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 Ontario – 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.
June 22, 2022
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5,
IN THE MATTER OF
NATIONAL INSTRUMENT 21-101 MARKETPLACE OPERATION
IN THE MATTER OF
NATIONAL INSTRUMENT 23-101 TRADING RULES
IN THE MATTER OF
NATIONAL INSTRUMENT 23-103 ELECTRONIC TRADING AND
DIRECT ELECTRONIC ACCESS TO MARKETPLACES
IN THE MATTER OF
(Section 15.1(2) of NI 21-101 and section 12.1(2) of NI 23-101 and section 10(2) of NI 23-103)
LedgerEdge Limited (“LedgerEdge”) has filed an application (the “Application”) with the Ontario Securities Commission (the “OSC”) requesting an order under Section 15.1(2) of National Instrument 21-101 – Marketplace Operation (“NI 21-101”), Section 12.1(2) of National Instrument 23-101 – Trading Rules (“NI 23-101”) and Section 10(2) of National Instrument 23-103 – Electronic Trading and Direct Electronic Access to Marketplaces (“NI 23-103” and, together with NI 21-101 and NI 23-101, the “Marketplace Rules”) exempting LedgerEdge 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 (“ATS”) in Ontario (the “Requested Relief”).
Terms defined in National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
This Order is based on the following facts represented by LedgerEdge:
- LedgerEdge is a private company limited by shares, existing under the Companies Act 2006 of the United Kingdom (the “U.K.”), with its head office located in London, England, U.K.
- LedgerEdge was founded in 2020 and operates as the electronic service provider of a trading platform for institutional clients (the “Platform”) that facilitates trading in European and U.S. high-grade bonds and high-yield bonds, sovereign, supranational and agency bonds, non-Canadian government bonds and emerging market bonds (collectively, the “Fixed Income Securities”).
- LedgerEdge does not have any offices or maintain other physical installations in Ontario.
- LedgerEdge is a wholly-owned subsidiary of LedgerEdge Inc., which is controlled 76.15% by Co-Founder David E. Rutter, 3.85% by Flow Traders U.S. Holding LLC and 20% by LedgerEdge Holding Company LP. LedgerEdge has no subsidiaries, but it is affiliated with LedgerEdge Securities Inc., a U.S. incorporated company formed to conduct similar activities from the U.S., which has applied for registration as a broker-dealer and ATS under U.S. securities legislation. All entities are under common management and control.
- Trading of the Fixed Income Securities is facilitated through the Platform, which is intended to bring together multiple buyers and sellers of corporate, government and public securities in the European Union (the “EU”) and the U.K. The buying and selling of MiFID financial instruments (corporate, government and public security) will be governed by non-discretionary rules in a way that results in contracts on the Platform. LedgerEdge will have no discretion in determining how the members on the Platform interact with each other. The Platform will use distributed ledger technology to manage pre-trade information flows.
- LedgerEdge is subject to a comprehensive regulatory regime in the United Kingdom (the “U.K.”). LedgerEdge is regulated and operating in the U.K. as a multilateral trading facility (“MTF”), registered with the U.K. Financial Conduct Authority (the “FCA”), a U.K. equivalent of the OSC, pursuant to articles 64 and 25D of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”) and for dealing in investments as agent pursuant to article 21 RAO.
- LedgerEdge is not in default of securities legislation in any jurisdiction.
- It is expected that certain Ontario institutional investors wish to become clients of LedgerEdge in order to access the liquidity afforded by the robust, existing network of clients.
- LedgerEdge seeks to provide institutional investors in Ontario with direct, electronic access to trading in any debt security that is a foreign security or a debt security that is denominated in foreign currency, as such terms are defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”), including:
- debt securities issued by a foreign government (including agencies or instrumentalities thereof);
- debt securities issued by corporate or other non-governmental issuers incorporated, formed or created under the laws of a foreign jurisdiction; or
- asset-backed securities (including mortgage backed securities), denominated in Euro, US dollars or other foreign currency.
(collectively, “Foreign Fixed Income Securities”).
- LedgerEdge trading platform’s operation and functionalities are akin to those of an ATS in that:
- the LedgerEdge MTF trading system is multilateral and brings together multiple third-party buying and selling interests in financial instruments;
- trading arrangements have a characteristic of a system, as the Platform operates in accordance with a set of defined rules setting the parameters through which orders can interact (as set out in the LedgerEdge Rulebook);
- the execution of transactions will take place on the trading system and in accordance with the rules of the trading system;
- once orders are matched in the trading system, a contract which is in accordance with the applicable legislation (i.e. Title II of MiFID) will be formed;
- orders will be matched on the trading system in accordance with non-discretionary rules and LedgerEdge as the operator of the trading system will have no discretion in relation to the matching of orders;
- LedgerEdge does not require any issuer to enter into an agreement to have its securities traded on the trading system;
- LedgerEdge does not provide, directly or through one or more subscribers, a guarantee of a two-sided market for a security or derivative on a continuous or reasonably continuous basis;
- LedgerEdge does not set requirements governing the conduct of participants, other than conduct in respect of the trading by those participants on the trading system; and
- LedgerEdge does not have any regulatory or enforcement powers over the participants on the trading system, other than the authority to terminate, suspend or limit the participants’ access to the trading system in case of misconduct and does not discipline participants other than by exclusion from participation in the trading system.
