Application for relief under s. 15.1 of National Instrument 21-101 Marketplace Operation, s. 12.1 of National Instrument 23-101 Trading Rules, and s. 10 of National Instrument 23-103 Electronic Trading and Direct Access to Marketplaces -- relief from the application of all provisions of the Marketplace Rules that apply to a person or company carrying on business as an alternative trading system in the Jurisdictions -- relief granted subject to terms and conditions.
Applicable Legislative Provisions
National Instrument 21-101 Marketplace Operation, s. 15.1.
National Instrument 23-101 Trading Rules, s. 12.1.
National Instrument 23-103 Electronic Trading and Direct Access to Marketplaces, s. 10.
January 3, 2024
IN THE MATTER OF
THE SECURITIES LEGISLATION OF ONTARIO,
QUEBEC AND NOVA SCOTIA
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF EQUILEND, LLC
(Section 15.1 of NI 21-101 and section 12.1 of NI 23-101
and section 10 of NI 23-103)
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application (the Application) from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) that the Filer be:
(a) exempt pursuant to subsection 15.1 of National Instrument 21-101 Marketplace Operation (NI 21-101) from NI 21-101 in whole;
(b) exempt pursuant to subsection 12.1 of National Instrument 23-101 Trading Rules (NI 23-101) from NI 23-101 in whole;
(c) exempt pursuant to subsection 10(1) of National Instrument 23-103 Electronic Trading and Direct Electronic Access to Marketplaces (NI 23-103) from NI 23-103 in whole
(the relief mentioned in paragraphs (a) to (c) being collectively referred to herein as the Exemptive Relief Sought).
Under National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions (for a coordinated review application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the decision is the decision of the principal regulator and evidences the decision of each other Decision Maker.
Terms defined in National Instrument 14-101 Definitions and Multilateral Instrument 11-102 Passport System have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a private limited liability company incorporated under the laws of the State of Delaware in the United States of America (U.S.), whose head office is located at 225 Liberty Street, 10th Floor, Suite 1020, New York, New York, 10281, U.S.
2. The Filer is a direct wholly-owned subsidiary of EquiLend Holdings LLC (EquiLend Holdings). EquiLend Holdings is a holding company for various EquiLend entities, including the Filer and EquiLend Canada Corp. (EquiLend Canada).
3. The Filer was formed in October 2001. It is registered as an alternative trading system (ATS) and a broker-dealer with the U.S. Securities and Exchange Commission (SEC) pursuant to section 15 of the U.S. Securities Exchange Act of 1934, as amended, (the Exchange Act). The Filer is also a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation. The Filer operates one (1) ATS that is registered with the SEC.
4. The Filer is subject to a comprehensive regulatory regime in the U.S. The Filer is registered with and regulated by the SEC and FINRA as a broker-dealer and an ATS. The SEC and FINRA fulfil their regulatory responsibilities within the framework established by the Exchange Act and FINRA member rules.
5. The Filer operates an electronic negotiation platform (the NGT Platform) that facilitates the negotiation of potential securities borrow and loan transactions in equities and fixed income securities, which fit into the broader category of securities financing transactions (SFTs) by providing secure access and connectivity between potential borrowers and lenders through a private network or the internet. All SFTs communicated through the NGT Platform are "potential SFTs" as the counterparties to a potential SFT must migrate off of the NGT Platform to complete or reject the prospective transaction under their respective bilateral or global securities lending agreements.
6. There is no obligation on the part of any counterparty to a potential SFT to ultimately settle the prospective transaction under the terms by which the potential SFT was communicated and matched on the NGT Platform. Rather, the counterparties may ultimately settle the prospective transaction in the over-the-counter market under those terms or the counterparties may cancel the prospective transaction after migrating off of the NGT Platform.
7. The Filer is informed of the ultimate status of the prospective transaction (i.e., whether the counterparties settle the prospective transaction under the terms through which it was communicated and matched on the NGT Platform or cancel the prospective transaction) through a feedback function in which the counterparties report back to the Filer on the status of the potential SFT after they have migrated off of the NGT Platform.
