Application for a decision to exempt a money services business (MSB) from the dealer registration and prospectus requirements in connection with certain distributions of and trades in over-the-counter (OTC) derivatives that are made by the filer with a "permitted counterparty" or an "eligible commercial hedger" -- "permitted counterparty" defined to mean "permitted client" as defined in Section 1.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations -- "eligible commercial hedger" generally defined to mean a non-individual commercial hedger as defined in proposed derivatives business conduct and registration rules but with reduced financial threshold -- exemption sought as an interim response to current regulatory uncertainty associated with the regulation of OTC derivatives, pending the development by the Canadian Securities Administrators (the CSA) of a uniform framework for the regulation of OTC derivatives in all provinces and territories of Canada -- Decision includes terms and conditions of relief that are based on the regulatory framework for derivatives firms set out in the proposed derivatives business conduct and registration rules being developed by the CSA and a "sunset date" that is date that is the earlier of: (i) the date that is four years after the date of the Decision; and (ii) the coming into force in the jurisdiction of legislation or a rule that specifically governs dealer, adviser or other registration requirements applicable to market participants in connection with OTC derivative transactions.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 25(1), 53(1), 74.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, s. 1.1 ("permitted client").
Proposed National Instrument 93-101 Derivatives: Business Conduct and Proposed National Instrument 93-102 Derivatives: Registration ("commercial hedger" and "eligible commercial hedger").
November 16, 2020
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 GLOBAL REACH FINANCIAL SOLUTIONS INC. (the Filer)
The Principal Regulator (as defined below) in the Jurisdiction has received an application (the Application) from 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
(a) the dealer registration requirement (the Dealer Registration Relief), and
(b) the prospectus requirement (the Prospectus Relief),
in the Legislation in respect of distributions of or other trades in OTC Derivatives (as defined below) in connection with the Filer's foreign exchange risk management and payment services business (the Filer's FX Business) made by
(c) the Filer to or with a "Permitted Counterparty" (as defined below) or an "Eligible Commercial Hedger" (as defined below), and
(d) by a Permitted Counterparty or an Eligible Commercial Hedger to or with the Filer
as the case may be, subject to the terms and conditions below (the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
1. the Ontario Securities Commission is the principal regulator for this application (the Principal Regulator); and
2. the Filer has provided notice that, in the case of the Dealer Registration Relief and, in the jurisdictions where required, the Prospectus Relief, section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Newfoundland and Labrador, Northwest Territories, Nunavut, Prince Edward Island and Yukon (the Applicable Jurisdictions).
Terms defined in National Instrument 14-101 Definitions or MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
In this decision, the following terms have the following meanings:
"Commercial hedger" means a person or company that carries on a business and that transacts in an OTC Derivative to hedge a risk in respect of that business associated with any of the following:
(a) an asset that the person or company owns, produces, manufactures, processes, or merchandises or reasonably anticipates owning, producing, manufacturing, processing, or merchandising;
(b) a liability that the person or company incurs or reasonably anticipates incurring; or
(c) a service which the person or company provides, purchases, or reasonably anticipates providing or purchasing;
"OTC Derivative" has the meaning ascribed to that term in Appendix A to this decision;
"Permitted Counterparty" means a person or company that is a "permitted client", as that term is defined in section 1.1 [Definition of terms used throughout this Instrument] of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103);
"Eligible Commercial Hedger" means a person or company, other than an individual, that
(a) is a commercial hedger in relation to the OTC Derivative that it transacts with the Filer;
(b) has represented to the Filer in writing that it has the requisite knowledge and experience to evaluate the information provided to the person or company about OTC Derivatives by the Filer, the suitability of the OTC Derivatives for the person or company, and the characteristics of the OTC Derivatives to be transacted on the person or company's behalf, and
(c) has, or directly or indirectly owns or is owned by or is under common ownership with an entity, or group of entities, that has, net assets of at least $500,000 as shown on its most recently prepared financial statements;
Underlying Interest has the meaning ascribed to that term in Appendix A to this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer is incorporated under the Canada Business Corporations Act (Canada). The Filer's principal office is located in Vancouver, British Columbia.
2. The Filer is a subsidiary of Global Reach Group Holdings (Jersey) Ltd., which, with its affiliates, is part of the Global Reach corporate group (the Global Reach Group), a provider of foreign exchange (FX) risk management and payment services, headquartered in the United Kingdom (the UK), with operations in six countries, including offices in the Netherlands, Spain, South Africa and Cyprus.
3. The Global Reach Group has three trading subsidiaries in the UK, all of which hold the relevant licences from the UK Financial Conduct Authority (the UK FCA):
(a) Global Reach Markets Limited -- an authorized investment firm which provides advice / deals as matched principal broker in OTC FX derivatives;
(b) Global Reach Partners -- an authorized payment institution which provides foreign exchange and payment services to corporate clients (where the FX falls outside of the investment rules -- spot and deliverable forwards where the underlying requirement is for the payment of goods or services); and
(c) Foreign Currency Exchange Limited -- an authorized e-money institution providing payment wallets and foreign exchange services (where outside of investment regulation).
Each of these entities is required to adhere to both prudential and conduct requirements ensuring their financial soundness, the protection of client money and the fair treatment of clients.
4. The Filer acknowledges that the Principal Regulator and the regulatory authorities in the other jurisdictions (collectively, the Canadian Securities Regulators) may share information about the Filer and this Application with the UK FCA and authorizes the UK FCA to share information about the Filer and the Global Reach Group with the Canadian Securities Regulators.
5. The Filer provides FX and payment services for commercial and other non-retail customers in Canada for the hedging of risk or payment facilitation and not for speculative or investment purposes.
6. As described below, on May 13, 2020, the Filer acquired the key elements of the Canadian business of EncoreFX Inc. (EncoreFX), a former provider of foreign exchange risk management and payment services (the Acquisition) that filed for bankruptcy in March 2020.