- Pursuant to the CSA Staff Notice 21-322 Applicability of Regulation to the Operation of MTFs or OTFs in Canada (the “CSA Staff Notice 21-322”), LedgerEdge is prohibited from carrying on business in Ontario unless it complies with or is exempted from the Marketplace Rules.
- The prospective participants in Ontario (the “Ontario Participants”) will be comprised only of institutional investors that qualify as permitted clients as that term is defined in Section 1.1 of NI 31-103.
- LedgerEdge will confirm that Ontario Participants that seek to participate on the Platform are institutional investors who qualify as permitted clients, as such term is defined in section 1.1 of NI 31-103, by obtaining a representation from the Ontario Participants for access to the Platform in their onboarding documentation. The documentation will specify that this representation is deemed to be repeated by the Ontario Participant each time it enters an order for a trade on the Platform.
- LedgerEdge relies on the “international dealer exemption” under section 8.18 of NI 31-103 in Ontario for any trading in securities with permitted clients located in Ontario. LedgerEdge is not registered in any capacity under the Securities Act (Ontario) (the “OSA”).
- In order to obtain direct access to the Platform, an Ontario Participant must agree to abide by the LedgerEdge Rulebook.
- LedgerEdge will also require the Ontario Participants to sign a Participation Agreement agreeing to the terms and conditions of the use of the Platform, including clear and transparent access criteria and requirements for all market participants on the Platform, as well as requirements for participants to maintain the integrity of the Platform. LedgerEdge applies these criteria to all Platform participants in an impartial manner.
- In addition to complying with the LedgerEdge Rulebook and all applicable laws pertaining to the use of the Platform, prospective clients must also satisfy the LedgerEdge onboarding requirements. For the purpose of trading on the Platform, LedgerEdge acts as executing broker and will complete credit, know-your-client and anti-money laundering verifications, suitability analyses and other account supervision procedures prior to being allowed access on the Platform and on an ongoing basis in accordance with the Ontario law and LedgerEdge requirements.
- LedgerEdge will only permit trading in Foreign Fixed Income Securities that are permitted to be traded in the U.K., European Union or United States under applicable securities laws and regulations.
- LedgerEdge is required under Article 8 of Markets in Financial Instruments Regulation (EU) No 600/2014 (“MiFIR”) and Regulatory Technical Standards 2 (“RTS 2”) to immediately publish trading interests in instruments admitted to trading on the Platform, unless a pre-trade transparency waiver applies pursuant to article 9(1)(a), (b) and (c) of MiFIR and RTS 2. Where a pre-trade transparency waiver does not apply, all orders will be made available by Tradeweb on the website operated on behalf of LedgerEdge. LedgerEdge will, in all cases, ensure that data is made available five (5) minutes after publication (where no pre-trade transparency waiver applies). LedgerEdge will, in accordance with Article 10 of MiFIR and RTS 2, immediately publish through an “Approved Publication Arrangement” (“APA”) operated by a Data Reporting Service Provider authorized by UK FCA, details of relevant trades executed on the Platform (including price, volume and trade time), unless a post-trade deferral applies pursuant to article 11(1) and (3) of MiFIR and article 8(1) and 11(1) of RTS 2. LedgerEdge will apply for post-trade deferrals. Where the post-trade deferrals do not apply, LedgerEdge will ensure that all data is made available free of charge 5 minutes after publication and is available on a reasonable commercial basis before the 5 minute time period in line with European Securities and Markets Authority (“ESMA”) guidelines. LedgerEdge will report transactions of the Ontario Participants in the same manner as it reports other participant transactions. LedgerEdge’s reporting does not absolve any participants of their own regulatory reporting requirements.
- LedgerEdge acknowledges that the OSC will monitor developments in international and domestic capital markets and LedgerEdge’s activities on an ongoing basis to determine whether it is appropriate for the OSC to continue to grant the Requested Relief and, if so, whether it is appropriate for the Requested Relief to continue to be granted subject to the terms and conditions set out in Schedule A to this decision.
- LedgerEdge acknowledges that the scope of the Requested Relief and the terms and conditions imposed by the OSC set out in Schedule A to this decision may change as a result of the OSC’s monitoring of developments in international and domestic capital markets or LedgerEdge’s activities, or as a result of any changes to the laws in Ontario affecting trading in derivatives, commodity futures contracts, commodity futures options or securities.
Based on the Application, together with the representations made by and acknowledgments of LedgerEdge to the OSC, the OSC is satisfied that the granting of the Requested Relief would not be prejudicial to the public interest.
It is hereby ordered by the OSC that pursuant to section 15.1(2) of NI 21-101, section 12.1(2) of NI 23-101 and section 10(2) of NI 23-103, the Requested Relief is granted, provided that LedgerEdge complies with the terms and conditions attached hereto as Schedule A.
