Application - Canadian Trading and Quotation System Inc. (CNQ)

Canadian Securities Exchange (CSE) recognition orders

July 26, 2002

VIA E-MAIL AND DELIVERED

July 16, 2002

Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario
M5H 3S8

Attention: Randee Pavalow, Director, Capital Markets

Dear Ms. Pavalow:

Re: Application for Recognition of Canadian Trading and Quotation System Inc. ("CNQ")

Introduction

This letter sets out the application of CNQ to the Ontario Securities Commission ("Commission") for recognition as a quotation and trade reporting system in accordance with section 21.2.1 of the Securities Act (Ontario).

Background

CNQ will operate an electronic, automated marketplace for participating investment dealers to trade equity securities of qualified reporting issuers. Investment dealers ("CNQ Dealers") will agree with CNQ to be bound by CNQ's rules (including trading rules) and enforcement and discipline jurisdiction. CNQ will contract with Market Regulation Services Inc. ("RS Inc.") to provide market regulation services to CNQ's marketplace. Issuers ("Issuers") that are reporting issuers in Ontario can apply to CNQ to qualify their securities for quotation and trading on CNQ's marketplace. Issuers will prepare and post an enhanced disclosure record to CNQ's website (the "Website") and agree with CNQ to follow CNQ's policies and submit to CNQ's enforcement and discipline jurisdiction. Investors will be able to directly access trading data and an Issuer's enhanced disclosure record at CNQ's website at www.cnq.ca.

Business Components

There will be two fundamental components of CNQ, the Quotation and Trading System and the Website:

1) The Quotation and Trading System

Overview

The Quotation and Trading System (the "System") is a screenbased, automated electronic marketplace. The System will provide to CNQ Dealers order display, including price and volume, recent trade history and other market information. The System will be open for trading during regular Canadian trading hours on all business days. CNQ Dealers will be able to access the System on a secure basis and be able to configure the display of the System to their individual preferences.

Access

CNQ Dealers will be able to access the System by either a dedicated CNQ trading terminal (a PC with CNQ's trading software) or through a third-party order-entry system (such as Belzberg, KTG Technologies, E*Trade or Reuters).

Automated Marketplace

The System is a fully automated electronic marketplace. CNQ Dealers with access will be able to enter into the System orders to buy or sell securities of qualified CNQ Issuers. Orders are queued in the marketplace according to priority rules (price and time). When a match is made a trade occurs and is confirmed to the respective CNQ Dealers and to the Canadian Depository for Securities Limited ("CDS") clearinghouse for settlement.

The System is a central limit order book (auction market), functionally similar to the marketplaces operated by TSX (formerly TSE and CDNX), combined on a stock-by-stock basis with competitive market-making by CNQ Dealers (dealer market). Market makers enjoy limited exclusive order entry privileges for the stocks in which they are approved market makers.

Order Entry and Handling: Market Makers

CNQ grants limited exclusive order entry privileges to CNQ Dealers willing to become market makers in a CNQ Issuer's stock. In consideration for providing continuous quotations (that is both an order to buy and an order to sell) of minimum size, often as principal, CNQ, on an issuer-by-issuer basis, limits order entry access only to market makers. A non-market maker may only enter a client order directly into the System which is either a market order or a limit order at the displayed bid or ask price, as the case may be, to trade automatically with a market maker. A non-market maker may also enter a cross between the bid and ask. Otherwise, non-market makers must route orders for these particular CNQ Issuers' stocks through a market maker who is obligated to execute or expose client orders according to the order handling rules. In stocks without market makers any CNQ Dealer may enter orders into the order book which then functions as a pure auction market.

2) The Website

Enhanced Issuer Disclosure and Market Data

CNQ's Website will provide investors a central resource to obtain information about CNQ Issuers, the CNQ marketplace and CNQ. Enhanced disclosure of CNQ Issuer information on www.cnq.ca will enable investors to make better-informed investment decisions.

In order to enhance the disclosure by CNQ Issuers and provide investors with more meaningful and timely information CNQ will require CNQ Issuers to prepare and post on the Website a prospectus-like base disclosure document (the "Quotation Statement"), quarterly and monthly updates and reports, press releases and notices of transactions (similar to the documentation provided confidentially to exchanges by exchange listed issuers). CNQ Issuers will post the required (and other permitted) disclosure documentation on a password protected, secure basis to the Website ("Issuer Information").

The Website will display both the Issuer Information and market data from the System. Investors will access timely and meaningful disclosure concerning CNQ Issuers, trading information and market data at the CNQ Website.

Provision of Information

CNQ will provide all necessary notices and information to the Commission as set out in the Commission's order recognizing CNQ as a quotation and trade reporting system ("Recognition Order").

Corporate Governance

CNQ was incorporated under the Business Corporations Act (Ontario) ("OBCA") on November 24, 2000.

Ownership

CNQ is a private issuer. At the present time, none of its shares are owned by dealers or issuers.

Independent Directors

CNQ believes that its arrangements with respect to the appointment, removal from office and functions of the persons ultimately responsible for making or enforcing the rules of CNQ, namely, the CNQ Board, are such as to ensure a proper balance between the interests of CNQ Dealers and CNQ Issuers.

The constating documents of CNQ provide that its Board will have a minimum of one and a maximum of 9 directors. In order to ensure a diversity of representation on the Board, at least 50% of the directors will be independent directors provided that the CNQ president shall be deemed to be neither independent nor non-independent if the Board has an uneven number of directors. An "independent" director is one who is not an associate of nor a partner, director, officer, employee or shareholder of a CNQ Dealer or Issuer, a person owning or exercising control over 10% or more of the outstanding voting securities of CNQ (a "major shareholder") or any affiliate of any such person. In addition, employees of CNQ (other than the president, who is deemed to be neither independent nor non-independent as noted above) and any person employed by CNQ in the previous 2 years are not independent directors.

