HSCB Securities (USA) Inc. – s. 38 of the CFA 1201

Ruling

Headnote

Application under section 38 of the Commodity Futures Act (Ontario) for relief from the dealer registration requirements in section 22 of the CFA in connection with certain trades by the Applicant, a U.S.-registered broker-dealer and futures commission merchant, in commodity futures contracts and commodity futures options on exchanges located in Canada where the Applicant is acting as principal or agent in such trades to, from or on behalf of a Canadian affiliate and where such Canadian affiliate is entering into such trade as principal and for its own account only.

Statutes Cited

Commodity Futures Act, R.S.O. 1990, c. C.20, as am., ss. 22 and 38.

January 24, 2020

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

RULING (Section 38 of the CFA)

UPON the application (the Application) of HSBC Securities (USA) Inc. (the Applicant) to the Ontario Securities Commission (the Commission) for a ruling of the Commission, pursuant to section 38 of the CFA, that

(a) the Applicant is not subject to the dealer registration requirements in section 22 of the CFA (the dealer registration requirements in the CFA) in connection with trades in commodity futures contracts and commodity futures options that trade on exchanges located in Canada (Canadian Futures) where the Applicant is acting as principal or agent in such trades to, from or on behalf of an HSBC Affiliate (as defined below) and where such HSBC Affiliate is entering into such trade as principal and for its own account only; and

(b) the HSBC Affiliates are not subject to the dealer registration requirements in the CFA in connection with trades in Canadian Futures, where the Applicant acts in respect of the trades in Canadian Futures on behalf of the HSBC Affiliate and the HSBC Affiliate is entering into such trade as principal and for its own account only (collectively, the Ruling Sought);

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

(i)

"CEA" means the United States Commodity Exchange Act;

"CFTC" means the United States Commodity Futures Trading Commission;

"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;

(ii) terms used in this Decision that are defined in the Securities Act (Ontario) (OSA), and not otherwise defined in this 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 corporation formed under the laws of the State of Delaware. The Applicant's head offices are located at 452 5th Avenue, New York, NY 10018, United States of America (U.S.). The Applicant is a direct wholly-owned subsidiary of HSBC Markets (USA) Inc., which in turn is indirectly wholly owned by HSBC Holdings plc.

2. The Applicant is registered as a broker-dealer with the SEC, a member of FINRA, a registered futures commission merchant (FCM) with the CFTC, and a member of the NFA.

3. The Applicant is a direct member of all major U.S. commodity futures exchanges and is a foreign approved participant of the Montreal Exchange.

4. In connection with its securities trading activities, the Applicant relies on the "international dealer exemption" under section 8.18 of NI 31-103 in Alberta, British Columbia, Ontario and Quebec (the IDE).

5. The Applicant is not in default of securities legislation in any jurisdiction in Canada or under the CFA, subject to the matter to which this decision relates. The Applicant is in compliance in all material respects with U.S. securities and commodity futures laws.

6. HSBC Securities (Canada) Inc. (HSBC Securities Canada), an affiliate of the Applicant, is registered as a dealer in the category of investment dealer in each of the provinces and territories of Canada, and in the category of derivatives dealer in Quebec. HSBC Securities Canada is also a dealer member of the Investment Industry Regulatory Organization of Canada (IIROC) and has its head office in Ontario. HSBC Securities Canada is a wholly-owned subsidiary of HSBC Bank Canada, a Canadian chartered bank validly existing under the laws of Canada (HSBC Bank Canada). HSBC Securities Canada and HBSC Bank Canada are collectively referred to herein as the HSBC Affiliates.

7. The Applicant currently relies on a ruling and exemption of the Commission dated November 21, 2016 under the CFA, Re HSBC Securities (USA) Inc., granting, inter alia, an exemption from the dealer registration requirement in the CFA in connection with certain execution and clearing activities in commodity futures contracts and options on commodity futures contracts that trade on exchanges located outside of Canada (Non-Canadian Futures Relief).

8. The Applicant also currently relies on a ruling of the Commission dated January 30, 2017 under the CFA, Re HBSC Securities (USA) Inc. granting, inter alia, an exemption from the dealer registration requirement in the CFA in connection with certain clearing activities in Canadian Futures for institutional permitted clients (Give-Up Relief).

9. The HSBC Affiliates wish to trade in Canadian Futures with or through the Applicant given the Applicant's international expertise of the global futures markets. HSBC Affiliates currently also trade in commodity futures contracts and options on commodity futures contracts that trade on exchanges located outside of Canada (Non-Canadian Futures) with or through the Applicant. Consequently, HSBC Affiliates prefer to utilize the comprehensive execution, operational and risk support services of the Applicant, as their affiliated FCM, to facilitate the HSBC Affiliates' trading in both Canadian Futures and Non-Canadian Futures.

