Ontario Securities Commission Bulletin

Issue 35/26 - June 28, 2012

Ont. Sec. Bull. Issue 35/26

Table of Contents

Chapter 1 - Notices / News Releases

Notices

• Current Proceedings before the Ontario Securities Commission

• CSA Consultation Paper 91-406 -- Derivatives: OTC Central Counterparty Clearing (Corrected)

• OSC Notice 11-767 -- Notice of Statement of Priorities for Financial Year to End March 31, 2013

• OSC Staff Notice 33-737 -- Enhanced Transparency of Communications with Registrants

Notices of Hearing

• Peter Beck et al.

• Peter Beck et al. -- ss. 127, 127.1

• Peter Beck et al. -- ss. 127, 127.1

News Releases

• Canadian Securities Regulators Seek Comments on OTC Central Counterparty Derivatives Clearing Framework

• Canadian Securities Regulators Seek Comments on the Potential Regulation of Proxy Advisory Firms

• Peter Beck, Swift Trade et al. Settle with the Ontario Securities Commission

Notices from the Office of the Secretary

• Peter Beck et al.

• Peter Beck et al.

• Peter Beck et al.

• Firestar Capital Management Corp. et al.

• Bunting & Waddington Inc. et al.

• New Hudson Television Corporation et al.

• Simply Wealth Financial Group Inc. et al.

• David Charles Phillips and John Russell Wilson

Chapter 2 - Decisions, Orders and Rulings

Decisions

• Wand Capital Corporation -- s. 1(10)

• BMO Investments Inc. et al.

• First Asset Investment Management Inc. and First Asset Morningstar Emerging Markets Composite Bond Index ETF

• Franklin Templeton Investments Corp. and Wellington West Franklin Templeton Balanced Retirement Income Fund

• Sara Lee Corporation

• Clairvest Group Inc.

• AlphaPro Management Inc.

• AlphaPro Management Inc. and Horizons ETFs Management (Canada) Inc.

Orders

• Aeroquest International Limited -- s. 1(6) of the OBCA

• Peter Beck et al. -- ss. 127, 127.1

• Firestar Capital Management Corp. et al. -- s. 127

• Bunting & Waddington Inc. et al.

• New Hudson Television Corporation et al. -- ss. 127(1), 127(8)

• David Charles Phillips and John Russell Wilson -- ss. 127, 127.1

• Chicago Mercantile Exchange Inc. -- s. 147

Chapter 3 - Reasons: Decisions, Orders and Rulings

OSC Decisions, Orders and Rulings

• Simply Wealth Financial Group Inc. et al.

• Peter Beck et al.

Chapter 4 - Cease Trading Orders

• Temporary, Permanent & Rescinding Issuer Cease Trading Orders

• Temporary, Permanent & Rescinding Management Cease Trading Orders

• Outstanding Management & Insider Cease Trading Orders

Chapter 5 - Rules and Policies

• NI 23-103 Electronic Trading

Chapter 8 - Notice of Exempt Financings

• Reports of Trades Submitted on Forms 45-106F1 and 45-501F1

Chapter 11 - IPOs, New Issues and Secondary Financings

Chapter 12 - Registrations

• Registrants

Chapter 13 - SROs, Marketplaces and Clearing Agencies

SROs

• Notice of Commission Approval -- IIROC Rules Notice -- UMIR -- Provisions Respecting Electronic Trading

Marketplaces

• Chi-X Canada ATS Ltd. -- Notice of Proposed Changes and Request for Comment

• Chi-X Canada ATS Ltd. -- Notice of Proposed Changes and Request for Comment

• Liquidnet Canada Inc. -- Notice of Proposed Changes and Request for Comment

• Chicago Mercantile Exchange Inc. -- Notice of Commission Order -- Application for Interim Exemptive Relief

• ICE Futures Canada, Inc. -- Notice and Request for Comment -- Application for Exemption from Recognition and Registration as an Exchange

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Chapter 1 -- Notices / News Releases

Current Proceedings before the Ontario Securities Commission

June 28, 2012

CURRENT PROCEEDINGS

BEFORE

ONTARIO SECURITIES COMMISSION

Unless otherwise indicated in the date column, all hearings will take place at the following location:

The Harry S. Bray Hearing Room

Ontario Securities Commission

Cadillac Fairview Tower

Suite 1700, Box 55

20 Queen Street West

Toronto, Ontario

M5H 3S8

Late Mail depository on the 19^th Floor until 6:00 p.m.

