Securities Law & Instruments


Headnote

Application to the Commission pursuant to section 38 of the Commodity Futures Act (Ontario) (CFA) for a ruling that the Applicant be exempted from the dealer registration requirement in paragraph 22(1)(a) and the prohibition against trading on non-recognized exchanges in section 33 of the CFA. As an introducing broker, the Applicant will offer the ability to trade in commodity futures contracts and commodity futures options that trade on exchanges located outside of Canada and that are cleared through clearing corporations located outside of Canada, including block trades, to certain of its clients in Ontario who meet the definition of “permitted client” in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

Application to the Director for an exemption, pursuant to section 6.1 of OSC Rule 91-502 Trades in Recognized Option (OSC Rule 91-502) exempting the Applicant and its Representatives from the proficiency requirements in sections 3.1 of OSC Rule 91-502 for trades in commodity futures options on exchanges located outside of Canada.

Applicable Legislative Provisions

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 22, 33, 38.
Securities Act, R.S.O. 1990, c. S.5, as am.
Ontario Securities Commission Rule 91-502 Trades in Recognized Options, ss. 3.1, 6.1.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 8.18.

IN THE MATTER OF
THE COMMODITY FUTURES ACT,
R.S.O. 1990, c. C. 20, AS AMENDED
(the CFA)

AND

IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
(the OSA)

AND

IN THE MATTER OF
ONTARIO SECURITIES COMMISSION RULE 91-502
TRADES IN RECOGNIZED OPTIONS
(Rule 91-502)

AND

IN THE MATTER OF
TULLETT PREBON FINANCIAL SERVICES LLC

RULING & EXEMPTION
(Section 38 of the CFA and Section 6.1 of Rule 91-502)

UPON the application (the Application) of Tullett Prebon Financial Services LLC (the Applicant) to the Ontario Securities Commission (the Commission) for:

(a)           a ruling of the Commission, pursuant to section 38 of the CFA, that the Applicant is not subject to the dealer registration requirements in the CFA (as defined below) or the trading restrictions in the CFA in connection with trades (Futures Trades) in Exchange-Traded Futures (as defined below), including Block Trades (as defined below) on exchanges located outside Canada (Non-Canadian Exchanges) where the Applicant is acting as agent in such trades to, from or on behalf of Permitted Clients (as defined below);

(b)           a ruling of the Commission, pursuant to section 38 of the CFA, that a Permitted Client (as defined below) is not subject to the dealer registration requirements in the CFA or the trading restrictions in the CFA in connection with Futures Trades on Non-Canadian Exchanges, where the Applicant acts in respect of the Futures Trades on behalf of the Permitted Client pursuant to the above ruling; and

(c)           a decision of the Director, pursuant to section 6.1 of Rule 91-502, exempting the Applicant and its salespersons, directors, officers and employees (the Representatives) from section 3.1 of Rule 91-502 in connection with Futures Trades.

AND WHEREAS for the purposes of this ruling and exemption (collectively, the Decision):

(i)            Block Trade means a trade in a large quantity of Exchange-Traded Futures entered into between ECPs (in this case, via an introducing broker) pursuant to a privately negotiated transaction that, pursuant to the applicable rules of a Non-Canadian Exchange, are permitted to be executed on the Non-Canadian Exchange apart from the public auction market established by the Non-Canadian Exchange subject to meeting specified quantity thresholds (which are different large amounts depending on the particular Non-Canadian Exchange) and provided that the price of the trade is entered and reported on the Non-Canadian Exchange within a specified time period following the trade;

CFTC means the United States Commodity Futures Trading Commission;

dealer registration requirements in the CFA means the provisions of section 22 of the CFA that prohibit a person or company from trading in Exchange-Traded Futures unless the person or company satisfies the applicable provisions of section 22 of the CFA;

ECP means eligible contract participant as that term is defined in the United States Commodity Exchange Act;

