirements to address market, capital and operational risks pursuant to the IIROC Rules and the IIROC Acceptable Practices.
36. The Filer submits that the regulatory regimes developed by the AMF and IIROC for foreign exchange contracts, including IB Forex transactions, adequately addresses issues relating to the potential risk to the client of the Filer acting as counterparty. In view of these regulatory regimes, investors would receive little or no additional benefit from requiring the Filer to also comply with the prospectus requirement.
37. The Requested Relief in respect of each Applicable Jurisdiction is conditional on the Filer being registered as an investment dealer with the securities regulator in such Applicable Jurisdiction and maintaining its membership with IIROC and that all IB Forex transactions be conducted pursuant to IIROC Rules and in accordance with IIROC Acceptable Practices.
The Principal Regulator is satisfied that the test set out in the Legislation to make the Decision is met.
The Decision of the Principal Regulator is that the Requested Relief is granted provided that:
(a) The Filer shall not rely on any of (i) the August 20, 2010 Order and (ii) the July 27, 2011 notice;
(b) all IB Forex transactions with residents in the Applicable Jurisdictions shall be distributed through the Filer;
(c) with respect to residents of an Applicable Jurisdiction, the Filer remains registered as a dealer in the category of investment dealer with the Principal Regulator and each securities regulatory authority in such Applicable Jurisdiction and a member of IIROC;
(d) all IB Forex transactions with clients resident in the Applicable Jurisdictions shall be conducted pursuant to IIROC Rules imposed on members seeking to trade in foreign exchange contracts and in accordance with IIROC Acceptable Practices, as amended from time to time;
(e) if the Filer continues to offer IB Forex transactions to residents of Québec, all IB Forex transactions with clients resident in the Applicable Jurisdictions be conducted pursuant to the rules and regulations of the QDA and the AMF, as amended from time to time, unless and to the extent there is a conflict between i) the rules and regulations of the QDA and the AMF, and ii) the requirements of the securities laws of the Applicable Jurisdictions, the IIROC Rules and IIROC Acceptable Practices, in which case the latter shall prevail;
(f) prior to a client first entering into an IB Forex transaction, the Filer has provided to the client the risk disclosure document described in paragraph 24 and has delivered, or has previously delivered, a copy of the risk disclosure document provided to that client to the Principal Regulator;
(g) prior to a client's first IB Forex transaction and as part of the account opening process, the Filer has obtained a written or electronic acknowledgement from the client, as described in paragraph 25, confirming that the client has received, read and understood the risk disclosure document;
(h) the Filer has furnished to the Principal Regulator the name and principal occupation of its officers or directors, together with either the personal information form and authorization of indirect collection, use and disclosure of personal information provided for in National Instrument 41-101 General Prospectus Requirements or the registration information form for an individual provided for in Form 33-109F4 of National Instrument 33-109 Registration Information Requirements completed by any officer or director;
(i) the Filer shall promptly inform the Principal Regulator in writing of any material change affecting the Filer, being any change in the business, activities, operations or financial results or condition of the Filer that may reasonably be perceived by a counterparty to a derivative to be material;
(j) the Filer shall promptly inform the Principal Regulator in writing if a self-regulatory organization or any other regulatory authority or organization initiates proceedings or renders a judgment related to disciplinary matters against the Filer concerning the conduct of activities with respect to IB Forex transactions;
(k) within 90 days following the end of its financial year, the Filer shall submit to IIROC and the Principal Regulator the audited annual financial statements of the Filer; and
(l) the Requested Relief shall immediately expire upon the earliest of
(i) four years from the date that this Decision is issued;
(ii) in respect of a subject Applicable Jurisdiction or Quebec, the issuance of an order or decision by a court, the securities regulatory authority in such Applicable Jurisdiction, the AMF (in respect of Quebec) or other similar regulatory body that suspends or terminates the ability of the Filer to offer foreign exchange contracts to clients in such Applicable Jurisdictions; and
(iii) with respect to an Applicable Jurisdiction, the coming into force of legislation or a rule by its securities regulatory authority regarding the distribution of OTC derivatives to investors in such Applicable Jurisdiction (the Interim Period).