THE COMMISSIONERS

SCHEDULED OSC HEARINGS

ADJOURNED SINE DIE

Global Privacy Management Trust and Robert Cranston

Livent Inc., Garth H. Drabinsky, Myron I. Gottlieb, Gordon Eckstein, Robert Topol

LandBankers International MX, S.A. De C.V.; Sierra Madre Holdings MX, S.A. De C.V.; L&B LandBanking Trust S.A. De C.V.; Brian J. Wolf Zacarias; Roger Fernando Ayuso Loyo, Alan Hemingway, Kelly Friesen, Sonja A. McAdam, Ed Moore, Kim Moore, Jason Rogers and Dave Urrutia

Hollinger Inc., Conrad M. Black, F. David Radler, John A. Boultbee and Peter Y. Atkinson

CSA Consultation Paper 91-406 -- Derivatives: OTC Central Counterparty Clearing (Corrected)

[Editor's note: A version of CSA Consultation Paper 91-406 -- Derivatives: OTC Central Counterparty Clearing which did not include final revisions was inadvertently published in (2012), 35 OSCB 5638 (June 21, 2012). The following text is the final version.]

CANADIAN SECURITIES ADMINISTRATORS

CSA CONSULTATION PAPER 91-406

DERIVATIVES: OTC CENTRAL COUNTERPARTY CLEARING

Canadian Securities Administrators Derivatives Committee

June 20, 2012

CSA Consultation Paper 91-406 -- Derivatives: OTC Central Counterparty Clearing

On November 2, 2010, the Canadian Securities Administrators ("CSA") Derivatives Committee (the "Committee") published Consultation Paper 91-401 -Over-the-Counter Derivatives Regulation in Canada ("Consultation Paper 91-401").{1}Consultation Paper 91-401 set out high-level proposals for the regulation of over-the-counter ("OTC") derivatives. The Committee sought input from the public with respect to the proposals and eighteen comment letters were received from interested parties.{2}

The Committee has continued to contribute to and follow international regulatory proposals and legislative developments, and collaborate with the Bank of Canada, the Office of the Superintendent of Financial Institutions ("OSFI"), the Department of Finance Canada, market participants, as well as bodies such as the International Organization of Securities Commissions ("IOSCO"), the Financial Stability Board ("FSB") and the OTC Derivatives Regulators' Forum ("ODRF"). This public consultation paper, one in a series of eight papers that build on the regulatory proposals contained in Consultation Paper 91-401, proposes a framework for centralized clearing in the Canadian OTC derivatives markets. It is hoped that this paper will generate necessary commentary and debate that will assist members of the CSA in selecting appropriate policies and rules that will eventually be implemented in the various jurisdictions of Canada.

The Committee is working with foreign regulators to develop international standards that will shape the rules that we develop, including those regarding CCP clearing. Although a significant market in Canada, the Canadian OTC derivatives market comprises a relatively small share of the global market, with the majority of transactions involving Canadian market participants being entered into with foreign counterparties. It is therefore crucial that rules be developed for the Canadian market that accord with international practice to ensure that Canadian market participants have full access to international markets and are regulated in accordance with international principles. The Committee will continue to monitor and contribute to the development of international standards and specifically review proposals on industry standards relating to CCP clearing.

EXECUTIVE SUMMARY

The adoption of requirements relating to CCP clearing will be a key element in addressing the reform of financial markets in Canada. The introduction of requirements for CCP clearing of previously bilaterally cleared or uncleared derivatives transactions will not only greatly enhance the transparency of markets for regulators, but will also enhance the overall mitigation of risks. We include below a summary of the Committee's recommendations for CCP clearing:

Mandatory clearing requirements

In order to achieve Canada's G-20 commitments, and in accordance with international standards guidance from IOSCO and the FSB, the Committee proposes that CSA members take the necessary steps to make the CCP clearing of eligible OTC derivatives mandatory.

a) The Committee proposes that regulations be adopted requiring CCPs to submit derivatives or categories of derivatives for regulatory review to determine whether the instrument is eligible for CCP clearing and a possible determination that they be subject to a requirement to be centrally cleared by all market participants that are not exempt from the mandatory clearing requirement.

b) The coordinated development of procedures by CSA members will be a necessary first step in determining which OTC derivatives contracts can be centrally cleared and which of these must be centrally cleared, the factors relevant in those determinations and which participants must be required to clear their OTC contracts. In addition, CSA members will develop procedures for the recognition of CCPs and the approval of CCP rules and policies. All will be in accordance with international best practices.