Exchange-Traded Futures means a commodity futures contract or a commodity futures option that trades on one or more organized exchanges located outside of Canada and that is cleared through one or more clearing corporations located outside of Canada;

FINRA means the Financial Industry Regulatory Authority in the United States;

NI 31-103 means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;

NFA means the National Futures Association in the United States;

Permitted Client means a client in Ontario that is a "permitted client" as that term is defined in section 1.1. of NI 31-103;

SEC means the United States Securities and Exchange Commission;

specified affiliate has the meaning ascribed to that term in Form 33-109F6 to National Instrument 33-109 Registration Information; and

trading restrictions in the CFA means the provisions of section 33 of the CFA that prohibit a person or company from trading in Exchange-Traded Futures unless the person or company satisfies the applicable provisions of section 33 of the CFA; and

(ii)           terms used in the Decision that are defined in the OSA, and not otherwise defined in the Decision or in the CFA, shall have the same meaning as in the OSA, unless the context otherwise requires.

AND UPON considering the Application and the recommendation of staff of the Commission;

AND UPON the Applicant having represented to the Commission and the Director as follows:

1              The Applicant is a limited liability company organized under the laws of the State of Delaware. Its head office is located in Jersey City, New Jersey, United States of America.

2              The Applicant provides introducing services for ECPs. In order to provide these services, the Applicant is an approved member of the NFA and is registered as an introducing broker with the CFTC. The Applicant is also a broker-dealer registered with the SEC and a member of FINRA.

3              Tullett Prebon Canada Limited (TPCL) is an affiliate of the Applicant. TPCL is registered as an exempt market dealer in Ontario, Quebec and Nova Scotia.

4              Pursuant to its registrations and memberships, the Applicant is authorized to handle customer orders, to effect Block Trades, and introduce customers to an executing broker registered as a futures commission merchant, and otherwise act as an introducing broker in the United States. Rules of the CFTC and NFA require the Applicant to maintain adequate capital levels, make and keep specified types of records relating to customer accounts and transactions, and comply with other forms of customer protection rules, including rules respecting: know-your-customer obligations, client identification and account-opening requirements, anti-money laundering checks, dealing and handling customer orders obligations including managing conflicts of interest and best execution rules. These rules require the Applicant to treat Permitted Clients consistently with the Applicant's United States customers with respect to transactions made on exchanges in the United States. In respect of Exchange-Traded Futures, the Applicant does not provide direct execution, except for effecting Block Trades, or clearing services and is not authorised to receive or hold client money in any jurisdiction.

5              The Applicant requires the Decision in order to offer certain of its Permitted Clients in Ontario the ability to trade in Exchange-Traded Futures, including Block Trades, and in connection with such trades the Applicant would act as an introducing broker and effect trades in Exchange-Traded Futures, including Block Trades, on Non-Canadian Exchanges.

6              The Applicant relies on the international dealer exemption under section 8.18 of NI 31-103 in Ontario and is not registered under the Securities Act (Ontario) or the CFA.

7              The Applicant is not in default of securities legislation in any jurisdiction of Canada or under the CFA. The Applicant is in compliance in all material respects with U.S. securities and commodity futures laws.

8              The Applicant will not maintain an office, sales force or physical place of business in Ontario.

9              The Applicant will introduce Futures Trades on behalf of Permitted Clients in Ontario in the same manner that it introduces trades on behalf of its United States clients which are ECPs. The Applicant will follow the same know-your-customer and order handling procedures that it follows in respect of its United States clients. Permitted Clients will be afforded the benefits of compliance by the Applicant with statutory and other requirements of the regulators, self-regulatory organizations and exchanges located in the United States. Permitted Clients in Ontario will have the same contractual rights against the Applicant as United States clients of the Applicant.

