Headnote
National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions – Application by investment dealer (Filer) for relief from prospectus requirement in connection with distribution of contracts for difference and OTC foreign exchange contracts (collectively, CFDs) to investors, subject to terms and conditions – Filer acts as both market intermediary and as principal or counterparty to CFD transaction with client – Filer registered as investment dealer and a member of the Investment Industry Regulatory Organization of Canada (IIROC) – Filer complies with IIROC rules and IIROC acceptable practices applicable to offerings of CFDs – Filer seeking relief to permit Filer to offer CFDs to investors on the basis of clear and plain language risk disclosure document rather than a prospectus – risk disclosure document contains disclosure substantially similar to risk disclosure document required for recognized options in OSC Rule 91-502 Trades in Recognized Options, the regime for OTC derivatives contemplated by former proposed OSC Rule 91-504 OTC Derivatives (which was not adopted), and the Quebec Derivatives Act – Relief consistent with relief contemplated by OSC Staff Notice 91-702 Offerings of contracts for difference and foreign exchange contracts to investors in Ontario(OSC SN 91-702) – Relief revokes and replaces relief previously granted to Filer in April 2003 in respect of distribution of OTC foreign exchange contracts – Relief granted, subject to terms and conditions as described in OSC SN 91-702 including four-year sunset clause
Legislation Cited
Securities Act, R.S.O. 1990, c.S.5, as am., s. 53 and 74(1) NI 45-106 Prospectus and Registration Exemptions, s. 2.3 OSC Rule 91-502 Trades in Recognized Options OSC Rule 91-503 Trades in Commodity Futures Contracts and Commodity Futures Options Entered into on Commodity Futures Exchanges Situate Outside of Ontario Proposed OSC Rule 91-504 OTC Derivatives (not adopted)
October 14, 2011
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 Friedberg Mercantile Group Ltd. (the Filer)
DECISION
Background
The principal regulator 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 the prospectus requirement in respect of the distribution of contracts for difference and over-the-counter (OTC) foreign exchange contracts (collectively, CFDs) to investors resident in Canada (the Requested Relief) subject to the terms and conditions below.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application (the Principal Regulator); and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada, other than the provinces of Quebec and Alberta, (the Non-Principal Jurisdictions, and, together with the Jurisdiction, the Applicable Jurisdictions).
Interpretation
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this Decision, unless otherwise defined.
Representations
This Decision is based on the following facts represented by the Filer:
The Filer
The Filer is a corporation existing under the Canada Business Corporations Act, with its only offices in Toronto, Ontario.
The Filer is (and has for many years been) registered as a dealer in the category of investment dealer in each of the provinces and territories of Canada, and is a member of the Investment Industry Regulatory Organization of Canada (IIROC).
The Filer does not have any securities listed or quoted on an exchange or marketplace in any jurisdiction inside or outside of Canada.
The Filer is not, to the best of its knowledge, in default of any requirements of securities legislation in Canada or IIROC Rules or IIROC Acceptable Practices (as defined below).
The Filer (as successor at law to Friedberg Mercantile Group) has previously been granted an exemption from the prospectus requirement in the Jurisdiction by Order dated April 15, 2003 (the Existing Relief) with respect to trading in OTC derivatives in which the underlying interests consist entirely of currencies (OTC foreign exchange contracts). The Filer has been offering OTC foreign exchange contracts to investors, including retail investors, on the basis of the Existing Relief and in compliance with applicable IIROC Rules and other IIROC Acceptable Practices.
The Filer wishes to offer OTC foreign exchange contracts and other types of CFDs to investors in the Applicable Jurisdictions on the terms and conditions described in this Decision. For the Interim Period (as defined below), the Filer is seeking the Requested Relief in connection with this proposed offering of CFDs in Ontario and intends to rely on this Decision and the “Passport System” described in MI 11-102 (the Passport System) to offer CFDs in the Non-Principal Jurisdictions.
In Québec, the Filer has applied for an order from the Autorité des marchés financiers (the AMF) to offer CFDs to both accredited and retail investors pursuant to the provisions of the Derivatives Act (Québec) (the QDA). The final AMF Order will, if granted, exempt the Filer from the qualifying requirement set forth in section 82 of the QDA relating to the creation or marketing of CFDs offered to the public, subject to certain terms and conditions.
In Alberta, the Filer understands that staff of the Alberta Securities Commission have advised other IIROC members that they have public interest concerns with a filer relying on the Passport System to passport a prospectus exemption order relating to CFDs. Accordingly, to the extent the Filer wishes to offer CFDs to investors in Alberta, the Filer intends to make a separate local application for relief in that jurisdiction.
As a member of IIROC, the Filer is only permitted to enter into CFDs pursuant to the rules and regulations of IIROC (the IIROC Rules).
In addition, IIROC has communicated to its members certain additional expectations as to acceptable business practices (IIROC Acceptable Practices) as articulated in IIROC's “Regulatory Analysis of Contracts for Differences (CFDs)” published by IIROC on June 6, 2007, as amended on September 12, 2007 (the IIROC CFD Paper), for any IIROC member proposing to offer OTC foreign exchange contracts or other types of CFDs to investors. To the best of its knowledge, the Filer is in compliance with IIROC Acceptable Practices in offering CFDs. The Filer will continue to offer CFDs in accordance with IIROC Acceptable Practices as may be established from time to time.
The Filer is required by IIROC to maintain a certain level of capital to address the business risks associated with its activities. The capital reporting required by IIROC (as per the calculation in the Joint Regulatory Financial Questionnaire (the JRFQ) and the Monthly Financial Reports to IIROC) is based predominantly on the generation of financial statements and calculations as to ensure capital adequacy. The Filer, as an IIROC member, is required to have a specified minimum capital which includes having any additional capital required with regards to margin requirements and other risks. This risk calculation is summarized as a risk adjusted capital calculation which is submitted in the firm's JRFQ and required to be kept positive at all times.