c) Canadian market regulators should adopt a 'bottom-up approach' where OTC derivatives are submitted by a CCP to a market regulator . The market regulator will determine which derivatives will be eligible for CCP clearing and which of those will be subject to mandatory CCP clearing. In conjunction with this approach, the Committee recommends the use of the 'top down approach', a process where CSA members have the power to identify those OTC derivatives that have not been submitted by a CCP in the bottom-up approach but which nonetheless should be subject to mandatory CCP clearing.

d) Co-ordinated CSA regulations should establish the processes to be followed and the criteria that will be used in determining if a derivative should be subject to mandatory CCP clearing. The Committee believes that the evaluation processes should include a public comment period.

e) The Committee believes that a sixty-day public comment period will allow for sufficient time to provide feedback. A communications protocol should be established among CSA members to assist in the harmonization process.

f) A register for those derivatives determined to be subject to mandatory CCP clearing should be established and the information be publicly available.

Back-loading of pre-existing transactions

The Committee proposes that market participants be required to centrally clear new OTC derivative transactions that regulators have determined to be subject to a CCP clearing obligation. Derivatives transactions entered into before the regulations are in effect (pre-existing transactions) and which are not cleared through a CCP could be novated to the CCP at a later date (back-loading). The Committee believes that:

a) the back-loading of pre-existing transactions should be done on a voluntary basis. However, when such transactions are subject to novation or assigned, effectively becoming new trades, they should be subject to any clearing obligation, and that

b) market regulators should conduct a review using information from trade repositories and other sources to determine whether additional back-loading obligations are appropriate to address existing risks. This analysis will be completed once sufficient trade repository data is available.

Clearing timeframes

For voluntarily cleared derivatives, that is, OTC derivative trades not executed on an approved trading venue and not subject to mandatory clearing, the Committee recommends their prompt submission to the CCP (no later than the close of business on the day of execution.)

If a derivative which is subject to a clearing obligation is traded on a recognized trading venue, the counterparties must submit the trade as soon as possible.

Intra-group Transactions

The Committee will not be recommending a broad exemption for intra-group transactions based on the risks to the overall market and third parties resulting from such an exemption. The Committee does ask for comments on intra-group transactions.

Recognition of Central Counterparties

Canadian market regulators should recognize and regulate CCPs. This oversight would include the acceptance or rejection of rules and procedures, the application of terms and conditions to such rules, including the CCPs risk management model, as well as the review of regular CCP fillings and financial statements, and the performing of regular and ad hoc inspections.

Governance

CCPs must adopt corporate governance policies to ensure that conflicts of interest are managed and that the board of directors includes independent representation. CCP Boards must establish committees with appropriate structure and mandates to play key roles in the governance of the CCP.

Fees

Clearing and other fees must be fully transparent to clearing members, customers and regulators as well as to the public.

Participant Access

CCPs should develop robust access requirements to ensure that clearing members do not bring undue risk to the CCP and are able to fulfill their obligations, but which do not impose access restrictions for non-competitive ends. At the same time such rules should not unreasonably prohibit, condition, or limit access to the services offered by the CCP. The access policy should consider a potential clearing member's ability to meet its financial and operational responsibilities arising from its relationship with the CCP.

Open Access to Trading Platforms

Regulation should require the development of policies by CCPs to facilitate open access to trading platforms. Such policies should not unreasonably prohibit or limit access to the CCP regardless of how or where a transaction is executed. CCP access requirements should not result in a competitive advantage to any trading platform.

CCP Rules

The CCP's rule book and procedure framework, including default procedures, must be clear and comprehensive. Both market regulators and participants must have certainty that such rules will be followed during periods of market stress. CCP rules should clearly define and limit the range of circumstances in which it has the ability to invoke emergency powers ensuring that participants understand and manage the risk and cost associated with their participation in the CCP. In particular:

a) CCPs should ensure compliance with published default procedures in all situations and have processes in place to monitor compliance and deal with situations of non-compliance. A mechanism for appeals from CCP decisions should also exist.

b) CCPs must put in place a process for the adoption of rules, including their submission for regulatory, board and, where necessary, member approval.

c) Regulators of both domestic and foreign CCPs should develop and commit to clear co-operative oversight arrangements that deal with the regulation of CCPs subject to multi-jurisdictional regulation. Such protocols should clarify the role of regulators in monitoring and directing the governance model, the rule-making process and the operations of a CCP. They should also clarify the rights and responsibilities of all relevant regulators and their ability to take steps in addressing issues of a local public interest.

