On October 17, 2022, Ontario Securities Commission (OSC) Rule 32-506 (Commodity Futures Act) Exemptions for International Dealers, Advisers and Sub-Advisers (OSC Rule 32-506) and amended OSC Rule 91-502 Trades in Recognized Options (OSC Rule 91-502, together the Instruments) came into force.

The Instruments, published on August 11, 2022, codify regularly granted exemptive relief from the registration requirements under the Commodity Futures Act (CFA) for international firms that deal only with institutional clients in relation to commodity futures contracts and commodity futures options that trade on foreign exchanges. Also included are exemptions for international firms and their representatives from the options proficiency requirements in OSC Rule 91-502.

On April 15, 2021, the OSC put into place interim class orders to provide substantially the same relief as that which is provided now that the Instruments are in force. International firms that relied on the interim class orders, which expired on the effective date of the Instruments, are not required to take any further action due to the Instruments coming into force.

International Dealer Exemption

OSC Rule 32-506 provides a filings-based "international dealer" exemption similar to the international dealer exemption under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Under this exemption, the CFA dealer registration requirements 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 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).

Reliance on the international dealer exemption also exempts a person 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

OSC Rule 32-506 also provides a filings-based "international adviser" exemption similar to the international adviser exemption under NI 31-103. Under this exemption, the CFA adviser registration requirements would not apply in respect of advice provided to an unregistered CFA permitted client relating to the trading of foreign contracts, subject to the following conditions:

  • 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.

International Sub-Adviser Exemption

OSC Rule 32-506 also provides 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, subject to certain terms and conditions.

Contrast with NI 31-103

We previously wrote about the proposed version of the Instruments published in December 2020 and view the Instruments as a positive and welcome development. As discussed in our previous blog post, in contrast to the equivalent exemptions available to international dealers and advisers in NI 31-103, the exemptions under the Instruments impose certain limitations that may restrict their availability to certain international market participants. In particular, the condition that an international dealer have "no office or place of business in Ontario" impacts international market participants who may need the flexibility to place highly specialized professional employees temporarily or permanently in Ontario for a variety of business or personal reasons.

The requirement for a firm to have a head office or principal place of business in a "specified foreign jurisdiction" whose regulatory regime the OSC has had the opportunity to consider is also new.

Although the OSC has indicated that it would consider applications for discretionary relief from these conditions on a case-by-case basis, an approach more closely aligned with the existing conditions of NI 31-103 would have been preferable to provide more flexibility and reduce operational complexities for international market participants.

As with reliance on the NI 31-103 exemptions, the OSC must be notified by December 1 of each year of a firm's reliance on the CFA exemptions. Firm's must also comply with filing and fee payments requirements.

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.