7. As a result of the Acquisition, many of the individuals who previously held senior roles with EncoreFX became officers or employees of the Filer. The Filer is seeking relief to conduct the FX trading business formerly carried on by EncoreFX in Ontario and the other Applicable Jurisdictions.
8. The Filer is not registered under the securities, commodity futures or derivatives legislation of any of the provinces or territories of Canada in any capacity.
9. The Filer is classified as a Money Services Business under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada) (PCMLTFA) and associated regulations. The Filer is registered as a Money Services Business (MSB) or equivalent in all provinces in which it carries on business. As an MSB, the Filer fully complies with anti-money laundering and anti-terrorist financing laws and regulations in Canada and, in particular, the Guidelines produced by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
10. The Filer is currently offering FX and payment services to businesses in all provinces other than Quebec. Sales, dealing and operations staff have been hired in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario.
11. Outside of Ontario, the Filer provides corporate clients currency exchange services, foreign currency payments and risk management services. Clients receive personalized risk management planning and execution services backed by the proprietary Strategy Optimization Platform (SOP) reporting and analysis tools. Clients also have access to the proprietary online Express platform for self serving their spot transactions, payments and forward drawdowns and for transaction reporting requirements.
12. Outside of Ontario, the Filer relies on exemptions for trading in OTC Derivatives with "Qualified Persons" set out in the following instruments:
ASC Blanket Order 91-507 Over-the-Counter Trades in Derivatives
Blanket Order 91-501 Over-the-Counter Derivatives
Blanket Order 91-501 Over-the-Counter Trades in Derivatives
Local Rule 91-501 Derivatives
Blanket Order 91-501 Over the Counter Trades in Derivatives
General Order 91-908 Over-the-Counter Derivatives
13. The Filer is seeking the Requested Relief in Ontario in connection with the Application because the Ontario Securities Commission (the OSC) has not adopted a blanket order or local rule comparable to the above instruments. Rather, the Filer understands that the OSC has historically considered applications for exemptive relief by firms seeking to trade OTC Derivatives on a case-by-case basis, pending the development of modernized derivatives business conduct and registration rules.
14. The Filer did not carry on business in Ontario prior to the Acquisition of assets of EncoreFX and following the Acquisition has not engaged in Ontario in any activities that, in the Filer's view, require compliance with the registration or prospectus requirements of Ontario securities law or any other derivatives-specific rule, including OSC Rule 91-507, Trade Repositories and Derivatives Data Reporting (the OSC trade reporting rule).
15. The Filer's activities in Ontario following the Acquisition have been limited to certain currency exchange transactions that are settled by actual delivery of the foreign currency to the customer or an arm's length third party within two business days, with no rollover or extension. For the purposes of this representation, "actual delivery" means a transfer of ownership, possession and control of the foreign currency to the customer or an arm's length third party within two business days. The Filer does not act as agent, bailee or custodian for the customer in Ontario and does not have or share possession or control of the customer's foreign currency.
16. The Filer is not in default of securities, commodity futures or derivatives legislation in any province or territory of Canada.
OSC staff position
17. OSC staff have advised the Filer that OTC Derivatives may, depending on the nature of the contract, the manner in which it is offered, the nature of the client, and the manner in which the underlying or reference asset is delivered or custodied, constitute or involve "securities" and "derivatives" for the purposes of Ontario securities law.
18. In support of this view, OSC staff have referred the Filer to the following OSC and CSA staff guidance and caselaw:
• OSC Staff Notice 91-702 Offerings of Contracts for Difference and Foreign Exchange Contracts to Investors in Ontario (OSC Staff Notice 91-702) and the cases cited therein, including Pacific Coast Coin Exchange v. Ontario (Securities Commission) (the Pacific Coast decision), and subsequent exemptive relief decisions that have granted exemptive relief to investment dealers based on the guidance in OSC Staff Notice 91-702;
• CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto Assets;
• Commission and Court decisions involving online trading platforms, decisions, evidences of ownership of a commodity, including "warehouse receipts", for investment or speculative purposes; and
• Commission guidance in the Companion Policy to OSC Rule 91-506 Derivatives: Product Determination (OSC Rule 91-506) on when an FX derivative may be considered to qualify for the "spot currency exclusion" in s. 2(1)(c) of OSC Rule 91-506;
19. OSC staff have also referred the Filer to a number of recent insolvencies involving online trading platforms, including EncoreFX, as indicative of the potential risks to investors who purchase FX or commodities through unregistered trading platforms but do not receive actual delivery of the FX or other commodity from the unregistered platform at the time of the transaction.
The Filer's Acquisition of the EncoreFX business
20. On March 30, 2020, EncoreFX filed an assignment in bankruptcy pursuant to Section 49(1) of the Bankruptcy and Insolvency Act (Canada) (the BIA). Ernst & Young Inc. (EY) was appointed as the Licensed Insolvency Trustee (the Trustee).
21. On May 13, 2020, the Filer acquired the key elements of the Canadian business of EncoreFX. The Filer has retained 60 former EncoreFX employees, including the former President of EncoreFX, Paul Lennox, who is a CFA Charter holder with more than 27 years of financial industry experience.
22. The Filer only acquired certain assets of EncoreFX, and EncoreFX remains a separate, unrelated company; the ownership of the two companies is different and the directors are different. The two current officers of the Filer with signing authority, the Chief Financial Officer and Chief Compliance and Risk Officer, had no involvement with EncoreFX prior to the Acquisition.
23. If the Filer were a registered firm under the Securities Act (Ontario) (the OSA), the Filer's officers, directors and "permitted individuals" (as that term is defined in National Instrument 33-109 Registration Information (NI 33-109) would be as follows:
• Millie Richardson, Chief Compliance and Risk Officer, Director
• Brett Flowers, Chief Financial Officer, Director
• Paul Lennox, President, Director -- former President of EncoreFX (officer)
• Kevin Neufeld, Senior Vice President Sales, Director -- former SVP Sales EncoreFX
24. No customers of EncoreFX have been directly transferred to the Filer; the Filer is opening new accounts with customers. The Filer did not carry on business in Ontario prior to the acquisition of assets of EncoreFX and following the acquisition has not engaged in Ontario in any activities requiring registration or a prospectus.