Risk Management

Regulations should be developed requiring that CCPs develop and implement a robust risk management program in accordance with international best practices and the FMI Principles. These programs should be fully transparent to regulators, clearing members and other relevant stakeholders. Specific requirements include that a CCP:

a) Have in place an effective, multi-level contingency structure that includes accurate liquidity analysis and member margining, a default waterfall that sets out clearly the funding events that will occur in the case of a member default and the contributions that will be required of members and the CCP's own capital (if any) and any further financial backstops or insurance that can be accessed;

b) Conducts a full analysis of all relevant risks and has in place appropriate risk management procedures, such as margin and haircut adjustments;

c) Impose risk limits on individual clearing members;

d) Inform its regulator or regulators when a clearing member is at risk of default and when any default procedures are triggered;

e) Undertake periodic testing and reviews of its clearing systems, including models and default procedures, and of clearing member procedures and systems. These tests should involve extreme but plausible market conditions;

f) Maintain and utilize accurate pricing and valuation procedures;

g) Maintain and utilize product approval procedures to ensure that new clearing products do not bring undue risk to the CCP and its members;

h) Have a chief risk officer who is responsible for the implementation of risk management procedures and who reports to the CCP's board of directors or risk management committee, as appropriate;

i) Subject risk management models, including those for valuation and margin calculations, to independent review and validation;

j) Provide regulators with periodic reports relating to the risks applicable to the CCP and a description of how such risks are managed; and

k) Provide regulators with financial reports relating to the CCP, which should include aggregated risk exposures.

Systems and Technology

The Committee believes that regulations for CCPs in Canada should require a program of risk analysis and oversight in order to identify and minimize the sources of operational risk, particularly in regards to systems and technology. The development of appropriate controls to ensure that systems are reliable, secure and have adequate scalability should be required.

Reporting

The Committee recommends that each CSA jurisdiction seek the legislative authority to require the CCP to transmit to regulators the information required for oversight purposes. This will include the frequency and format of the information required.

Foreign-based CCPs and Regulatory Co-operation

As a majority of counterparties to derivatives trades entered into by Canadian participants are resident outside of Canada, it is clear that Canadian market participants will require access to foreign CCPs to clear at least some OTC derivatives transactions. The Committee believes that the review and recognition (or exemption from recognition) of foreign-based CCPs is a priority to ensure that Canada meets its G20 commitments.

Comments and Submissions

The Committee invites input on the issues outlined in this public consultation paper. You may provide written comments in hard copy or electronic form. The committee understands that some market participants were waiting to read the clearing paper before sending comments on end-user exemptions, the committee will welcome all end-user exemption comments with respect to clearing.

The comment period expires September 21, 2012.

The Committee will publish all responses received on the websites of the Autorité des marchés financiers (www.lautorite.qc.ca) and the Ontario Securities Commission (www.osc.gov.on.ca).

Please address your comments to each of the following:

Alberta Securities Commission

Autorité des marchés financiers

British Columbia Securities Commission

Manitoba Securities Commission

New Brunswick Securities Commission

Nova Scotia Securities Commission

Ontario Securities Commission

Please send your comments only to the following addresses. Your comments will be forwarded to the remaining jurisdictions:

Questions

Please refer your questions to any of:

1. INTRODUCTION

In September 2009, the G20 called for the improvement of the global financial markets and its members committed themselves to reforming financial markets and their oversight by the end of 2012 ("G20 Commitments"). As discussed in Consultation Paper 91-401 on Over-the-Counter Derivatives Regulation in Canada ("Consultation Paper 91-401"),{3}much international co-operative work has been undertaken through groups such as the Financial Stability Board ("FSB"), the International Organization of Securities Commissions ("IOSCO"), the Committee on Payment and Settlement Systems ("CPSS") and the OTC Derivatives Regulators' Forum ("ODRF").{4}

This paper describes the Committee's proposals relating to CCP clearing of OTC derivatives. The paper starts by describing mandatory CCP clearing and approaches for determining the derivatives to which the mandatory CCP clearing obligation would apply. As well, the paper discusses issues of back loading pre-existing trades, timeframes for CCP clearing and the recognition of counterparties. The paper incorporates and requires compliance with CPSS-IOSCO's Principles for Financial Market Infrastructures (the "FMI Principles") particularly in the areas of governance, CCPs' fees, access, risk management and systems and technology. Finally, asset protection, trade reporting, regulatory cooperation over foreign based CCPs and infrastructure are highlighted. The Committee encourages market participants and the public to submit comment letters addressing specific questions as well as any other issue or question raised by this consultation paper.