Manager, Market Regulation
Ontario Securities Commission
TERMS AND CONDITIONS
Regulation and Oversight
1. LedgerEdge will continue to be subject to the regulatory oversight of the regulator in its home jurisdiction;
2. LedgerEdge will either be registered in an appropriate category or rely on an exemption from registration under Ontario securities laws;
3. LedgerEdge will not enter into an agreement or understanding with any issuer with respect to the admission of the issuer's securities to its trading system or continued trading of the issuer's securities on its trading system;
4. LedgerEdge will not charge any issuer a fee with respect to the admission or continued trading of the issuer's securities on its trading system;
5. LedgerEdge will not provide, directly or through one or more subscribers, a guarantee of a two-sided market for a security or derivative on a continuous or reasonably continuous basis;
6. LedgerEdge will not set requirements governing the conduct of subscribers, other than conduct in respect of the trading by those subscribers on its trading system;
7. LedgerEdge will not discipline participants other than by exclusion from participation in its trading system;
8. LedgerEdge will promptly notify the OSC if its status in its home jurisdiction has been revoked, suspended, or amended, or the basis on which its status has significantly changed;
9. LedgerEdge will not provide direct access to an Ontario Participant unless the Ontario Participant is a permitted client as that term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;
10. LedgerEdge will require Ontario Participants to provide prompt notification to LedgerEdge if they no longer qualify as permitted clients;
11. LedgerEdge must make available to Ontario Participants appropriate training for each person who has access to trade on the Platform;
Trading by Ontario Participants
12. Trading on LedgerEdge by Ontario Participants must be cleared and settled through a clearing agency that is regulated as a clearing agency by the clearing agency's applicable regulator;
13. LedgerEdge will permit Ontario Participants to only trade those securities which are permitted to be traded in the United Kingdom, European Union or United States under applicable securities laws and regulations;
14. LedgerEdge will only allow Ontario Participants to trade those fixed income securities listed in representation number 9 of this decision;
15. LedgerEdge will report all transactions of Ontario Participants to which pre-trade transparency waiver or post-trade deferrals do not apply in a timely manner (within five (5) minutes) in accordance with ESMA guidelines;
16. LedgerEdge will promptly notify Staff of the OSC of any of the following:
(a) any material change to its business or operations or the information provided in its application for exemptive relief, including, but not limited to:
(i) changes to its regulatory oversight;
(ii) changes to its functions or operations that will cause LedgerEdge to not be able to comply with the terms and conditions in sections 3 through 7 above;
(iii) the access model, including eligibility criteria, for Ontario Participants;
(iv) systems and technology; and
(v) its clearing and settlement arrangements;
(b) any material 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, LedgerEdge by the regulator in the home jurisdiction or any other regulatory authority to which it is subject;
(d) any matter known to LedgerEdge 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 participant known to LedgerEdge or its representatives that may have a material, adverse impact upon LedgerEdge or any Ontario Participant;
17. LedgerEdge will maintain the following updated information and submit such information in a manner and form acceptable to staff of the OSC on a semi-annual basis (within 30 days of the end of each six-month period), and at any time promptly upon the request of staff of the OSC:
(a) a current list of all Ontario Participants, specifically identifying for each Ontario Participant the basis upon which it represented to LedgerEdge that it could be provided with direct access;
(b) a list of all Ontario applicants for status as an Ontario Participant who were denied such status or access or who had such status or access revoked during the period;
(i) for those Ontario applicants for status as Ontario Participants who had their access to such status denied, an explanation as to why their access was denied;
(ii) for those Ontario Participants who had their status revoked, an explanation as to why their status was revoked;
(c) for each product:
(i) the total trading volume and value originating from Ontario Participants, and
(ii) the proportion of worldwide trading volume and value on LedgerEdge conducted by Ontario Participants, presented in the aggregate for such Ontario Participants; and
(d) a list of any system outages that occurred for any system impacting Ontario Participants' trading activity on the Platform which were reported to the regulator in LedgerEdge's home jurisdiction;
18. LedgerEdge will provide to its Ontario Participants 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 Ontario, and may be required to be pursued in the home jurisdiction rather than in Ontario;
(b) the rules applicable to trading on LedgerEdge may be governed by the laws of the home jurisdiction, rather than the laws of Ontario; and
(c) LedgerEdge is regulated by the regulator in its home jurisdiction, rather than the OSC;
Submission to Jurisdiction and Appointment of Agent for Service
19. With respect to a proceeding brought by the OSC, arising out of, related to, concerning, or in any other manner connected with the OSC's regulation and oversight of the activities of LedgerEdge in Ontario, LedgerEdge will submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario, and (ii) an administrative proceeding in Ontario;
20. LedgerEdge will submit to the OSC a valid and binding appointment of an agent for service in those jurisdictions upon which the OSC 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 OSC's regulation and oversight of LedgerEdge's activities in Ontario;
21. LedgerEdge must, and must cause its affiliated entities, if any, to promptly provide to the OSC, on request, any and all data, information, and analyses in the custody or control of LedgerEdge 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
22. LedgerEdge must share information and otherwise cooperate with other recognized or exempt exchanges, recognized self-regulatory organizations, recognized or exempt clearing agencies, investor protection funds, and other appropriate regulatory bodies.