10           In transacting Block Trades for its customers, the Applicant, as the introducing broker, will match a buyer and a seller (both ECPs) in a privately negotiated trade for a large quantity of Exchange-Traded Futures. Pursuant to the rules of the applicable Non-Canadian Exchange, the trade is permitted to be executed apart from the public auction market established by the Non-Canadian Exchange. Once the terms of the trade are agreed upon between the buyer and the seller, the trade is submitted by the Applicant to the Exchange to be publicly reported within the required time period for Block Trades. Once submitted to the Non-Canadian Exchange, the clearing and settlement process by and through the customer’s futures commission merchant will commence independent of the Applicant’s involvement in the transaction.

11           The Applicant will solicit Futures Trades in Ontario only from persons who qualify as Permitted Clients.

12           Permitted Clients of the Applicant will only be offered the ability to effect Futures Trades on Non-Canadian Exchanges.

13           The Exchange-Traded Futures to be traded by Permitted Clients will include, but will not be limited to, Exchange-Traded Futures for energy and other commodity products.

14           Permitted Clients of the Applicant will be able to execute Exchange-Traded Futures orders by contacting the Applicant's client order handling desk.

15           In the case of a trade in Exchange-Traded Futures that is a Block Trade involving a Permitted Client as a buyer or a seller, the Applicant, as the introducing broker, will match the Permitted Client in a privately negotiated trade, which will be executed apart from the public auction market established by the applicable Non-Canadian Exchange and submitted for public reporting to the Non-Canadian Exchange within the required time period applicable for Block Trades. Once submitted to the Non-Canadian Exchange, the clearing and settlement process by and through the Permitted Client’s futures commission merchant in accordance with the rules and customary practices of the exchange will commence independent of the Applicant’s involvement in the transaction. In no case will the Applicant enter into a give-up agreement with any executing broker registered as a futures commission merchant or clearing broker unless such firm is registered with the applicable regulatory bodies in the jurisdiction in which it executes the trades in Exchange-Traded Futures, and as with any executing broker registered as a futures commission merchant or clearing broker located in the U.S., unless such firm is registered with the SEC and/or CFTC, as applicable.

16           In the case of a trade in Exchange-Traded Futures that is not a Block Trade involving a Permitted Client, the Applicant may perform introducing (as introducing broker) functions for Futures Trades. The executing broker will act to "give-up" the transacted trades to the Permitted Client's clearing broker.

17           The clearing brokers and executing broker will also be required to comply with the rules of the exchanges of which each is a member and any relevant regulatory requirements, including requirements under the CFA, as applicable. Where applicable, the Permitted Client, the executing broker and the Permitted Client’s clearing broker will represent to the Applicant, in an industry-standard give-up agreement, that each will perform its obligations in accordance with applicable laws, governmental, regulatory, self-regulatory, exchange and clearing house rules and the customs and usages of the exchange or clearing house on which the relevant Permitted Client’s Exchange-Traded Futures order will be executed and cleared. The Applicant will not enter into a give-up agreement with any executing broker registered as a futures commission merchant or clearing broker unless such firm is registered with the applicable regulatory bodies in the jurisdiction in which it executes Futures Trades.

18           As is customary for all Futures Trades, a clearing corporation appointed by the exchange or clearing division of the exchange is substituted as a universal counterparty on all trades in Exchange-Traded Futures and Permitted Client orders that are submitted to the exchange in the name of the recognized exchange member and clearing broker. The Permitted Client of the Applicant is responsible to its clearing broker for payment of daily mark-to-market variation margin and/or proper margin to carry open positions and the Permitted Client's clearing broker is in turn responsible to the clearing corporation/division for payment.

19           Permitted Clients will pay commissions for trades introduced by the Applicant.

20           Absent this Decision, the trading restrictions in the CFA apply unless, among other things, an Exchange-Traded Future is traded on a recognized or registered commodity futures exchange and the form of the contract is approved by the Director. To date, no Non-Canadian Exchanges have been recognized or registered under the CFA.