Accordingly, CNQ's independent directors will be individuals who are not connected with its major shareholders, marketplace participants or quoted companies.

Governance Committee

Draft By-law 3A provides that the Board shall establish a Governance Committee comprising an equal number of independent and non-independent directors and the president, who shall be deemed to be neither independent nor non-independent. The Governance Committee shall be responsible for proposing identifying, recruiting and nominating new directors. While the Governance Committee has responsibility for proposing nominees to the Board, the entire Board has responsibility for the nomination.

In discharging its responsibilities, the Governance Committee shall endeavor to ensure that the business, affairs and operations of CNQ are conducted:

• to ensure compliance with Ontario securities law;

• to prevent fraudulent and manipulative acts and practices;

• to promote just and equitable principles of trade; and

• to foster cooperation and coordination with persons or companies engaged in regulating, clearing, settling and processing information with respect to and facilitating transactions in, securities.

If the shareholders elect a director other than one recommended by the Governance Committee and proposed by the Board, or fail to elect such nominee as director, CNQ shall immediately notify the Commission.

Shareholder Vote to Confirm Directors

Under the OBCA and CNQ's by-laws, CNQ's shareholders elect the directors by a simple majority, provided that if a vacancy occurs on the Board and a quorum of directors remains in office, the directors may appoint a qualified person to hold office for the unexpired term of his or her predecessor. If a vacancy results in CNQ not being in compliance with the requirement for a minimum percentage of independent directors, the Board must take steps to remedy the situation as quickly as possible.

Audit Committee

Draft By-law 3A provides for an Audit Committee to be comprised of four directors, none of whom shall be officers or employees of the Corporation. The Committee shall comprise an equal number of independent and non-independent directors.

Fitness

CNQ will ensure that each major shareholder, officer and director is a fit and proper person whose past conduct affords reasonable grounds for belief that the business of CNQ will be conducted with integrity and in the public interest.

Fees

Any and all fees imposed by CNQ will be equitably allocated. They will not have the effect of creating barriers to access and will be balanced with the criteria that CNQ will have sufficient revenues to satisfy its responsibilities.

CNQ's process for setting fees will be fair, appropriate and transparent.

CNQ's current fee schedule is as follows:

Issuers

Initial Fee		$10,000 (1)
Non-Refundable		$2000
Monthly Fee		$300
Fundamental Change		$10,000
Reactivation Fee		$500

(1) The initial fee shall be reduced to $8,000 for application for quotation made prior to issuance of the order recognizing CNQ as a quotation and trade reporting system.

Dealers

Initial Set-Up Fee		$2500
Monthly Access Fee		$1250
Trading Fees		The sum of $0.05 per 1,000 shares plus $4.00 per $1,000 value, payable per trade by each side.

CNQ will engage Market Regulation Services Inc. ("RS Inc") as a regulation services provider and trades on CNQ will be subject to the fees set by RS Inc. in addition to CNQ fees.

Fees for market data have not been determined at this time.

Access

A dealer is eligible to become a CNQ Dealer if it is an Ontario registrant and a member in good standing of the Investment Dealers Association of Canada. CNQ may refuse to approve an applicant, or approve an applicant subject to terms and conditions if it believes that the dealer will not comply with CNQ Requirements, is not qualified by reason of integrity, solvency, training or experience, or it is otherwise not in the public interest to accept such dealer.

Any dealer who is refused approval, or granted approval subject to terms and conditions will be provided with the reasons for the decision and will have a right of appeal to the CNQ Board.

Once approved, a CNQ Dealer must comply with all CNQ Requirements.

Financial Viability

CNQ is a for-profit corporation. It will maintain sufficient financial resources for the proper performance of its functions. On a quarterly basis (or as required by the recognition order if certain criteria are not met), CNQ will provide the Commission with a calculation of certain liquidity, debt coverage and financial leverage measures as set out in the recognition order. CNQ will also assess the appropriateness of the calculations and whether any alternative calculations should be considered and report the results of that assessment to the Commission.

Regulation

CNQ will maintain its ability to perform its regulation functions including setting requirements governing the conduct of and disciplining CNQ Dealers and CNQ Issuers.

CNQ will retain RS Inc. as a regulation services provider to provide, as agent for CNQ, market regulation services approved by the Commission. CNQ will annually assess the performance of RS Inc. of its regulation functions and report to the Board, together with any recommendations for improvement.

The Investment Dealers Association of Canada will monitor and enforce compliance with the CNQ mark-up and sales practice rules. RS Inc. will monitor and enforce compliance with the Universal Market Integrity Rules, which will govern trading on CNQ in addition to CNQ-specific trading rules. CNQ will perform all other regulation functions.

Capacity and Integrity of Systems

For each of its systems that support order entry, order routing, execution, data feeds, trade reporting and trade comparison, capacity and integrity requirements, CNQ will:

(a) on a reasonably frequent basis, and in any event, at least annually,

(i) make reasonable current and future capacity estimates;

(ii) conduct capacity stress tests of critical systems to determine the ability of those systems to process transactions in an accurate, timely and efficient manner;

(iii) develop and implement reasonable procedures to review and keep current the development and testing methodology of those systems;

(iv) review the vulnerability of those systems and data centre computer operations to internal and external threats including physical hazards, and natural disasters; and

(v) establish reasonable contingency and business continuity plans;

(b) annually, cause to be performed an independent review and written report, in accordance with established audit procedures and standards, of its controls for ensuring that it is in compliance with paragraph (a) and conduct a review by senior management of the report containing the recommendations and conclusions of the independent review; and

(c) promptly notify the Commission of material systems failures and changes.