2. MANDATORY CCP CLEARING

In 2009, the G20 leaders agreed that all standardized OTC derivatives should be centrally cleared by the end of 2012. In a CCP model, after a trade is executed, either directly between two counterparties or on an exchange or electronic trading platform, the CCP becomes the counterparty to each of the contract participants. Clearing OTC derivatives through a CCP will result in more effective management of counterparty credit risk, thus mitigating the effects if one of the counterparties does not fulfill its obligations. It is the G20's belief, one that is shared by many market regulators, that CCP clearing can contribute to the stability of our financial markets and reduce market risk. Many derivatives have and will continue to evolve from customized contracts traded in a purely OTC, bilateral market to standardized contracts that are centrally cleared and, perhaps, negotiated on an electronic trading platform.{5}Further incentives to centrally clear will also be created for prudentially regulated entities under the new Basel III regulatory capital framework. This process is not straightforward, however, and competing market interests can affect this progression. Therefore, members of the G20, including the US and the European Union (EU),{6}have required or will require that standardized derivatives be centrally cleared through regulatory requirements.

In response to Consultation Paper 91-401, commenters supported mandatory CCP clearing of OTC derivatives that are eligible for CCP clearing, while expressing concerns with respect to which OTC derivatives contracts should be subject to this requirement.

The Canadian Bankers Association ("CBA") "endorses the CSA's recommended approach to implement mandatory clearing of OTC derivatives that are determined to be appropriate for clearing and capable of being cleared."{7} The International Swaps and Derivatives Association ("ISDA") "strongly agree with the approach to implementing mandatory clearing of derivatives trades that are appropriate for clearing"{8}but also recommend "an extended period between a CCP being given permission to clear a product and clearing becoming mandatory on that product."

TMX Group concurred:

We agree with the recommendations to implement a mandatory requirement for centralized clearing of OTC derivatives. The micro (or firm) level benefits of central clearing for OTC derivatives, including capital, collateral and operational efficiencies, and the macro (or systemic) level benefits, including systemic risk management, will greatly improve the resilience of the Canadian financial system and improve the overall efficiency of these markets.{9}

Several commenters agreed that there are benefits to CCP clearing arrangements; however they felt that the additional burdens{10}of posting margin{11}could deter market participants from using derivatives for risk management purposes, particularly for life insurers, managed funds and commercial end users of derivatives.

The Mouvement Desjardins made the following comment regarding hedge accounting:

In addition, regulators should consider the accounting rules that reserve favourable treatment for customized risk management transactions. Mandatory clearing and standardization of OTC derivatives should not result in increased volatility in users' financial statements.{12}

Despite the commenters' support of CCP clearing, a variety of valid concerns were expressed. These concerns will be addressed throughout the paper and the Committee will consider them when developing rule and exemption proposals for CSA consideration.{13}

To increase transparency and reduce systemic risk, market regulators and financial market infrastructures will implement requirements that will result in changes to some current practices, changes which may result in increased costs. On the other hand, it is conceivable that savings from netting at a CCP could decrease the margin costs.

2.1 Committee Recommendations

After reviewing comment letters that were submitted in response to Consultation Paper 91-401, the Committee proposes that Canadian market regulators take the necessary steps to make mandatory the CCP clearing of eligible OTC derivatives. The Committee also recommends that the CSA members adopt rules and procedures for:

• the determination of which OTC derivatives contracts are eligible to be centrally cleared and which of these should be subject to mandatory CCP clearing, including a description of the factors relevant to such a determination;

• the determination of which participants should be required to clear their OTC derivatives contracts;

• the recognition of CCPs; and

• the approval of CCP rules, procedures and policies in relation to the clearing of OTC derivatives contracts.

3. DERIVATIVES SUBJECT TO A MANDATORY CLEARING REQUIREMENT

The Committee believes that the benefits of centralized clearing, including the reduction of counterparty risk and increased regulatory transparency, justify to the extent practical mandatory CCP clearing of the broadest array of OTC derivatives. However, it is evident that some OTC derivatives will continue to be customized, and thus non-standardized, to allow for an effective hedge of a market participant's risks. These derivatives, by their nature, will be so illiquid that to impose a CCP clearing obligation for them would result in either the CCP being subject to unacceptable risk or require the CCP to impose substantial margin requirements, which in turn will cause the transaction to be prohibitively expensive to the counterparties involved. In either case, inefficiencies in the market will result, as a mandate to centrally clear highly customized derivatives would effectively ban their use. A process must therefore be developed to determine which products should be subject to a mandatory CCP clearing obligation.