25. The Global Reach Group also notified the UK FCA of the purchase.
The Reasons for the Bankruptcy of EncoreFX
26. The Filer understands that, as disclosed in the First Report of the Trustee dated April 22, 2020 filed with the Supreme Court of British Columbia in Bankruptcy and Insolvency, at paragraphs 36 to 42, EncoreFX failed due to a liquidity squeeze brought about in part by the extreme exchange rate volatility as a result of the COVID-19 pandemic and the subsequent inability of some of its clients to honour their obligations to post margin on their out-of-the-money (OTM) positions due to the impact of COVID-19 on their own businesses, while EncoreFX was OTM with its liquidity providers and was obligated to post margin.
27. EncoreFX issued clients margin calls in accordance with their mark-to-market terms but many clients with OTM positions were not able to meet their margin calls in a timely manner.
28. As noted in the First Report of the Trustee, in order to be competitive within its industry, EncoreFX offered terms to certain clients booking EncoreFX derivatives that included no initial margin and OTM limits up to a predetermined amount (i.e., the client's derivative contract would have to be OTM greater than for example US $500,000 before EncoreFX would require the client to pay margin).
29. The liquidity squeeze came about as a number of clients became OTM on their transactions and defaulted on their obligations because of the rapid changes in the FX market and extreme market volatility caused by the COVID-19 pandemic, and as a consequence, EncoreFX was left OTM with its liquidity providers and was obligated to pay significant additional margin.
30. EncoreFX ownership determined that even if all OTM amounts owing could be collected from clients over time, there was no short-term liquidity available to EncoreFX to meet its obligations, and EncoreFX made the decision to suspend all trading activity as at March 29, 2020.
Enhanced measures and safeguards by the Filer to protect client assets
31. The two current officers of the Filer with signing authority, the Chief Financial Officer and Chief Compliance and Risk Officer, had no involvement with EncoreFX prior to the acquisition.
32. Senior managers of the Filer report directly to Global Reach Group level executives with respect to their operational and risk management functions. The management and dealing team of the Filer are very experienced FX industry professionals, many with more than 20 years MSB and FX derivatives experience.
33. The Filer and Global Reach Group operate a centralized treasury function that is required to meet Global Reach Group's UK regulatory standards. As such, the Filer has robust liquidity controls and stress tests positions before they are taken onto the book to ensure that it has sufficient capital and liquidity, including in the event of extreme market conditions.
34. In addition, the Global Reach Group is subject to investment regulation by the Financial Conduct Authority in the United Kingdom and would, as a matter of course, apply its Group minimum standards to all subsidiaries, including the application of Treating Customers Fairly, conflicts of interest and other conduct requirements. All customers will (as at EncoreFX) receive product disclosure statements which clearly set out the risks.
35. Additionally, Global Reach Group is currently putting in place measures to hold customer funds in trust in order to provide increased protection.
36. Moreover, the Filer has adopted the CFA Code of Ethics, adapted for hedging clients, and its dealers are required to successfully complete the CSI Derivatives Fundamentals and Options Licensing course.
Proposed Conduct of OTC Derivative Transactions
37. The Filer proposes to enter into bilateral OTC Derivative transactions with counterparties located in all provinces and territories of Canada that consist exclusively of persons or companies that are Permitted Counterparties or Eligible Commercial Hedgers. The Filer understands that the Permitted Counterparties and Eligible Commercial Hedgers would be entering into the OTC Derivative transactions for hedging purposes and not for speculative or investment purposes. The Underlying Interest of the OTC Derivatives to be entered into between the Filer and a Permitted Counterparty or an Eligible Commercial Hedger will consist of an actual or anticipated commercial or financial foreign currency asset or liability.
38. The Filer may provide early settlement limits and mark-to-market (MTM) limits before requiring margin or collateral, and will require a Permitted Counterparty or an Eligible Commercial Hedger to deposit margin or collateral with the Filer in respect of its obligations in connection with an OTC Derivative transaction that is OTM, as a means of managing the MTM risk that the Filer faces with its counterparties on OTM positions (where the MTM value of the OTC Derivative reflects a credit exposure to the Filer). A Permitted Counterparty or an Eligible Commercial Hedger will be credit risk assessed to determine the maximum MTM exposure acceptable to the Filer. If a Permitted Counterparty or Eligible Commercial Hedger's MTM exposure exceeds the acceptable MTM limit, they will be required to post additional collateral (or variation margin) to the Filer in order to maintain their position in the OTC Derivative.
39. Since the Filer's counterparties are not entering into OTC Derivatives transactions for speculative purposes, the Filer will stipulate a threshold amount in its contracts, which is the reference value of the MTM exposure of the OTC Derivative above which collateral has to be posted to the Filer. Higher credit risk counterparties are additionally required to post initial margin at the outset of an OTC Derivative transaction, as an extra cushion of support to protect the Filer against unexpected credit and operational risks. These risks can include problems such as operational error, large changes in MTM value of an OTC Derivative, as well as delays in receiving collateral.
40. The Filer seeks the Requested Relief as an interim, harmonized solution to the uncertainty and fragmentation that currently characterizes the regulation of OTC Derivatives across Canada, pending the development of a uniform framework for the regulation of OTC Derivative transactions in all provinces and territories of Canada.
Development of a modernized framework for OTC Derivatives
41. Ontario has now established a framework for regulating the trading of derivatives in Ontario (the Ontario Derivatives Framework) through amendments to the OSA that were made by the Helping Ontario Families and Managing Responsibility Act, 2010 (Ontario). The amendments to the OSA establishing the Ontario Derivatives Framework will not become effective until the date on which they are proclaimed in force. These amendments are not expected to be proclaimed in force until an ongoing public consultation on the regulation of OTC Derivatives has been completed.
