In an effort to reduce the regulatory burden for international firms providing trading or advisory services to institutional investors in Ontario, the Ontario Securities Commission (OSC) has published a proposal that would eliminate the need to file formal applications for exemptive relief to trade or advise on futures and options on futures listed on non-Canadian exchanges for qualified “permitted clients” in Ontario.
- Proposed OSC Rule 32-506 (Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers (Proposed OSC Rule 32-506) is made under the Commodity Futures Act (Ontario) (CFA). Amendments are also proposed for OSC Rule 91-502 Trades in Recognized Options (the Proposed 91-502 Amendment).
- Proposed OSC Rule 32-506 and the Proposed 91-502 Amendment (together, the Proposed Instrument) would exempt international firms from certain CFA registration requirements and proficiency requirements in OSC Rule 91-502 for which discretionary relief is currently only available on an application basis.
- OSC staff will continue to consider applications for exemptive relief by international firms and other market participants that raise novel issues on a case-by-case basis.
Under the CFA, no person may trade in a commodity futures contract or a commodity futures option unless registered as a dealer, or an exemption is available. Similarly, no person may act as an adviser unless registered as an adviser or an exemption is available. Exemptions from these registration requirements are available under the CFA. However, unlike the securities regulatory regime, the CFA does not include a standardized set of exemptions for international firms that only deal with institutional clients. As a result, international dealers and advisers who wish to provide services to Ontario institutional clients with respect to contracts traded on foreign futures exchanges (foreign contracts) are generally required to apply for formal exemptive relief on a basis similar to the securities registration exemptions for international firms under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).
The Proposed Instrument is intended to reduce the regulatory burden on international firms by eliminating the need to apply for and obtain exemptive relief from the registration requirement under the CFA.
International Dealer Exemption
Proposed OSC Rule 32-506 would introduce a filings-based “international dealer” exemption similar to the international dealer exemption under NI 31-103. Under this exemption, the dealer registration requirement in the CFA would not apply in respect of a trade in a contract with or on behalf of a “CFA permitted client”, subject to the following conditions (the International Dealer Exemption):
- the trade is in respect of a foreign contract on a non-Canadian exchange;
- the person or company:
- has its head office or principal place of business in a specified foreign jurisdiction and does not have an office or place of business in Ontario;
- engages in the business of trading in contracts in the specified jurisdiction; and
- is registered, licensed or otherwise authorized under the securities, commodity futures or derivatives legislation of the specified foreign jurisdiction in which its head office or principal place of business is located in a category that permits it to carry on the activities in that jurisdiction that registration as a dealer under the CFA would permit it to carry on in Ontario;
- the person or company provides certain prescribed written disclosure to the CFA permitted client; and
- the person or company has submitted a completed Form 32-506F1 Submission to Jurisdiction and Appointment of Agent for Service (Form 32-506F1).
Persons relying on the International Dealer Exemption would have to notify the OSC of that fact by December 1 each year and comply with the filing and fee payment requirements similar to those applicable to an exempt international firm under OSC Rule 13-502 Fees (OSC Rule 13-502).
A person relying on the International Dealer Exemption would also be exempt from the CFA adviser registration requirement if the person provides advice to a CFA permitted client in connection with an activity or trade under the International Dealer Exemption, other than in respect of a managed account of the CFA permitted client.
International Adviser Exemption
Proposed OSC Rule 32-506 would also introduce a filings-based “international adviser” exemption similar to the international adviser exemption under NI 31-103. Under this exemption, the adviser registration requirement in the CFA would not apply in respect of advice provided to an unregistered CFA permitted client with respect to the trading of foreign contracts, subject to the following conditions (the International Adviser Exemption):
- the person or company provides advice to the non-registrant CFA permitted client only as to the trading of foreign contracts and does not provide advice as to the trading of Canadian contracts, unless providing such advice is incidental to its providing advice on foreign contracts;
- the person or company:
- has its head office or principal place of business in a specified foreign jurisdiction;
- engages in the business of advising others in relation to contracts in the specified foreign jurisdiction; and
- is registered in a category of registration, or operates under an exemption from registration, or is otherwise licensed or authorized under the applicable securities, commodity futures or derivatives legislation of the specified foreign jurisdiction to carry on the activities in the specified foreign jurisdiction that registration under the CFA as an adviser in the category of commodity trading manager would permit it to carry on in Ontario;
- as at the end of the person or company's most recently completed financial year, not more than 10% of the aggregate consolidated gross revenue of the person or company, its affiliates and its affiliated partnerships, excluding the gross revenue of an affiliate or affiliated partnership of the person or company if the affiliate or affiliated partnership is registered under securities legislation, commodity futures legislation or derivatives legislation of a jurisdiction of Canada, was derived from the portfolio management activities of the person or company, its affiliates and its affiliated partnerships in Canada (including both securities-related and commodity-futures-related activities);
- prior to advising a non-registrant CFA permitted client with respect to a foreign contract, the person or company provides to the non-registrant CFA permitted client certain prescribed disclosure; and
- the person or company has provided the OSC with a completed Form 32-506F1.
The annual renewal requirements are similar to those under the International Dealer Exemption.
International Sub-Adviser Exemption
Proposed OSC Rule 32-506 would also provide a statutory exemption for persons or companies acting as a sub-adviser to a principal adviser on conditions similar to the international sub-adviser exemption under NI 31-103.
Certain New Limitations and Next Steps
The streamlining and codification of the exemptions under the Proposed Instrument are generally a positive development. The definition of “CFA permitted client” is slightly expanded in relation to the definition of “permitted client” under NI 31-103, although it does not include “hedgers” (as in other Canadian jurisdictions). The new exemptions would not be subject to the requirement to file the prescribed regulatory action disclosure form, an adjustment which eliminates a material regulatory burden for many global filers.
The Proposed Instrument, however, introduces certain new restrictions, including limiting eligibility to firms regulated in “specified foreign jurisdictions”1 and restricting firms relying on the International Dealer Exemption from having an office or place of business in Ontario. In the context of the current global pandemic, cross-border limitations of this type seem unnecessarily restrictive and may create operational challenges for certain firms.
Unlike NI 31-103, the Proposed Instrument would only apply in Ontario. International firms must therefore continue to seek discretionary relief, where available, to engage in similar activities in other Canadian Jurisdictions.
Firms currently relying on existing discretionary exemption orders will need to file under the Proposed Instrument as the existing orders will automatically lapse under the terms of their standard sunset provisions.
The Proposed Instrument is intended to serve as an interim measure pending the repeal of the CFA and its replacement by more modern legislation.
1 Australia, Brazil, European Union member countries, Hong Kong, India, Japan, Korea, Mexico, New Zealand, Singapore, Switzerland, the United Kingdom and the United States.
Originally Published by Stikeman Elliott, March 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.