Exemption from the requirement to annually engage a qualified external auditor to conduct an independent systems review (ISR) and prepare a report in accordance with established audit standards and best industry practices -- exemption subject to a qualified auditor continuing to conduct all of the components of an ISR throughout a 24 month period -- and continuing to provide written reports of the various ISR components reviewed to staff of the Commission -- National Instrument 24-102 Clearing Agency Requirements.
Applicable Legislative Provisions
National Instrument 24-102 Clearing Agency Requirements, ss. 4.7(1)(a), 4.7(2)(a) and (b), and 6.1.
IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, CHAPTER S.5, AS AMENDED (THE ACT) AND IN THE MATTER OF NATIONAL INSTRUMENT 24-102 CLEARING AGENCY REQUIREMENTS (NI 24-102) AND IN THE MATTER OF LCH LIMITED (the Filer)
On September 10, 2013, the Ontario Securities Commission (Commission) issued an order under section 21.2 of the Act recognizing the Filer as a clearing agency. As a recognized clearing agency, the Filer is subject to the requirements in NI 24-102.
The Commission has received an Application (Application) from the Filer for a decision, pursuant to section 6.1 of NI 24-102 exempting the Filer from the following requirements in NI 24-102:
(a) the requirement in paragraph 4.7(1)(a) of NI 24-102 that the Filer as a recognized clearing agency must on a reasonably frequent basis and, in any event, at least annually, engage a qualified external auditor to conduct an independent systems review (ISR) and prepare a report, in accordance with established audit standards and best industry practices, that assesses the clearing agency's compliance with paragraphs 4.6(a) and 4.6.1(2)(a) and section 4.9; and
(b) the requirements in paragraphs 4.7(2)(a) and (b) of NI 24-102 that the clearing agency must provide the report resulting from the review conducted under paragraph (1)(a) to (a) its board of directors, or audit committee, promptly upon the report's completion, and (b) to the regulator or, in Quebec, the securities regulatory authority, by the earlier of the 30th day after providing the report to its board of directors or the audit committee or the 60th day after the calendar year end.
(collectively, the ISR Requirements)
The Filer is also recognized as a clearing house by the Autorité des Marchés Financiers.
Amendments were made by the Commission to NI 24-102 on June 19, 2020 that included amendments to the ISR requirements. The previous requirement required that recognised clearing agencies engage a qualified party to conduct the ISR. The new requirement requires the engagement of a qualified external auditor to conduct an ISR.
The Filer has represented to the Director as follows:
1. The Filer is incorporated under the laws of England and Wales with its head office located in London, United Kingdom.
2. The Filer is recognized as a central counterparty and supervised by the Bank of England (BoE), registered as a derivatives clearing organisation with the U.S. Commodity Futures Trading Commission (CFTC) and recognised as a third-country CCP in the European Union in accordance with the European Markets Infrastructure Regulation (EMIR). The Filer is also subject to oversight by other market regulators and central banks in jurisdictions in which business is carried out.
3. The Filer's other regulators currently do not have a requirement to engage qualified external auditors to perform ISRs across the full range of topics outlined in NI 24-102 or a requirement to do so annually.
4. The Filer believes that its independent Audit function, in conjunction with external reports in key areas, provides sufficient assurance in relation to all ISR topic areas as required by NI 24-102 and supports the Filer's continued resilience in terms of services provided in Ontario. The Filer's Internal Audit (IA) function is comprised with qualified auditors who adhere to the Institute of Internal Auditors (IIA) Standards for the Professional Practice of Internal Auditing. The independent nature of this function ensures IA maintains objectivity, while being familiar with and knowledgeable about the systems subjected to the review. The IA team has access to IT specialists with audit capabilities within the Filer's corporate parent.
5. The Filer also provides and will continue to provide a mapping to the Commission of the ISR requirements against a forward-looking audit plan to ensure all areas of the ISR are covered appropriately and on a frequency, which is risk-based. The audit plan covers all the components of the ISR within a 24 month period. In addition, as required by the BoE, the Filer has a business continuity policy and a disaster recovery plan which are subject to independent reviews and approved by the board. The CFTC requires the Filer to commission independent annual vulnerability and penetration tests and a tri-annual review of the information security control environment.
6. The Filer is a global CCP with members and clients in over 60 countries. It is currently licensed in 10 jurisdictions.
7. The additional work required to comply with the requirement to engage a qualified external auditor to cover all components of an ISR and to complete an ISR on an annual basis, as required by NI 24-102, would result in the Filer incurring additional costs beyond those already incurred in relation to ongoing external reviews of business continuity and information security. The Filer would also incur costs in terms of management and operational staff's time to familiarise the external auditor with its information systems environment.
UPON considering the Application and representations made by the Filer;
AND UPON the Director being satisfied it would not be prejudicial to the public interest to exempt the Filer from the ISR Requirements;
IT IS THE DECISION of the Director pursuant to section 6.1 of NI 24-102 that the Filer is exempt from the ISR Requirements;
1. The Filer shall promptly notify the Commission of any material changes to representations set out herein; and
2. The Filer must continue to engage a qualified auditor to conduct all of the components of an independent systems review throughout a 24 month period and prepare individual reports of the components reviewed, in accordance with established audit standards and best industry practices, that assesses the Filer's compliance with paragraphs 4.6(a) and 4.6.1(2)(a) and section 4.9 of NI 24-102. The Filer must continue to prepare written reports of the various components reviewed throughout the 24 month period which must be provided to staff of the Commission no later than 30 days after such reports are provided to the Filer's board of directors or audit committee. The Filer must provide a consolidated report summarizing the results from reviews undertaken during the 24 month period to staff of the Commission, by the 60th day after the calendar year end following the 24 month period.
DATED February 26, 2021