42. On April 19, 2018, the Canadian Securities Administrators (the CSA) published a Notice and Request for Comment on the Proposed National Instrument 93-102 Derivatives: Registration (Proposed NI 93-102), and on June 14, 2018, the CSA published a Notice and Second Request for Comment on the Proposed National Instrument 93-101 Derivatives: Business Conduct (Proposed NI 93-101), which, together, are intended to implement a comprehensive regime for the regulation of persons or companies that are in the business of trading or advising on derivatives.
Rationale for Requested Relief
43. The Filer acknowledges that the definitions of the terms "security" and "derivative" in the OSA are broad and agrees that its clients could benefit from the protection of additional risk disclosure delivered in connection with the exemption order. Accordingly, the Filer is willing to electronically deliver or make available an information statement or other offering document to its clients in order to more fully explain the structure, features and risks of the Filer's OTC Derivatives, as more fully set out in Appendix B.
44. The Requested Relief would substantially address, for the Filer and its Permitted Counterparty and Eligible Commercial Hedger clients, the regulatory uncertainty and fragmentation that is currently associated with the regulation of OTC Derivative transactions in Canada, by permitting these parties to enter into OTC Derivative transactions in reliance upon exemptions from the dealer registration and prospectus requirements of the securities legislation of Ontario and each Applicable Jurisdiction on the basis of certain terms and conditions that are set forth in Proposed NI 93-101 and Proposed NI 93-102.
45. If the Requested Relief is granted, the Filer will comply with the terms and conditions of the Requested Relief including the Business Conduct and Risk Mitigation Terms and Conditions in Appendix B (collectively, the Terms and Conditions of the Relief).
46. The Filer acknowledges that the scope of the Requested Relief and the Terms and Conditions of the Relief may change as a result of developments in international and domestic capital markets or the Filer's activities, or as a result of any changes to the laws in Canada affecting trading in derivatives, commodity futures contracts, commodity futures options or securities.
Books and Records
47. The Filer acknowledges that it is or will become a "market participant" for the purposes of the OSA if the Requested Relief is granted. For the purposes of the OSA, and as a market participant, the Filer is required by subsection 19(1) of the OSA to: (i) keep such books, records and other documents as are necessary for the proper recording of its business transactions and financial affairs, and the transactions that it executes on behalf of others; and (ii) keep such books, records and documents as may otherwise be required under Ontario securities law.
48. For the purposes of its compliance with subsection 19(1) of the OSA, the Filer will keep books and records that comply with the requirements set out in Appendix B.
49. To the extent necessary and in respect of the OTC Derivative transactions, the Filer will comply with the derivatives trade reporting rules and instruments in effect in the provinces and territories of Canada.
The Principal Regulator is satisfied that the decision meets the test set out in the Legislation for the Principal Regulator to make the decision.
The decision of the Principal Regulator is that the Requested Relief is granted, provided that:
(a) the Filer takes reasonable steps and documents such steps in writing to ensure that the Filer solicits and transacts in OTC Derivatives only with clients and prospective clients in Canada that are Permitted Counterparties or Eligible Commercial Hedgers;
(b) the Filer conducts all OTC Derivatives transactions with clients in compliance with the Business Conduct and Risk Mitigation Terms and Conditions as set out in Appendix B;
(c) prior to first entering into an OTC Derivative transaction with a client, the Filer has
(i) provided to the client the Risk Disclosure Document (as defined in Appendix B) and has delivered, or has previously delivered, a copy of the Risk Disclosure Document provided to that client to the Principal Regulator; and
(ii) obtained a written or electronic acknowledgement from the client, confirming that the client has received, read and understood the Risk Disclosure Document;
(d) as represented in paragraph 34 hereof, Global Reach Group and the Filer remain in compliance with the Global Reach Group minimum standards applicable to all subsidiaries, including in connection with treating customers fairly, conflicts of interest and other conduct requirements in accordance with UK FCA standards;
(e) the Filer remains in compliance with the requirements of the PCMLTFA and FINTRAC that apply to the Filer;
(f) the Filer has furnished to the Principal Regulator the name and principal occupation of its officers and directors, together with the personal information form and authorization of indirect collection, use and disclosure of personal information provided for in Form 33-109F4 of National Instrument 33-109 Registration Information completed by any officer or director;
(g) the Filer will not provide advice or make a recommendation to a client or prospective client in relation to securities or derivatives, other than in connection with the Filer's FX Business and in accordance with the Business Conduct and Risk Mitigation Terms and Conditions as set out in Appendix B. For clarity, the Filer may provide general information through its website or other marketing materials about the merits of an FX transaction provided the general advice is fair, balanced and not misleading, and the Filer may provide clients with risk management advice and recommendations as to FX products or strategies for hedging purposes relative to specific circumstances and objectives in accordance with the Business Conduct and Risk Mitigation Terms and Conditions as set out in Appendix B. The Filer will not operate a managed account as that term is defined in section 1.1 of NI 31-103;
(h) 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 client to be material;
(i) 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 OTC Derivatives;
(j) the Requested Relief shall immediately expire upon the earliest of
A. four years from the date that this Decision is issued;
B. 90 days after the date of registration of the Filer under securities, commodity futures or derivatives legislation in any jurisdiction in Canada;
C. the issuance of an order or decision by a court, a Commission or other similar regulatory body in or outside of Canada, that suspends or terminates the ability of any member of the Global Reach Group to trade OTC Derivatives; and
D. with respect to an Applicable Jurisdiction, the coming into force of legislation or a rule by its Commission regarding the trading of derivatives with investors in such Applicable Jurisdiction
(the Interim Period).
Ontario Securities Commission
Ontario Securities Commission
"Clearing Corporation" means an association or organization through which Options or futures contracts are cleared and settled.