8. The NGT Platform is operated through EquiLend Holdings and its subsidiaries (the Subsidiaries), including the Filer, each which are separately regulated, registered or are otherwise exempt from registration in their respective jurisdictions, including the U.S., Canada, the United Kingdom, the Republic of Ireland and the European Union, Australia, Hong Kong and certain other jurisdictions in Asia.
9. EquiLend Canada operates the NGT Platform in Canada. EquiLend Canada is registered as an investment dealer in Ontario and Québec and is also a member of the Canadian Investment Regulatory Organization (CIRO) for the purposes of operating as an ATS in Ontario and Québec.
10. The NGT Platform facilitates the negotiation of potential SFTs in equities and fixed income securities.
11. The securities exchanged in the potential SFTs communicated and matched on the NGT Platform are as follows:
(a) "foreign exchange traded securities" within the meaning of NI 21-101;
(b) non-Canadian debt securities, including:
(i) high-grade and high-yield U.S. corporate bonds;
(ii) U.S. Government-sponsored agency bonds;
(iii) U.S. Government debt securities (e.g., Treasury Bonds, Treasury Notes, etc.);
(iv) emerging market bonds, which are defined as U.S. dollar or Euro-denominated bonds issued by sovereign entities or corporations domiciled in a developing country, including both high grade and non-investment grade debt;
(v) European high-grade and high-yield corporate bonds, which are defined as corporate bonds issued by entities domiciled in Europe; and
(vi) non-U.S. sovereign government bonds (e.g., UK gilts or German bundesbonds).
12. In addition, the Filer currently enables NGT Platform communication functionality involving potential SFTs referencing "exchange-traded securities", "corporate debt securities" and "government debt securities" (collectively, Canadian Securities) with counterparties outside of Canada, and intends in the future to enable NGT Platform communication functionality involving potential SFTs referencing such securities with Canadian subscribers located in the Jurisdictions, each within the meaning of NI 21-101, as an incidental part of its business, which will constitute less than 10% of global NGT Platform attributed volume as measured across each twelve (12) month calendar year cycle.
13. The Filer does not have any offices or maintain other physical installations in Nova Scotia, Ontario, Québec or any other Canadian province or territory except for an office in Toronto, Ontario whose activities are limited to sales and marketing.
14. Prior to getting access to the NGT Platform, a subscriber (customer) must sign an EquiLend Global User Agreement (User Agreement) with the Filer that covers, among other things, obligations of the subscriber, and termination events.
15. The subscriber identifies to the Filer by name an authorized Administrator, who then permissions each employee or contractor of the subscriber to use the NGT Platform (Named Users). The Named Users are the only individuals within the subscriber licensed to access and use the NGT Platform.
16. Once a potential SFT is mutually agreed and completed outside the NGT Platform by the counterparties, and the Filer is informed of the completion by the counterparties through the Filer's feedback function, the NGT Platform will send trade details to the parties of the transaction via a pre-approved method (e.g., email). Subscribers, independently and in advance, notify the Filer that they are properly documented with and able to trade with specific counterparties prior to engaging in transactions with that counterparty. The Filer is not a party to the potential SFT and is not otherwise directly or indirectly involved in the execution, clearing or settlement of any potential SFT communicated on the NGT Platform.
17. The Filer proposes to offer direct access to the NGT Platform to prospective subscribers in the Jurisdictions (Canadian Subscribers) to facilitate transactions in potential SFTs. Access to the NGT Platform will be limited to Canadian Subscribers who meet the Filer's eligibility criteria. Subscribers generally fall into the following categories: "qualified institutional buyers", as such term is defined in Rule 144A under the U.S. Securities Act of 1933, as amended, "eligible contract participants", as such term is defined in Section 1a(18) of the U.S. Commodity Exchange Act of 1936, as amended; large multi-national banks; insurance companies; registered investment companies / investment funds; registered broker-dealers / investment dealers; derivatives dealers; and/or any other person (whether a corporation, partnership, trust or otherwise) with total assets of at least U.S.$50 million which can include pension funds and hedge funds.
18. Before being provided direct access to the NGT Platform, the Filer will confirm that each Canadian Subscriber is a non-individual "permitted client" as that term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Retail customers and natural persons will not be provided with access to the NGT Platform.