The Committee is proposing a combination of two approaches: the bottom-up approach, which refers to a process through which OTC derivatives contracts that a CCP clears or proposes to clear are made subject to a mandatory CCP clearing requirement by a market regulator; and the top-down approach, which is the process by which a market regulator has the power to identify OTC derivatives contracts for which mandatory CCP clearing is desirable, irrespective of whether a CCP clears or proposes to clear such contracts. The bottom-up and top-down approaches are discussed in more detail in sections 3.1 and 3.2 below.

One of the key elements of the bottom-up approach is that a market regulator will receive applications for all OTC derivatives contracts that a recognized CCP clears or proposes to clear and will then assess whether a mandatory clearing obligation is suitable for such contracts.{14} In assessing whether an OTC derivatives contract is subject to a mandatory clearing obligation, a market regulator will consider, among other things, whether:

• the contract is or can be sufficiently standardized to be cleared through a CCP,

• the underlying instruments or markets for the underlying instruments provide adequate pricing information,

• there is sufficient liquidity in the contract, and

• the contract would bring undue risk into a CCP.

In determining whether the implementation of a mandatory clearing requirement is appropriate, market regulators will also weigh the risk to the financial system if the OTC derivatives contract continued to be cleared and settled bilaterally against the risk that it would bring into the CCP if the derivatives contract were to be centrally cleared. For example, there may be a derivatives contract for which a CCP cannot manage the risk and is therefore not suitable for a mandatory clearing obligation. Market regulators should endeavour to achieve a net reduction of risk to the entire financial system.

1. Standardization

In its report, FSB Implementing Reforms, the FSB recommended that authorities develop incentives for market participants to use standardized OTC derivatives.

Standardization is a key condition for central clearing and trading on exchanges or electronic trading platforms, and also helps to facilitate greater market transparency. To promote the G-20's vision for greater use of these safer channels, authorities must ensure that appropriate incentives for market participants to use standardized products are in place. In particular, authorities should counter incentives that market participants may have to use nonstandardized products solely to avoid central clearing and trading requirements.{15}

The Committee believes that several factors should be taken into consideration when determining the level of standardization of an OTC derivative contract. It is proposed that a product which uses standardized, widely-accepted and widely-used legal documentation, including standardized features and contractual terms should be reviewed to determine if it should be subject to mandatory clearing.

Consideration should also be given to the level of standardization of an OTC derivative contract's transaction process, i.e., whether the product supports straight-through processing, which is defined as the automation of the entire process from trade initiation to settlement (and often referred to as STP). STP reduces risk from the otherwise manually-intensive nature of post-trade processing and the potential for significant market disruptions in closing out positions following a member default.{16}

Other factors for consideration include:

• whether the contract is traded on an electronic trading platform, and

• whether conventions and standard industry practices are in place to address a contract's lifecycle events.

2. Adequate pricing information

Transparency of transaction prices is required to support the risk management framework of the CCP. Historical pricing information, including pricing in all market conditions, is needed for determination of initial margin calculations. Current pricing information is important to allow the CCP to understand the changing risks related to a derivatives position as a result of market factors. Such information is also a necessary element of establishing variation margin requirements. Furthermore, a CCP should develop alternative pricing methods for instances where there is a disruption in standard pricing channels. Ultimately, the CCP should have access to sufficient data, the ability and the capacity to independently price such instruments.

3. Liquidity

To be centrally cleared, a derivative contract must have sufficient liquidity to allow the CCP to manage its risks in the case of a participant's default. Where a default occurs, sufficient liquidity would give the CCP flexibility to port the participant's positions to another participant, to offset its exposure to the non-defaulting counterparty by entering into a contract with a new offsetting counterparty, or to liquidate the positions.

In response to Consultation Paper 91-401, ISDA commented that the sufficient liquidity criterion should be applied conservatively and recommended certain parameters for determining liquidity in a product:

[W]e consider that the "sufficient liquidity" requirement ought to be applied very conservatively. We repeat the importance of this, as a CCP must calculate net margin each day and price availability is required to do this. In addition, since this requirement applies for the whole life of the trade price availability must be guaranteed in all market conditions, including stressed markets.