21           If the Applicant was registered under the CFA as a “futures commission merchant”, it could rely upon certain exemptions from the trading restrictions in the CFA to effect trades of Exchange-Traded Futures to be entered into on certain Non-Canadian Exchanges.

22           Section 3.1 of Rule 91-502 states that any person who trades as agent in, or gives advice in respect of, a recognized option, as defined in section 1.1 of Rule 91-502 is required to successfully complete the Canadian Options Course (which has been replaced by the Derivatives Fundamentals Course and the Options Licensing Course).

23           All Representatives of the Applicant who would trade futures or options for Permitted Clients have passed the National Commodity Futures Examination (Series 3), being the relevant futures and options proficiency examination administered by FINRA.

AND UPON the Commission and Director being satisfied that it would not be prejudicial to the public interest to grant the order requested;

IT IS RULED, pursuant to section 38 of the CFA, that the Applicant is not subject to the dealer registration requirements set out in the CFA and the trading restrictions in the CFA in connection with Futures Trades where the Applicant is acting as agent in such trades to, from or on behalf of Permitted Clients provided that:

(a)           each client effecting Futures Trades is a Permitted Client;

(b)           the executing broker and clearing broker each represent and covenant to the Applicant that it is or will be appropriately registered or exempt from registration under the CFA, in connection with the Permitted Client effecting trades in Exchange-Traded Futures; provided that these requirements will not apply in the context of a Block Trade if the Applicant does not know and cannot reasonably determine the identity of the executing broker or the clearing broker at the time of the trade and would not have an opportunity to obtain such representations or take such steps;

(c)           the Applicant only introduces Futures Trades for Permitted Clients on Non-Canadian Exchanges;

(d)           at the time trading activity is engaged in, the Applicant:

(i)            has its head office or principal place of business in the United States;

(ii)           is registered as an introducing broker with the CFTC;

(iii)           is a member firm of the NFA; and

(iv)          engages in the business of an introducing broker in Exchange-Traded Futures in the United States;

(e)           the Applicant has provided to the Permitted Client the following disclosure in writing:

(i)            a statement that the Applicant is not registered in Ontario to trade in Exchange-Traded Futures as principal or agent;

(ii)           a statement that the Applicant’s head office or principal place of business is located in New York, New York, United States of America;

(iii)           a statement that all or substantially all of the Applicant’s assets may be situated outside of Canada;

(iv)          a statement that there may be difficulty enforcing legal rights against the Applicant because of the above; and

(v)           the name and address of the Applicant’s agent for service of process in Ontario.

(f)            the Applicant has submitted to the Commission a completed Submission to Jurisdiction and Appointment of Agent for Service in the form attached as Appendix "A" hereto;

(g)           the Applicant notifies the Commission of any regulatory action initiated after the date of this decision in respect of the Applicant, or any predecessors or specified affiliates of the Applicant, by completing and filing with the Commission Appendix "B" hereto within ten days of the commencement of any such action; provided that the Applicant may satisfy this condition by filing with the Commission within ten days of the date of this decision a notice making reference to and incorporating by reference the disclosure made by the Applicant pursuant to U.S. federal securities laws that is identified in the FINRA BrokerCheck system, and any updates to such disclosure that may be made from time to time and by providing notification, in a manner reasonably acceptable to the Director, of any filing of a Form BD "Regulatory Action Disclosure Reporting Page" required by FINRA;

(h)           if the Applicant does not rely on the international dealer exemption in section 8.18 of NI 31-103 (the IDE), by December 31st of each year, the Applicant pays a participation fee based on its specified Ontario revenues for its previous financial year in compliance with the requirements of Part 3 and section 6.4 of OSC Rule 13-502 Fees as if the Applicant relied on the IDE;

(i)            by December 1st of each year, the Applicant notifies the Commission of its continued reliance on the exemption from the dealer registration requirement granted pursuant to this Decision by filing Form 13-502F4 Capital Markets Participation Fee Calculation; and

(j)            this Decision will terminate on the earliest of:

(i)            the expiry of any transition period as may be provided by law, after the effective date of the repeal of the CFA;

(ii)           six months, or such other transition period as may be provided by law, after the coming into force of any amendment to Ontario commodity futures law (as defined in the CFA) or Ontario securities law (as defined in the OSA) that affects the dealer registration requirements in the CFA or the trading restrictions in the CFA; and

(ii)           five years after the date of this Decision.

