On October 10, 2013 the Ontario Securities Commission issued Staff Notice 21-707Swap Execution Facilities to notify that it provided exemptive relief in respect of a number of “Swap Execution Facilities” or “SEFs” regulated by the U.S. Commodity Futures Trading Commission (the CFTC) from the requirement to be recognized as an exchange in Ontario.
Background – CFTC regulation of SEFs
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) certain amendments were made to the Commodity Exchange Act (U.S.) (the CEA) to establish a new regulatory framework for swaps. Among other changes to the CEA, the Dodd-Frank Act established SEFs as a new regulated market category, and required that the execution of certain swaps occur on a designated contract market or SEF.
The Dodd-Frank Act defines an SEF as “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility that: (A) facilitates the execution of swaps between persons; and (B) is not a designated contract market.” The CFTC’s final SEF Rule, adopted on May 16, 2013 (the SEF Rule), formalizes this definition and establishes registration requirements for SEFs as well as core principles to govern the operation of SEFs.
The SEF Rule had an effective date of August 5, 2013 with general compliance required as of October 2, 2013. The CFTC granted temporary registration to a number of SEFs in advance of the October 2 deadline to be effective until the CFTC has fully reviewed each SEF application for full compliance with the applicable requirements under the CEA and the SEF Rule.
While securities legislation in Ontario does not define the term “exchange”, the Companion Policy to National Instrument 21-101 Marketplace Operation provides that Canadian Securities regulators would generally consider a “marketplace” to be an exchange where it, among other things, sets requirements governing the conduct of its participants and disciplines marketplace participants by means other than exclusion from trading. While a comprehensive framework for the regulation of derivatives in Ontario has yet to be enacted, effective December 8, 2010, the definition of “marketplace” under the Securities Act (Ontario) was expanded from its application to securities only to apply to any person or company that “constitutes, maintains or provides a market or facility for bringing together buyers and sellers of securities or derivatives”.
In order to comply with the SEF Rule, one of the many obligations of a regulated SEF is to have requirements governing the conduct of its participants, to monitor compliance with those requirements and to discipline participants, including by means other than exclusion from the marketplace.
Accordingly, OSC staff state in the Staff Notice that “[b]ecause SEFs have self-regulatory responsibilities, they are considered “exchanges” under Ontario securities law. If an SEF provides access to participants in Ontario, it is considered to be doing business in Ontario and must be recognized as an exchange or obtain an exemption from recognition.” Consequently, the OSC granted temporary relief to a number of SEF applicants from the requirement to be recognized as an exchange, subject to a number of conditions, including the requirement to submit a more fulsome application for a subsequent relief order which is to replace the temporary relief. It is also a condition of the temporary relief orders that the SEF will not provide direct access to an Ontario participant unless the Ontario participant is appropriately registered as applicable under Ontario securities laws or is exempt from or not subject to those requirements, and qualifies as an “eligible contract participant” under the CEA.
Similar relief was also granted to certain SEFs by the Autorité des marchés financiers (the AMF) in Quebec from the requirement to be recognized as an exchange under the Derivatives Act (Quebec) and from the requirements of National Instrument 21-101 Marketplace Operation and National Instrument 23-101 Trading Rules.