"Forward Contract" means an agreement, not entered into or traded on or through an organized market, stock exchange or futures exchange and cleared by a Clearing Corporation, to do one or more of the following on terms or at a price established by or determinable by reference to the agreement and at or by a time established by or determinable by reference to the agreement:
(a) make or take delivery of the Underlying Interest of the agreement; or
(b) settle in cash instead of delivery.
"Option" means an agreement that provides the holder with the right, but not the obligation, to do one or more of the following on terms or at a price determinable by reference to the agreement at or by a time established by the agreement:
(a) receive an amount of cash determinable by reference to a specified quantity of the Underlying Interest of the Option.
(b) purchase a specified quantity of the Underlying Interest of the Option.
(c) sell a specified quantity of the Underlying Interest of the Option.
"OTC Derivative" means one or more of, or any combination of, an Option, a Forward Contract, or any instrument of a type commonly considered to be a derivative, in which:
(a) the agreement relating to, and the material economic terms of, the Option, Forward Contract, swap or other instrument have been customized to the purposes of the parties to the agreement and the agreement is not part of a fungible class of agreements that are standardized as to their material economic terms;
(b) the creditworthiness of a party having an obligation under the agreement would be a material consideration in entering into or determining the terms of the agreement; and
(c) the agreement is not entered into or traded on or through an organized market, stock exchange or futures exchange.
"Underlying Interest" means, for a derivative, the commodity, interest rate, actual or anticipated commercial or financial foreign currency asset or liability, foreign exchange rate, security, economic indicator, index, basket, benchmark or other variable, or another derivative, and, if applicable, any relationship between, or combination of, any of the foregoing, from or on which the market price, value or payment obligations of the derivative are derived or based.
Business Conduct and Risk Mitigation
Terms and Conditions
Part I -- Risk disclosure
Risk Disclosure Statement [All clients]
1. The Filer will, prior to a client's first OTC Derivatives Transaction with the Filer, and as part of the account-opening process, provide the client with a separate risk disclosure document that clearly explains, in plain language, the transaction and the risks associated with the transaction (collectively the Risk Disclosure Document). The Risk Disclosure Document will include a plain language description of the structure, feature and risks of the OTC Derivative, and the potential risks to the client in the event of the bankruptcy or insolvency of the Filer.
2. The Risk Disclosure Document will clearly explain, in plain language, that the Filer is not registered under the securities, commodity futures or derivatives laws of any jurisdiction of Canada and that client assets are not protected under the Canadian Investor Protection Fund (CIPF), the U.S. Securities Investor Protection Corporation, or equivalent protections. The Risk Disclosure Statement will include a reference to and a copy of or link to this decision.
3. Prior to the client's first OTC Derivatives transaction, Filer will also 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 from and prominent among other acknowledgements provided by the client as part of the account-opening process.
4. Prior to a client's first Filer Transaction, Filer will ensure a complete copy of the Risk Disclosure Document to be provided to that client is delivered, or has previously been delivered, to the Principal Regulator.
Part II -- Core business conduct obligations [All clients]
Acting fairly, honestly and in good faith
5. The Filer shall act and shall take reasonable steps to cause each individual acting on its behalf to act fairly, honestly and in good faith with clients.
Conflicts of interest
6. The Filer will establish, maintain and apply reasonable policies and procedures to identify existing material conflicts of interest, and material conflicts of interest that the Filer in its reasonable opinion would expect to arise, between Filer, including each individual acting on behalf of the Filer, and a client of the Filer.
7. The Filer will respond to an existing or potential conflict of interest identified under the preceding paragraph. If a client, acting reasonably, would expect to be informed of a conflict of interest identified under the preceding paragraph, the Filer will disclose, in a timely manner, the nature and extent of the conflict of interest to the client whose interest conflicts with the interest identified.
8. On and after July 1, 2021, the Filer will comply, and will take reasonable steps to cause each individual acting on its behalf to act to comply, with the enhanced conflicts of interest provisions in section 13.4 and 13.4.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) as if the Filer were a "registered firm" and individuals acting on behalf of Filer were "registered individuals".
Gatekeeper know-your-client (KYC) obligations
9. The Filer will establish, maintain and apply reasonable policies and procedures to
(a) obtain facts necessary to comply with applicable legislation, including anti-money laundering (AML) legislation, relating to the verification of a client's identity,
(b) establish the identity of a client and, if the Filer has cause for concern, make reasonable inquiries as to the reputation of the client,
(c) if the Filer will, as a result of its relationship with a client have any credit risk in relation to the client, establish the creditworthiness of the client.
10. For the purpose of establishing the identity of a client that is a corporation, partnership or trust, the Filer will establish the following:
(a) the nature of the client's business;
(b) the identity of any individual who meets either of the following:
(i) in the case of a corporation, is a beneficial owner of, or exercises direct or indirect control or direction over, more than 25% of the voting rights attached to the outstanding voting securities of the corporation;
(ii) in the case of a partnership or trust, exercises control over the affairs of the partnership or trust.
11. The Filer will take reasonable steps to keep the information required under the preceding two paragraphs current. The requirement in the preceding two paragraphs does not apply if the client is a registered firm or a Canadian financial institution.
12. The Filer will adhere to the CFA Code of Ethics and take reasonable steps to ensure that its dealers are required to successfully complete the CSI Derivatives Fundamentals and Options Licensing course before soliciting or transacting with any client or prospective client.
13. The Filer will document and, in a manner that a reasonable person would consider fair and effective, promptly respond to each complaint made to the Filer about any product or service offered by the Filer or an individual acting on behalf of the Filer.
14. The Filer will include in the Risk Disclosure Document disclosure that clearly explains, in plain language, that the Filer is not a registered dealer in any jurisdiction in Canada and as such is not required to make available to clients the services of an independent dispute resolution or mediation service such as the Ombudsman for Banking Services and Investments (OBSI).
15. The Filer will promptly deliver a written confirmation of the OTC Derivatives transaction to either of the following:
(a) the client;
(b) if the client has consented in writing, a registered adviser acting for the client.
