Securities Law & Instruments

Headnote

Application for an order pursuant to section 80 of the Commodity Futures Act granting relief from sections 42, 43, 44 and 45 which contain requirements to deliver confirmations and statements to customers in the context of give-up transactions.

Applicable Legislative Provisions

Commodity Futures Act, R.S.O. 1990, c. C.20. as am., ss. 42, 43, 44, 45 and 80.

December 23, 2019

IN THE MATTER OF THE COMMODITY FUTURES ACT, R.S.O. 1990, CHAPTER C.20, AS AMENDED (the CFA) AND IN THE MATTER OF R.J. O'BRIEN & ASSOCIATES CANADA INC. (the Applicant)

DECISION

UPON the application (the Application) by R.J. O'Brien & Associates Canada Inc. (the Applicant) to the Ontario Securities Commission (the Commission) for a decision pursuant to section 80 of the CFA granting relief from sections 42, 43, 44 and 45 of the CFA which contain the requirement to deliver certain confirmations and statements of trade to customers in respect of trades in commodity futures contracts and commodity futures options (collectively, Futures Contracts) in the context of trade "give-ups".

AND WHEREAS the Applicant has represented to the Commission that:

1. The Applicant is a corporation formed under the laws of the Canada Business Corporations Act.

2. The head office of the Applicant is located in Toronto, Ontario.

3. The Applicant is a member of the Investment Industry Regulatory Organization of Canada (IIROC). The Applicant is also registered as an approved participant on the Bourse de Montreal (MX).

4. The Applicant is registered as an investment dealer under the securities legislation of all the provinces of Canada to trade securities and as a futures commission merchant under the commodity futures legislation of Ontario and Manitoba to trade in Futures Contracts. The Applicant is also registered as a dealer under the derivatives legislation of Quebec.

5. Subject to the matter to which this decision relates, the Applicant is not in default of securities or commodity futures legislation in any jurisdiction in Canada.

6. The Applicant engages in the following two, distinct types of customer trading relationships: (a) the Applicant acts as executing and introducing broker for customers; and (b) the Applicant acts solely as executing broker in give-up transactions.

7. With regards to the Applicant acting as executing broker in give-up transactions, the Applicant only provides trading services to "institutional customers" as defined in IIROC Rule 1.1 (Institutional Customers).

8. Give-up Transactions are purchases or sales of Futures Contracts by investors, each of whom is an Institutional Customer, that have an existing relationship as a client with a clearing broker but wish to use the trade execution services of one or more dealers and executing brokers for the purpose of executing such purchases or sales. Following execution of such purchases and sales, the executing brokers "give-up" the Give-up Transaction to the Institutional Customer's clearing broker for clearing, settlement and/or custody (Give-up Arrangement). The service provided by the Applicant pursuant to the Give-up Arrangement is limited to trade execution only.

The clearing broker maintains an account for each Institutional Customer that is administered in accordance with the terms and conditions of the account documentation of the clearing broker that has been signed by the Institutional Customer.

9. For a Give-up Transaction, the Institutional Customer does not open an account with the Applicant and the Applicant does not receive any money, securities, margin or collateral from the Institutional Customer.

10. The Give-up Arrangement is made by agreements entered into between the Institutional Customer, the Applicant and the clearing broker in respect of the Give-up Arrangement.

11. Although the Applicant is responsible for record-keeping, bookkeeping, custody and other administrative functions (Account Services) in respect of its own clients, it does not provide Account Services for execution-only customers in Give-up Transactions. Such Account Services remain the responsibility of those clients' clearing brokers.

12. The Applicant does, however, records in its own books and records and accounting system all Give-up Transactions that it executes, which generally comprise those Futures Contract positions held by it that are not allocated to any of its own Institutional Customer accounts. The Applicant communicates these unallocated positions to the relevant clearing brokers who either accept or reject the positions so allocated on behalf of their clients based on existing Give-up Arrangements. If a clearing broker rejects a proposed allocation, the Applicant contacts the person who executed the trade to obtain clarifying instructions and then allocates the position in accordance with the instructions so received.

13. The Applicant prepares monthly or transaction-by-transaction invoices detailing all Give-up Transactions (including the amount of any commissions to the Applicant for execution thereof) that the Applicant conducted during the month for each Institutional Customer pursuant to a Give-up Arrangement. The Applicant delivers such invoices to the clearing broker who then reconciles the Give-up Transactions with its own records.

14. The clearing broker will have the primary relationship with the Institutional Customers and is responsible for risk monitoring, overall trade monitoring as well as reporting trade confirmations and sending out statements of account.

15. The clearing broker is subject to the trade confirmation requirements and statement of account requirement in respect of its Institutional Customers in Give-up Transactions.

16. The Applicant does not require analogous relief from the securities legislation, specifically, sections 14.12 and 14.14 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and section 36(1) of the Securities Act (Ontario) (Act). There are exemptions available under NI 31-103 for IIROC member dealers provided they comply with the corresponding IIROC provisions in effect.

17. Once the appropriate relief from IIROC, which is subject to this relief, is obtained, the Applicant will be in compliance with IIROC requirements relating to the maintenance of records of executed transactions and in particular IIROC Dealer Member Rule 200.2(l) Trade Confirmations and 200.2(d) Client Account Statements.

18. Section 42 of the CFA requires that a registered dealer that has acted as an agent in connection with a trade in a Futures Contract promptly send customers a written confirmation of trade.

19. Section 43 of the CFA requires that a registered dealer that has acted as an agent in connection with a liquidating trade in a Futures Contract promptly send customers a written statement of purchase and sale.

20. Section 44 of the CFA requires that registered dealers send customers a written monthly statement.

21. Section 45 of the CFA requires that a registered dealer that has acted as an agent in connection with a trade in a Futures Contract send customers a written confirmation of a trade.

22. The Applicant is seeking a decision from the Commission pursuant to section 80 of the CFA that it be exempt from the sections 42, 43, 44 and 45 of the CFA with respect to give-up arrangements because the imposition of those requirements is unnecessary, duplicative and not industry practice globally in the derivatives market.

23. The Applicant has been advised by IIROC that the OSC exemption must be granted first before IIROC will grant similar relief.

AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

THE DECISION of the Commission is that the Applicant is exempt from the requirements of sections 42, 43, 44 and 45 of the CFA for the purposes of the Applicant acting as executing broker for give-up transactions, provided that:

a) the Applicant remains registered as a futures commission merchant and a member of IIROC;

b) the Applicant acting as executing broker in Give-Up Transactions only provides trading services to Institutional Customers;

c) the Applicant enters into a give-up agreement with the clearing broker and the customer; and

d) the clearing broker has agreed to provide customers with written trade confirmations and statements of account that include information for any Give-Up Transactions subject to this relief.

"Craig Hayman"
Commissioner
Ontario Securities Commission
"Raymond Kindiak"
Commissioner
Ontario Securities Commission