Further study is necessary to determine if there is sufficient liquidity with respect to each derivative asset class. Certain parameters for liquidity for each product are a minimum number of market makers, frequency of trading (daily) and depth of market (daily trading must be in sizes that are not insignificant). Some products may meet these requirements, or not, depending on tenor.{17}

4. Undue risk to the CCP

The CCP must have the expertise and operational capacity to manage efficiently all the risks associated with the products that it clears. The CCP must have the necessary ability, technology and resources to manage the volume and size of contracts related to each product that will be cleared. The CCP must be able to determine if a derivative would bring undue risk to the CCP and should therefore not be cleared.

In response to Consultation Paper 91-401, one of the issues raised was the approach market regulators should adopt when considering which OTC derivatives would be appropriate for clearing. Several responses cited criteria that are broadly similar to those outlined above and in the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act");{18} however some commenters raised additional factors to be considered. In its comment letter, the CBA supported the approach presented in Consultation Paper 91-401 but recommended a regulatory regime that is harmonized with international jurisdictions and one which includes consideration of the following additional factors:

Given that a large portion of derivatives activity by Canadian financial institutions (except equity linked) occurs with foreign counterparties, coupled with the need to harmonize the Canadian derivatives regulatory regime with international jurisdictions, the evaluation criteria used to identify OTC derivatives eligible for clearing should be broadly consistent with criteria applied, or proposed to be applied, under similar international legislation, including: (i) the reduction of systemic risk; (ii) the liquidity of contracts; (iii) the availability of pricing/valuation information; (iv) the ability of at least one central counterparty clearing house (a "CCP") to handle the volume of contracts; (v) the level of client protection provided by the CCP; and (vi) the clearing costs.{19}

The Mouvement Desjardins also recommended that the determination of trades that should be subject to mandatory CCP clearing include a review of additional factors:

Desjardins agrees with the recommended option [...] Regulators should consider the following:

• market volume of the derivative;

• number of market participants for the derivative;

• size of market participants for the derivative;

• available liquidity of market participants for the derivative;

• factors affecting the derivative, such as daily margin calculation method, payment dates and maturity;

• complexity of the derivative.{20}

3.1 Bottom-Up Approach

The Committee believes that market regulators should consider using a bottom-up approach where a CCP submits OTC products (or group, category, type or class of OTC products) that it already clears or proposes to clear to its market regulator(s) who would determine whether the products in question are eligible for central clearing and should be subject to mandatory clearing. This bottom-up approach would provide market regulators with information regarding contract design, the markets for the derivative and its underlying, price determination and risk makeup of the product, including any systemic risk it may pose.

In order to facilitate a market regulator's ability to assess effectively whether a product is eligible for central clearing and should be subject to a mandatory clearing obligation, it should clearly set out the information that it expects to receive from a CCP under the bottom-up approach. A CCP's submission would include, among other things, a description of the primary attributes of the product; the type of trading that takes place in the product (such as on an electronic trading platform); details of the CCP's risk management framework; and the timeframe in which the CCP can begin clearing the product.

Further, when market regulators receive a CCP's submission, they should follow transparent and specific procedures for determining whether a mandatory clearing obligation should apply, which generally would include: gathering information about the product and the markets in which the product is traded and any restrictions to which the CCP may be subject; and consultation with stakeholders, including other regulatory authorities, to inform the assessment of the product, as appropriate.

The bottom-up determination process is distinct from the existing rule approval processes that exist currently for clearing agencies.{21} The U.S. Securities and Exchange Commission ("SEC") clarifies the different filing requirements:

A clearing agency that plans to accept a security-based swap for clearing must file a Security-Based Swap Submission with the Commission for a determination by the Commission of whether a security-based swap, or a group, category, type or class of security-based swaps, is required to be cleared. As discussed in Section I, in cases where accepting a security-based swap (or group, category, type or class of security-based swaps) for clearing constitutes a change in a ''stated policy, practice, or interpretation'' of the clearing agency, the clearing agency also would be required to file a proposed rule change. In such cases, the Commission must determine (i) whether to approve the clearing agency's proposed rule change to clear the applicable security-based swap and (ii) whether the security-based swap would be subject to the mandatory clearing requirement.{22}

In response to Consultation Paper 91-401, several commenters, including the Working Group of Commercial Energy Firms, suggested that the bottom-up approach is the most appropriate:

The Working Group supports the Committee's recommendation that a central clearing requirement apply only to standardized derivatives contracts. A definition of a "standardized contract" likely always will be elusive. The best solution is for central counterparties ... to identify potential contracts that might fall under the central clearing requirements and, upon application by the CCP, for regulators to determine whether such contract is appropriate for central clearing. Regulators should provide notice and invite public comments as to whether a contract is appropriate for central clearing.{23}

The U.S. Commodity Futures Trading Commission ("CFTC") has finalized rules under the Dodd-Frank Act that set out criteria for the CFTC to determine which derivatives submitted to the CFTC by CCPs will be subject to mandatory clearing.