AND IT IS FURTHER RULED, pursuant to section 38 of the CFA, that a Permitted Client is not subject to the dealer registration requirements in the CFA or the trading restrictions in the CFA in connection with Futures Trades on Non-Canadian Exchanges where the Applicant acts in connection with Futures Trades on behalf of the Permitted Clients pursuant to the above ruling.

November 6, 2018

“Garnet Fenn”
Commissioner
Ontario Securities Commission

“Robert P. Hutchison”
Commissioner
Ontario Securities Commission

IT IS THE DECISION of the Director, pursuant to section 6.1 of Rule 91-502, that section 3.1 of Rule 91-502 does not apply to the Applicant and its Representatives in respect of Futures Trades, provided that:

(a)           the Applicant and its Representatives maintain their respective registrations with the CFTC and NFA which permit them to trade in commodity futures options in the United States; and

(b)           this Decision will terminate on the earliest of:

(i)            the expiry of any transition period as may be provided by law, after the effective date of the repeal of the CFA;

(ii)           six months, or such other transition period as may be provided by law, after the coming into force of any amendment to Ontario commodity futures law (as defined in the CFA) or Ontario securities law (as defined in the OSA) that affects the dealer registration requirements in the CFA or the trading restrictions in the CFA; and

(ii)           five years after the date of this Decision.

November 9, 2018

“Elizabeth King”
Deputy Director
Ontario Securities Commission


 

APPENDIX “A”

SUBMISSION TO JURISDICTION AND APPOINTMENT OF AGENT FOR SERVICE

INTERNATIONAL DEALER OR INTERNATIONAL ADVISER EXEMPTED FROM
REGISTRATION UNDER THE COMMODITY FUTURES ACT, ONTARIO

1.             Name of person or company ("International Firm"):

2.             If the International Firm was previously assigned an NRD number as a registered firm or an unregistered exempt international firm, provide the NRD number of the firm:

3.             Jurisdiction of incorporation of the International Firm:

4.             Head office address of the International Firm:

5.             The name, e-mail address, phone number and fax number of the International Firm's individual(s) responsible for the supervisory procedure of the International Firm, its chief compliance officer, or equivalent.

Name:
E-mail address:
Phone:
Fax:

6.             The International Firm is relying on an exemption order under section 38 or section 80 of the Commodity Futures Act (Ontario) that is similar to the following exemption in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (the "Relief Order"):

  [ ] Section 8.18 [international dealer]

  [ ] Section 8.26 [international adviser]

  [ ] Other [specify]:

7.             Name of agent for service of process (the "Agent for Service"):

8.             Address for service of process on the Agent for Service:

9.             The International Firm designates and appoints the Agent for Service at the address stated above as its agent upon whom may be served a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal or other proceeding (a "Proceeding") arising out of or relating to or concerning the International Firm's activities in the local jurisdiction and irrevocably waives any right to raise as a defence in any such proceeding any alleged lack of jurisdiction to bring such Proceeding.

10.          The International Firm irrevocably and unconditionally submits to the non-exclusive jurisdiction of the judicial, quasi-judicial and administrative tribunals of the local jurisdiction in any Proceeding arising out of or related to or concerning the International Firm's activities in the local jurisdiction.