10. The Applicant's activities trading Canadian Futures to, from or on behalf of the HSBC Affiliates may also constitute trading in Canadian Futures by the HSBC Affiliates. The HSBC Affiliates may be unable to rely on the exemptions from the dealer registration requirement in the CFA because the Applicant is not a registered dealer. Accordingly, the Applicant is also seeking exemptive relief pursuant to this ruling for the HSBC Affiliates to trade with the Applicant.

11. The Applicant is a "market participant" as defined under subsection 1(1) of the CFA. As a market participant, among other requirements, the Applicant is required to comply with the record keeping and provision of information provisions under section 14 of the CFA, which include the requirement to keep such books, records and other documents: (a) as are necessary for the proper recording of business transactions and financial affairs, and the transactions executed on behalf of others, (b) as may otherwise be required under Ontario commodity futures law, and (c) as may reasonably be required to demonstrate compliance with Ontario commodity futures laws, and to deliver such records to the Commission if required.

12. Section 22 of the CFA prohibits a person or company from trading in Exchange-Traded Futures unless the person or company satisfies the applicable provisions in section 22 of the CFA.

Activities

13. Pursuant to its registrations and memberships, the Applicant is authorized to handle customer orders and receive and hold customer margin deposits, and otherwise act as a futures 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, account-opening requirements, anti-money laundering checks, credit checks, delivery of confirmation statements, clearing deposits and initial and maintenance margins. With respect to transactions made on U.S. exchanges, in order to protect customers in the event of the insolvency or financial instability of the Applicant, the Applicant is required to ensure that customer securities and monies be separately accounted for, segregated at all times from the securities and monies of the Applicant and custodied exclusively with such banks, trust companies, clearing organizations or other licensed futures brokers and intermediaries as may be approved for such purposes under the CEA and the rules promulgated by the CFTC thereunder (collectively, the Applicant Approved Depositories). The Applicant is further required to obtain acknowledgements from any Applicant Approved Depository holding customer funds or securities that such funds and securities are to be separately held on behalf of such customers, with no right of set-off against the Applicant's obligations or debts.

14. Both of the HSBC Affiliates are regulated entities in Canada and affiliates of the Applicant and thus do not require the protections of the CFA.

15. The primary purpose of requesting that the Applicant be permitted to trade Canadian Futures with the HSBC Affiliates is to help the HSBC Affiliates manage their business risks by relying on the Applicant's international expertise of the global futures markets and permit the HSBC Affiliates to benefit from the comprehensive execution, operational and risk support services that the Applicant can provide, as their affiliated FCM, by facilitating the HSBC Affiliates' trading in Canadian Futures in addition to facilitating their trading in Non-Canadian Futures.

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

17. All Representatives of the Applicant who trade commodity options in the United States have passed the National Commodity Futures Examination (Series 3), being the relevant futures and options proficiency examination.

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

IT IS RULED, pursuant to section 38 of the CFA, that the Ruling Sought is granted, provided that the Applicant:

(a) has its head office or principal place of business in the U.S.;

(b) is registered as a FCM with the CFTC and engages in the business of an FCM in the U.S., and is registered as a broker-dealer under the securities legislation of the U.S. and engages in the business of a broker-dealer in the U.S.;

(c) is a member firm of the NFA and FINRA;

(d) takes all necessary steps to maintain the effectiveness of the Non-Canadian Futures Relief and the Give-Up Relief;

(e) complies with the terms and conditions of the Non-Canadian Futures Relief and the Give-Up Relief in connection with any trading activity related to the HSBC Affiliates, under this relief, including the requirements thereunder with respect to the appointment of an agent for service of process and the filing of notices of regulatory actions;

(f) complies with the filing and fee payment requirements applicable to a registrant under OSC Rule 13-502 Fees; provided that, if the Applicant does not rely on 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;

(g) the Applicant only executes and clears trades in Canadian Futures pursuant to this ruling for the HSBC Affiliates;

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

This Decision will terminate on the earliest of:

(a) such transition period as provided by operation of law, after the effective date of the repeal of the CFA;

(b) such transition period as provided by operation of law, after the coming into force of any amendments to Ontario commodity futures law or Ontario securities law (as defined in the OSA) that affects the dealer registration requirements in the CFA; and

(c) five years after the date hereof.

AND IT IS FURTHER RULED, pursuant to section 38 of the CFA, that the HSBC Affiliates are not subject to the dealer registration requirements in the CFA in connection with trades in Canadian Futures where the Applicant acts in in respect of the trades in Canadian Futures on behalf of the HSBC Affiliates pursuant to the above ruling and the HSBC Affiliate is entering into such trade as principal and for its own account only.

January 24, 2020

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