Tied Selling Restriction
16. The Filer will not impose undue pressure on or coerce a person or company to obtain an OTC Derivatives-related product or service from a particular person or company, including the Filer or any of its affiliated entities, as a condition of obtaining another product or service from the Filer.
Part III -- Supplemental business conduct obligations for certain clients
17. The Filer must comply with the requirements in this Part in relation to all clients, other than
(a) a client that is a Permitted Counterparty or
(b) a client that is an Eligible Commercial Hedger, if the Filer has provided the Specified Commercial Hedger with a copy of this Decision including Appendices and the Eligible Commercial Hedger has provided the Filer with written waiver confirming that they do not wish to receive the protections provided in this Part.
Derivatives-party-specific needs and objectives
18. The Filer will take reasonable steps to ensure that, before it makes a recommendation to or accepts an instruction from a client to transact in an OTC Derivative, it has sufficient information regarding all of the following to enable it to meet its obligations under section 18 [Suitability]:
(a) the client's needs and objectives with respect to its transacting in OTC Derivatives;
(b) the derivatives party's financial circumstances;
(c) the derivatives party's risk tolerance;
(d) if applicable, the nature of the derivatives party's business and the operational risks it wants to manage.
19. The Filer will take reasonable steps to keep the information required under the preceding section current.
20. The Filer, or an individual acting on behalf of the Filer, must take reasonable steps to ensure that, before it makes a recommendation to or accepts an instruction from a client to transact in an OTC Derivative, both the OTC Derivative and the transaction are suitable for the client.
21. If a client instructs the Filer, or an individual acting on behalf of the Filer, to transact in an OTC Derivative and, in the Filer's reasonable opinion, following the instruction would result in a transaction or derivative that is not suitable for the client, the Filer must inform the client in writing of the Filer's opinion and must not transact in the OTC Derivative unless the client instructs the Filer to proceed anyway.
22. On and after December 31, 2021, the Filer will comply, and will take reasonable steps to cause each individual acting on its behalf to act to comply, with the enhanced know-your-client, know-your product and suitability obligations Division 1 of Part 13 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) as if Filer were a "registered firm" and individuals acting on behalf of Filer were "registered individuals".
Permitted referral arrangements
23. Neither the Filer, nor any individual acting on behalf of the Filer, will participate in a referral arrangement in respect of an OTC Derivative with another person or company unless all of the following apply:
(a) before a client is referred by or to the Filer, the terms of the referral arrangement are set out in a written agreement between the Filer and the person or company;
(b) the Filer records all referral fees;
(c) the Filer, or the individual acting on behalf of the Filer, ensures that the information prescribed above is provided to the client in writing before the Filer or the individual receiving the referral either opens an account for the client or provides services to the client.
24. The Filer, or an individual acting on behalf of the Filer, will not refer a client to another person or company unless the Filer first takes reasonable steps to verify and conclude that the person or company has the appropriate qualifications to provide the services, and, if applicable, is registered to provide those services.
25. The written disclosure of the referral arrangement required by this Part [Permitted referral arrangements] must include all of the following:
(a) the name of each party to the agreement referred to in this section;
(b) the purpose and material terms of the agreement, including the nature of the services to be provided by each party;
(c) any conflicts of interest resulting from the relationship between the parties to the agreement and from any other element of the referral arrangement;
(d) the method of calculating the referral fee and, to the extent possible, the amount of the fee;
(e) the category of registration, or exemption from registration relied upon, of each derivatives firm and individual acting on behalf of the derivatives firm that is a party to the agreement with a description of the activities that the derivatives firm or individual is authorized to engage in under that category or exemption and, giving consideration to the nature of the referral, the activities that the derivatives firm or individual is not permitted to engage in;
(f) any other information that a reasonable client would consider important in evaluating the referral arrangement.
26. If there is a change to the information set out in the previous section, the Filer must ensure that written disclosure of that change is provided to each client affected by the change as soon as possible and no later than the 30th day before the date on which a referral fee is next paid or received.
27. On and after July 1, 2021, the Filer will comply, and will take reasonable steps to cause each individual acting on its behalf to act to comply, with the enhanced referral arrangement provisions in sections 13.7 to 13.10 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) as if the Filer were a "registered firm" and individuals acting on behalf of the Filer were "registered individuals".
Restriction on lending
28. Except as described in paragraphs 38 to 39, inclusive of the Requested Relief, the Filer will not lend money, extend credit or provide margin to a client.
Restriction on advising or managed accounts
29. The Filer is not registered to provide advice in relation to investments involving securities or derivatives. Accordingly, except as described below, the Filer will not advise a client or prospective client about the merits of an investment in securities or derivatives or recommend or represent that an investment in securities or derivatives is a suitable investment for the client.
30. For clarity, the Filer may provide general information through its website or other marketing materials about the merits of an FX transaction provided the general advice is fair, balanced and not misleading and the advice is not directed at or tailored to the needs of the particular person or company receiving the information, and the Filer may provide clients with risk management advice and recommendations as to FX products or strategies for hedging purposes relative to specific circumstances and objectives.
31. The Filer will not operate a managed account as that term is defined in section 1.1 of NI 31-103.
Restriction on contracts linked to novel or emerging asset classes
32. The Filer will not offer OTC Derivatives linked to bitcoin, ether, cryptocurrencies or other novel or emerging asset classes, or options or other derivatives thereon, to investors in the Applicable Jurisdictions without the prior written consent of the Principal Regulator.
Part IV -- Client accounts
33. The Filer must comply with the requirements in this Part in relation to all clients, other than
(a) a client that is a Permitted Counterparty or
(b) a client that is an Eligible Commercial Hedger, if the Filer has provided the Eligible Commercial Hedger with a copy of this Decision including Appendices and the Eligible Commercial Hedger has provided the Filer with written waiver confirming that they do not wish to receive the protections provided in this Part.
