March 19, 2019
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 The Depository Trust & Clearing Corporation (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from the requirement (the Reporting Requirement) of section 6.1 of National Instrument 45-106 Prospectus Exemptions (NI 45-106) that the Filer file a completed Form 45-106F1 Report of Exempt Distribution when the Filer distributes shares of its common stock (the Common Shares) to accredited investors under section 2.3 of NI 45-106 or, in Ontario, section 73.3 of the Securities Act (Ontario) (the Act) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the OSC) is the principal regulator for this application; and
(b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta and Québec (the Passport Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and OSC Rule 45-501 Ontario Prospectus and Registration Exemptions 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 is a user-owned entity that, through its subsidiaries, serves as the primary financial market infrastructure serving the United States capital markets across multiple asset classes, including equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments, mutual funds, insurance, alternative investment products and OTC derivatives. It is a non-public holding company that owns a number of companies operating financial market infrastructure, including Fixed Income Clearing Corporation (FICC) and two other clearing agencies (collectively, including FICC, the Clearing Agencies). The Filer is organized under New York law.
FICC is a business corporation organized under New York law providing clearing, settlement, risk management, and central counterparty (CCP) services for fixed income securities in the United States, including treasury securities and mortgage-backed securities. FICC operates clearing services through two divisions, the Government Securities Division (GSD) and the Mortgage-Backed Securities Division (MBSD).
The Common Shares are held of record by approximately 290 members of the Clearing Agencies. The Common Shares are allocated in accordance with a formula based on the relative usage of the Clearing Agencies’ services by members. Of the participants that own Common Shares, (i) approximately 33% are banks holding approximately 18% of the issued and outstanding Common Shares, (ii) approximately 66% are broker-dealers holding approximately 80% of the issued and outstanding Common Shares, and (iii) approximately 1% are other financial institutions. In addition, the Filer’s Series A Preferred Shares are held of record by Stock Clearing Corporation, a wholly owned subsidiary of New York Stock Exchange LLC, its Series B Preferred Shares are held of record by the Financial Industry Regulatory Authority, Inc. (FINRA), and its Series C Preferred Shares are held of record by institutional investors.
As at September 30, 2018, the condensed statements of financial condition of the Filer showed common shareholders’ par value of US$5 million and paid-in capital of US$411 million, while the value of participants’ and clearing funds and other participants’ assets was US$34.7 billion.
FICC is applying to the OSC for an order exempting it from recognition as a clearing agency under section 21.2 of the Act in order to provide its CCP services to Ontario market participants (the Recognition Relief). Depending on the extent of interest in becoming members of FICC among market participants in the Passport Jurisdictions following the granting of the Recognition Relief by the OSC, FICC might subsequently apply for corresponding orders in one or more of the Passport Jurisdictions.
Netting Members of GSD other than Registered Investment Company Netting Members are categorized as Tier One Netting Members. Registered Investment Company Netting Members and CCIT Members are categorized as Tier Two Members. Clearing Members of MBSD other than Registered Investment Company Clearing Members are categorized as Tier One Members. Registered Investment Company Clearing Members are categorized as Tier Two Members.
Each Netting Member of GSD (other than a central securities depository, Federal Reserve bank, central counterparty or Registered Investment Company Netting Members) and Clearing Member of MBSD (other than a central securities depository, Federal Reserve bank, central counterparty or Registered Investment Company Clearing Member) is required to purchase and own Common Shares. A Comparison-Only Member (other than a central securities depository, Federal Reserve bank or central counterparty) or a Tier Two Member of GSD and a Registered Investment Company Clearing Member of MBSD is permitted, but not required, to purchase and own Common Shares. Other members of GSD and MBSD are neither required nor permitted to purchase and own Common Shares.
Subject to FICC obtaining exemptions from any applicable requirements to be recognized as a clearing agency, Canadian entities would be eligible to be Foreign Netting Members of GSD or Foreign Clearing Members of MBSD, in which case they would be required to purchase Common Shares. Canadian entities also would be eligible to be CCIT Members of GSD, in which case they would be permitted to purchase Common Shares.
A shareholders agreement restricts the transfer of the Common Shares and the Filer’s Series A Preferred Shares and Series B Preferred Shares. The Series C Preferred Shares contain a legend that restricts transfers, unless pursuant to a registration statement declared effective under the Securities Act of 1933, as amended (the Securities Act), to (i) the Filer, (ii) the lead managers for the offering of the those shares, and (iii) for so long as those shares are eligible for resale pursuant to Rule 144A under the Securities Act (Rule 144A), “qualified institutional buyers” as defined in Rule 144A.
Ownership of the Common Shares is not a financial investment, but instead is a vehicle for supporting the Clearing Agencies and influencing their policies and operations through the election of directors. It guarantees that members of the Clearing Agencies govern and control the activities of the Clearing Agencies, including the kinds and quality of services provided and the service fees charged. It enables members of the Clearing Agencies to be in a position to assure that the Clearing Agencies establish fees that are cost-based and use-based.
The securities of the Filer (other than non-convertible debt securities) being beneficially owned by more than 50 persons reflects the extensive scope of the activities of the Filer, including its wholly owned subsidiaries, in the world’s largest financial market. The larger number of securityholders does not indicate the Filer should be considered other than as a non-public entity, although it is unable to rely on the “private issuer” exemption in NI 45-106 or the Act, under which there is no Reporting Requirement.
Under the Recognition Relief, FICC would promptly notify the OSC of the admission of any new Ontario member and would provide the OSC with certain quarterly information, including a current list of all Ontario members, and promptly provide such other information as may be requested from time to time by the OSC or its staff. The Filer would propose to provide equivalent notice and information if it is granted an exemption from recognition in any of the Passport Jurisdictions.
Decision
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 under the Legislation is that the Exemption Sought is granted, provided that:
(a) the Common Shares are distributed only to “permitted clients” (as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations) other than individuals;
(b) the Filer is not a reporting issuer in any jurisdiction of Canada at the time of the distribution; and
(c) upon the request of staff of a securities regulatory authority of a jurisdiction of Canada, the Filer will promptly provide information about any distribution made under this decision.
“Winnie Sanjoto”
Winnie Sanjoto, Manager, Corporate Finance