19. After a Canadian Subscriber demonstrates that it satisfies the eligibility criteria, the Canadian Subscriber must execute the User Agreement in which the prospective Canadian Subscriber represents to the Filer that the Canadian Subscriber's conduct of potential SFTs is subject to a level of regulation and oversight under applicable securities, banking or other appropriate laws that impose upon the Canadian Subscriber a combination of requirements such as audits, public disclosure of financial information, capital rules, collateral requirements, record keeping requirements or other similar safeguards, and agrees to use the NGT Platform and the related user documentation only in the ordinary course of its own business for its own internal use and be and remain at all times a non-individual "permitted client" as defined in NI 31-103.
20. Under the User Agreement, a Canadian Subscriber and its affiliates constitute a "Subscriber Group". The Subscriber Group will authorize Named Users, who are the only persons authorized to use the NGT Platform. The Subscriber Group's right to use the NGT Platform is conditioned upon the Subscriber Group obtaining and maintaining all government, legal and regulatory approvals, consents, authorizations, registrations, permits and licenses required for the conduct of its activities and its use of the NGT Platform, and using the NGT Platform only in compliance with applicable law.
21. The Filer has determined that it may be subject to dealer registration under applicable Canadian securities legislation and so it proposes to rely on the "international dealer exemption" under section 8.18 of NI 31-103 in the Jurisdictions and, subject to observing the volume ceiling in paragraph 10 above, on the "specified debt" exemption under section 8.21 of NI 31-103 and the "trades through or to a registered dealer" exemption under section 8.5 of NI 31-103.
22. The Filer will ensure that all applicants who become Canadian Subscribers satisfy the Filer's eligibility criteria, including, among other things, that each Canadian Subscriber is a "permitted client" as that term is defined in NI 31-103.
23. The Filer is not in default of securities legislation in any Jurisdiction.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemptive Relief Sought is granted provided that
(a) in the case of the registration requirements that may otherwise apply to the Filer in connection with the trading of Canadian Securities, the Filer
(i) does not execute trades in Canadian Securities with or for its clients, except as permitted under applicable securities laws, and
(ii) complies with the conditions of the international dealer exemption in section 8.18 of NI 31-103 as if such securities were "foreign securities" as defined in section 8.18 of NI 31-103; and
(b) the Filer complies with the terms and conditions attached hereto as Schedule A.
Terms and Conditions
Regulation and Oversight of the Marketplace
1. The Filer will continue to be subject to the regulatory oversight of the regulator in its home jurisdiction;
2. The Filer will either be registered in an appropriate category or rely on an exemption from registration under Canadian securities laws;
3. The Filer will promptly notify the Decision Makers if its status in its home jurisdiction has been revoked, suspended, or amended, or the basis on which its status has significantly changed;
4. The Filer will not provide direct access to a Canadian Subscriber unless the Canadian Subscriber is a non-individual "permitted client" as that term is defined in NI 31-103;
5. The Filer will require Canadian Subscribers to provide prompt notification to the Filer if they no longer qualify as non-individual "permitted clients";
6. The Filer must make available to Canadian Subscribers appropriate training for each person who has access to trade on the NGT Platform;
Trading by Canadian Subscribers
7. The Filer will only offer potential SFTs (securities borrow and loan transactions) to Canadian Subscribers and in that context use only the collateral listed in accordance with representation numbers 9 to 10 of this Decision;
8. Potential SFTs communicated on the NGT Platform by Canadian Subscribers will be executed, cleared and settled outside the NGT Platform, by subscribers and without any direct facilitation or involvement on the part of the Filer;
9. The Filer will only permit Canadian Subscribers to communicate potential SFTs in securities that are permitted to be traded in the United States under applicable securities laws and regulations;
10. The Filer will promptly notify staff of the Decision Makers of any of the following:
(a) any material change to its business or operations or the information provided in the Application, including, but not limited to:
(i) changes to its regulatory oversight;
(ii) the access model, including eligibility criteria, for Canadian Subscribers;
(iii) systems and technology; and
(iv) its clearing and settlement arrangements;