Relationship disclosure information
34. For the purposes of a requirement in this decision to deliver a document or provide disclosure to a client, including client relationship disclosure, trade confirmations and account statements, the Filer may deliver the document or provide the disclosure to the client in electronic form if the client has previously provided written consent to receive such documents in electronic form.
35. The Filer will, prior to a client's first transaction in an OTC Derivative, and as part of the account-opening process, provide the client with all information that a reasonable person would consider important about the client's relationship with the Filer and each individual acting on behalf of the Filer. Without limiting the foregoing, the information delivered to a client must include all of the following:
(a) a description of the nature or type of the client's account;
(b) a description of any conflicts of interest that the Filer is required to disclose to a client under this decision;
(c) disclosure of the fees or other charges the client might be required to pay related to the client's account;
(d) a general description of the types of transaction fees or other charges the client might be required to pay in relation the client's account;
(e) a general description of any compensation paid to the Filer by any other party in relation to a client's transactions in OTC Derivatives;
(f) disclosure of the Filer's obligations under this decision if a client has a complaint;
(h) a statement that the Filer is not registered to provide advice in relation to investments involving securities or derivatives; and
(i) the information the Filer must collect about the client under this decision, including the Filer's obligations to collect Gatekeeper know-your-client (KYC) information.
36. The Filer must deliver the information in the preceding section to the client in writing before the Filer transacts in an OTC Derivative with, for or on behalf of the client. If there is a significant change in respect of the information delivered to a client in the preceding section, the Filer must take reasonable steps to notify the client of the change in a timely manner and, if possible, before the Filer next transacts in an OTC Derivative with, for or on behalf of the client.
Content and delivery of transaction information
37. The Filer will promptly deliver a written confirmation of the transaction to either of the following:
(a) the client;
(b) if the client has consented in writing, a registered adviser acting for the client.
38. If the Filer transacts with, for or on behalf of a client that is an Eligible Commercial Hedger that has not waived its rights under this Part, the written confirmation required under the preceding section must include all of the following, if applicable:
(a) a description of the transaction;
(b) a description of the agreement that governs the transaction;
(c) the notional amount, quantity or volume of the underlying asset of the transaction;
(d) the number of units of the transaction (if applicable);
(e) the total price paid for the transaction and the per unit price of the transaction;
(f) the commission, sales charge, service charge and any other amount charged in respect of the transaction;
(g) the particular entity that transacted with the client and whether such entity acted as principal or agent in relation to the transaction;
(h) the date and the name of the trading facility on which the transaction took place;
(j) the date of the transaction;
39. The Filer must deliver a statement to a client, at the end of each quarterly period, if either of the following applies:
(a) within the quarterly period the Filer transacted in an OTC Derivative with, for or on behalf of the client;
(b) the client has an outstanding position resulting from a transaction where the Filer transacted in an OTC Derivative with, for or on behalf of the client.
40. A statement delivered under this section must include all of the following information for each transaction made with, for or on behalf of the client during the period covered by the statement, if applicable:
(a) the date of the transaction;
(b) a description of the transaction, including notional amount, the number of units of the transaction, the per unit price and the total price;
(c) information sufficient to identify the agreement that governs the transaction.
41. A statement delivered under this section must include all of the following information as at the date of the statement, if applicable:
(a) a description of each outstanding OTC Derivative;
(b) the valuation, as at the statement date, of each outstanding OTC Derivative referred to in paragraph (a);
(c) the final valuation, as at the expiry or termination date, of each OTC Derivative that expired or terminated during the period covered by the statement;
(d) a description of all client assets held or received by the Filer as collateral, and the name of the entity holding such collateral;
(e) any cash balance in the client's account;
(f) a description of any other client asset held or received by the Filer;
(g) the total market value of all cash, OTC Derivatives and other assets in the client's account, other than assets held or received as collateral.
Custody of client assets
42. The Filer will hold assets of a client resident in Canada
(a) separate and apart from the Filer's own property,
(b) in trust for the client,
(c) in the case of cash, in a designated trust account at a Canadian custodian (as defined in NI 31-103) or a Canadian financial institution.
43. The Filer will comply with the requirements of section 12.3 [Insurance -- dealer] of NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and Appendix A [Bonding and Insurance Clauses] to NI 31-103 as if it were a registered dealer, except modified as follows:
A. Fidelity -- cover required
B. On Premises -- cover not required as no assets of material value are held on premises and no client assets are held on site
C. In transit -- cover not required as there will be no physical transit of cash and securities
D. Forgery or alterations -- cover required
E. Securities -- cover not required as risk not applicable to the Filer's business model.
44. If, at any time, the excess working capital of the Filer, as calculated in accordance with Form 31-103F1 Calculation of Excess Working Capital, is less than zero, the Filer must notify the regulator or, in Québec, the securities regulatory authority as soon as possible.
45. The excess working capital of the Filer, as calculated in accordance with Form 31-103F1 Calculation of Excess Working Capital, must not be less than zero for 2 consecutive days.
46. For the purpose of completing Form 31-103F1 Calculation of Excess Working Capital, the minimum capital is the amount prescribed in section 12.1 of NI 31-103 for a registered dealer that is not also registered as an investment fund manager.
Part V -- Compliance and record-keeping
47. The Filer will establish, maintain and apply policies, procedures, controls and supervision sufficient to provide reasonable assurance that all of the following are satisfied:
(a) the Filer and each individual acting on its behalf in relation to transacting in a Filer Contract complies with securities legislation relating to trading and advising in securities or derivatives;
(b) the risks relating to its trading activities are managed in accordance with Filer's risk management policies and procedures;
(c) each individual who performs an activity on behalf of Filer relating to transacting in, or providing advice in relation to, an OTC Derivative, prior to commencing the activity and on an ongoing basis,
(i) has the experience, education and training that a reasonable person would consider necessary to perform the activity competently,
(ii) without limiting subparagraph (i), has the understanding of the structure, features and risks of each OTC Derivative that the individual transacts in, and
(iii) has conducted themselves with integrity.