11.          Until 6 years after the International Firm ceases to rely on the Relief Order, the International Firm must submit to the regulator

a.             a new Submission to Jurisdiction and Appointment of Agent for Service in this form no later than the 30th day before the date this Submission to Jurisdiction and Appointment of Agent for Service is terminated;

b.             an amended Submission to Jurisdiction and Appointment of Agent for Service no later than the 30th day before any change in the name or above address of the Agent for Service;

c.             a notice detailing a change to any information submitted in this form, other than the name or above address of the Agent for Service, no later than the 30th day after the change.

12.          This Submission to Jurisdiction and Appointment of Agent for Service is governed by and construed in accordance with the laws of the local jurisdiction.

Dated: _______________

________________________________________________
(Signature of the International Firm or authorized signatory)

________________________________________________
(Name of signatory)

________________________________________________
(Title of signatory)


 

Acceptance

The undersigned accepts the appointment as Agent for Service of _______________ [Insert name of International Firm] under the terms and conditions of the foregoing Submission to Jurisdiction and Appointment of Agent for Service.

Dated: ____________________

________________________________________________
(Signature of the Agent for Service or authorized signatory)

________________________________________________
(Name of signatory)

________________________________________________
(Title of signatory)

This form, and notice of a change to any information submitted in this form, is to be submitted through the Ontario Securities Commission’s Electronic Filing Portal:

https://www.osc.gov.on.ca/filings


APPENDIX “B”

NOTICE OF REGULATORY ACTION

1.             Has the firm, or any predecessors or specified affiliates1 of the firm entered into a settlement agreement with any financial services regulator, securities or derivatives exchange, SRO or similar agreement with any financial services regulator, securities or derivatives exchange, SRO or similar organization?

Yes _____ No _____

If yes, provide the following information for each settlement agreement:

Name of entity

Regulator/organization

Date of settlement (yyyy/mm/dd)

Details of settlement

Jurisdiction

2.             Has any financial services regulator, securities or derivatives exchange, SRO or similar organization:

 

Yes

No

(a)           Determined that the firm, or any predecessors or specified affiliates of the firm violated any securities regulations or any rules of a securities or derivatives exchange, SRO or similar organization?

___

___

(b)           Determined that the firm, or any predecessors or specified affiliates of the firm made a false statement or omission?

___

___

(c)           Issued a warning or requested an undertaking by the firm, or any predecessors or specified affiliates of the firm?

___

___

(d)           Suspended or terminated any registration, licensing or membership of the firm, or any predecessors or specified affiliates of the firm?

___

___

(e)           Imposed terms or conditions on any registration or membership of the firm, or predecessors or specified affiliates of the firm?

___

___

(f)            Conducted a proceeding or investigation involving the firm, or any predecessors or specified affiliates of the firm?

___

___

(g)           Issued an order (other than an exemption order) or a sanction to the firm, or any predecessors or specified affiliates of the firm for securities or derivatives-related activity (e.g. cease trade order)?

___

___

If yes, provide the following information for each action:

Name of entity

Type of action

Regulator/organization

Date of action (yyyy/mm/dd)

Reason for action

Jurisdiction

3.             Is the firm aware of any ongoing investigation of which the firm or any of its specified affiliates is the subject?

Yes _____ No _____

If yes, provide the following information for each investigation:

Name of entity

Reason or purpose of investigation

Regulator/organization

Date investigation commenced (yyyy/mm/dd)

Jurisdiction

Name of firm:

Name of firm’s authorized signing officer or partner

Title of firm’s authorized signing officer or partner

Signature

Date (yyyy/mm/dd)

Witness

The witness must be a lawyer, notary public or commissioner of oaths.

Name of witness

Title of witness

Signature

Date (yyyy/mm/dd)

This form, and notice of a change to any information submitted in this form, is to be submitted through the Ontario Securities Commission’s Electronic Filing Portal:

https://www.osc.gov.on.ca/filings

 

1       In this Appendix, the term "specified affiliate" has the meaning ascribed to that term in Form 33-109F6 to National Instrument 33-109 Registration Information.