(b) any change in its regulations or the laws, rules, and regulations in the home jurisdiction relevant to the products traded;
(c) any known investigations of, or regulatory action against, the Filer by the regulator in the home jurisdiction or any other regulatory authority to which it is subject;
(d) any matter known to the Filer that may affect its financial or operational viability, including, but not limited to, any significant system failure or interruption; and
(e) any default, insolvency, or bankruptcy of any subscriber known to the Filer or its representatives that may have a material, adverse impact upon the NGT Platform, the Filer or any Canadian Subscriber;
11. The Filer will maintain the following updated information and submit such information in a manner and form acceptable to staff of the Decision Makers on a semi-annual basis (within thirty (30) days of the end of each six (6) month period), and at any time promptly upon the request of staff of the Decision Makers:
(a) a current list of all Canadian Subscribers, presented on a per provincial basis, specifically identifying for each Canadian Subscriber the basis upon which it represented to the Filer that it could be provided with direct access to the NGT Platform;
(b) a list of all Canadian applicants for status as a Canadian Subscriber, presented on a per provincial basis, who were denied such status or access or who had such status or access revoked during the period;
(i) for those Canadian applicants for status as a Canadian Subscriber that were denied access, an explanation as to why access was denied;
(ii) for those Canadian Subscribers who had their status revoked, an explanation as to why their status was revoked;
(c) for each product:
(i) the total volume and value of SFTs communicated and matched on the NGT Platform as originating from Canadian Subscribers, presented on a per provincial Canadian Subscriber basis;
(ii) the proportion of worldwide volume and value of SFTs communicated and matched on the NGT Platform as conducted by Canadian Subscribers, presented in the aggregate per province for such Canadian Subscribers;
(iii) the volume and value of SFTs in Canadian Securities (as defined in representation 10 of this Decision) communicated and matched on the NGT Platform, and proportion of volume in such Canadian Securities relative to the total volume communicated and matched on the NGT Platform for the six (6) month period, calculated in a manner acceptable to the Decision Makers; and
(d) a list of any system outages that occurred for any system impacting Canadian Subscribers' trading activity on the NGT Platform which were reported to the regulator in the home jurisdiction;
12. The Filer will provide to its Canadian Subscribers disclosure that states that:
(a) rights and remedies against it may only be governed by the laws of the home jurisdiction, rather than the laws of Canada, and may be required to be pursued in the home jurisdiction rather than in Canada;
(b) the rules applicable to trading on the NGT Platform may be governed by the laws of the home jurisdiction, rather than the laws of Canada; and
(c) the Filer is regulated by the regulator in the home jurisdiction, rather than the Decision Makers;
Submission to Jurisdiction and Agent for Service
13. With respect to a proceeding brought by the Decision Makers, staff of the Decision Makers or another applicable securities regulatory authority in Canada arising out of, related to, concerning or in any other manner connected with such regulatory authority's regulation and oversight of the activities of the Filer in Canada, the Filer will submit to the non- exclusive jurisdiction of (i) the courts and administrative tribunals of Canada, and (ii) an administrative proceeding in Canada;
14. The Filer will file with the Decision Makers a valid and binding appointment of Osler, Hoskin & Harcourt LLP, or any subsequent agent, as the agent for service in Canada upon which the Decision Makers or other applicable regulatory authority in Canada may serve a notice, pleading, subpoena, summons, or other process in any action, investigation, or administrative, criminal, quasi-criminal, penal, or other proceeding arising out of or relating to or concerning the regulation and oversight of the NGT Platform or the Filer's activities in Canada; and
15. The Filer must, and must cause its affiliated entities, if any, to promptly provide to the Decision Makers, on request, any and all data, information, and analyses in the custody or control of the Filer or any of its affiliated entities, without limitations, redactions, restrictions or conditions, including, without limiting the generality of the foregoing:
(a) data, information, and analyses relating to all of its or their businesses; and
(b) data, information, and analyses of third parties in its or their custody or control; and
16. The Filer must share information and otherwise cooperate with other recognized or exempt exchanges, recognized self- regulatory organizations, investor protection funds and other appropriate legal and regulatory bodies.