Business continuity and disaster recovery
48. The Filer will establish, maintain and apply a written business continuity and disaster recovery plan that is reasonably designed to allow the Filer to minimize disruption and allow Filer to continue its business operations.
49. The business continuity and disaster recovery plan must outline the procedures to be followed in the event of an emergency or other disruption of Filer's normal business activities.
50. The Filer must conduct independent tests of its business continuity and disaster recovery plan on a reasonably frequent basis and not less than annually.
Derivatives party agreement
51. The Filer must ensure that, before transacting in a derivative with a counterparty that it enters into an agreement with that counterparty that establishes all of the material terms governing the trading relationship between the counterparties.
52. The Filer will keep records of its transactions, including all of the following, as applicable:
(a) records containing a general description of its derivatives business and activities conducted with clients, and compliance with applicable provisions of securities legislation, including
(i) records of client assets, and
(ii) records documenting the firm's compliance with internal policies and procedures;
(b) for each OTC Derivatives transaction, records demonstrating the existence and nature of the OTC Derivatives transaction, including
(i) records of communications with the client relating to the OTC Derivatives transaction,
(ii) documents provided to the client to confirm the transaction, the terms of the OTC Derivatives and each transaction relating to the OTC Derivatives,
(iii) correspondence relating to the OTC Derivatives and each transaction relating to the OTC Derivatives, and
(iv) records made by staff relating to the OTC Derivatives and each transaction relating to the OTC Derivatives, including notes, memos or journals;
(c) for each OTC Derivatives transaction, records that provide for a complete and accurate understanding of the OTC Derivatives transaction and all transactions relating to the OTC Derivatives transaction, including
(i) records relating to pre-execution activity for each transaction including all communications relating to quotes, solicitations, instructions, transactions and prices however they may be communicated,
(ii) reliable timing data for the execution of each transaction relating to the OTC Derivatives, and
(iii) records relating to the execution of the transaction, including
(A) information obtained to determine whether the client qualifies as a Permitted Counterparty or Eligible Commercial Hedger, as applicable,
(B) fees or commissions charged,
(C) any other information relevant to the transaction, and
(D) information used in calculating the OTC Derivatives valuation;
(d) an itemized record of post-transaction processing and events, including a record in relation to the calculation of margin and exchange of collateral;
(e) the price and valuation of the OTC Derivatives transaction.
Form, accessibility and retention of records
53. The records required to be maintained in this Instrument must be kept in a safe location, readily accessible and in a durable form for a period of 8 years following the date on which the derivative expires or is terminated, and
54. A record required to be provided to the regulator or the securities regulatory authority must be provided in a format that is capable of being read by the regulator or the securities regulatory authority.
Part VI -- Risk management policies and procedures
(1) The Filer must establish, maintain, and apply a written framework that is reasonably designed to establish a system of controls and supervision to monitor and manage the risks associated with its derivatives-related activity.
(2) The framework referred to in subsection (1) must be approved by the Filer's board of directors, or individuals acting in a similar capacity for the firm.
(3) The risk management framework referred to in subsection (1) must, at a minimum
(a) identify material risks to the Filer, including risks from affiliated entities and from specific derivatives or types of derivatives,
(b) establish risk tolerance limits,
(c) establish requirements for the Filer to appropriately manage risks,
(d) provide for the periodic review of the Filer's risks and risk tolerance limits to ensure they reflect the firm's derivatives related activity,
(e) permit senior management to monitor compliance with risk management requirements and risk tolerance limits in order to detect and address non-compliance,
(f) provide for periodic reports to the Filer's senior management and its board of directors on the Filer's material risks, risk tolerance limits, compliance with risk management requirements, compliance with risk tolerance levels and recommendations for changing the risk management framework and risk tolerance limits, and
(g) when there is a material change to the Filer's risk exposures or a material breach of a risk limit, require the Filer to on a timely basis, provide the firm's board of directors, or individuals acting in a similar capacity for the firm, with a report relating to those changes.
(4) The Filer must conduct an independent review of its risk management framework on a reasonably frequent basis.
Agreement for process of determining the value of a derivative
56. The Filer must agree on and clearly document the processes for determining the value of each OTC Derivatives transaction.
Agreement for process relating to disputes
(1) The Filer must enter into a written agreement with its counterparties that establishes procedures and processes to identify, record and monitor disputes relating to material terms or valuation and exchange of collateral between the Filer and its counterparties, and to resolve disputes relating to the material terms or valuation of an OTC Derivative in a timely manner.
(2) If a dispute referred to in subsection (1) has not been resolved within 30 days of the date when the Filer should, acting reasonably, become aware of the dispute, the Filer must report the dispute to the Principal Regulator.
(1) The Filer must establish, maintain and apply written policies and procedures that are reasonably designed to, at least once each calendar year, conduct portfolio reconciliation for all derivatives to which the Filer is a counterparty.
(2) The Filer must establish, maintain and apply written policies and procedures to resolve discrepancies in materials terms and valuations identified as a result of the portfolio reconciliation as soon as possible after they are identified.
(3) The Filer must enter into a written agreement with each derivatives party that describes the terms of the portfolio reconciliation required to be conducted under subsection (1).
(1) The Filer must establish, maintain and apply written policies and procedures that are reasonably designed to do all of the following:
(a) terminate fully offsetting derivatives with a counterparty that is a derivatives dealer in a timely fashion;
(b) terminate fully offsetting derivatives with a counterparty that is not a derivatives dealer, at the request of that derivatives party, in a timely fashion;
(c) engage in bilateral portfolio compression exercises with each of its counterparties that is a derivatives dealer, when appropriate; and
(d) engage in a multilateral portfolio compression exercise with each of its counterparties that is a derivatives dealer, when appropriate.
(2) Despite subsection (1), the policies and procedures required in that subsection do not need to apply to a derivative that is cleared.