The CFTC will make its determination based on information submitted by the CCP, including assurances that the designated clearing organization ("DCO") is eligible to accept a derivative; information regarding the existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data; the existence of a rule framework and expertise at the DCO; information on the effect on the mitigation of systemic risk in clearing the derivative; the existence of legal certainty in the event of the insolvency of the relevant DCO or one or more of its clearing members; product specifications and participant eligibility standards; pricing sources, models and procedures; risk management procedures; rules and procedures; and any other information required by the Commission.{24}

The SEC has proposed guidance to CCPs in demonstrating compliance with the criteria set out in its proposed rules under the Dodd-Frank Act. The guidance includes information that should be provided by a CCP proposing to clear a swap or category of swaps:

In describing the security-based swap, or any group, category, type or class of security-based swaps, that a clearing agency plans to accept for clearing, the clearing agency could include the relevant product specifications, including copies of any standardized legal documentation, generally accepted contract terms . . . standard practices for managing and communicating any life cycle events associated with the security-based swap and related adjustments, and the manner in which the information contained in the confirmation of the security-based swap trade is transmitted. The clearing agency also could discuss its financial and operational capacity to provide clearing services to all customers subject to the clearing requirements as applicable to the particular security-based swap. Finally, the clearing agency could include an analysis of the effect of a clearing requirement on the market for the group, category, type, or class of security-based swaps, both domestically and globally, including the potential effect on market liquidity, trading activity, use of security-based swaps by direct and indirect market participants and any potential market disruption or benefits. This analysis could include whether the members of the clearing agency are operationally and financially capable of absorbing clearing business (including indirect access market participants) that may result from a determination that the ... swap is required to be cleared.{25}

The European Securities and Markets Authority (ESMA) has also developed an approach for assessing the eligibility of OTC derivatives for clearing.{26} At this time ESMA is developing technical standards that will affect all OTC derivatives entered into by two financial parties, a financial counterparty and a non-financial counterparty and between two non-financial counterparties.{27}

Factors to be considered in determining whether a derivative should be subject to a mandatory clearing obligation include the market, the derivative, the CCP and the counterparties. This analysis will need to take into consideration characteristics that are specific to the Canadian market, such as the size and depth of liquidity or the homogeneity of market participants (where market participants' portfolios have very similar risk profiles). The bottom-up approach can be complemented by the top-down approach, described below.

3.2 Top-Down Approach

Under the top-down approach, market regulators conduct analysis of market data, particularly the information received from trade repositories, for the purpose of identifying derivatives or categories of derivatives that potentially should be subject to an obligation to be centrally cleared. Canadian market regulators would also review the decisions by foreign regulators to mandate the clearing of particular derivatives or categories of derivatives.

If the review of this data leads Canadian market regulators to believe that an instrument is suitable for CCP clearing, we will conduct market analysis, including holding discussions with relevant CCPs, and then make a determination whether the derivative or category of derivatives is clearable and thus must be cleared on a recognized CCP, or that it does not meet the eligibility standard and will not be subject to mandatory clearing. The determination will take into account the factors mentioned above: standardization of the derivative, liquidity of the market, the availability of accurate pricing, the risk the derivative would bring to a CCP, and the costs to the market participants.

The CFTC has set out its draft process for reviewing derivatives that have not been accepted for clearing in new § 39:

(1) The Commission, on an ongoing basis, will review swaps that have not been accepted for clearing by a derivatives clearing organization to make a determination as to whether the swaps should be required to be cleared. In undertaking such reviews, the Commission will use information obtained pursuant to Commission regulations from swap data repositories, swap dealers, and major swap participants, and any other available information. . . .

If no derivatives clearing organization has accepted for clearing a particular swap, group, category, type, or class of swaps that the Commission finds would otherwise be subject to a clearing requirement, the Commission will:

(i) Investigate the relevant facts and circumstances;

(ii) Within 30 days of the completion of its investigation, issue a public report containing the results of the investigation; and

(iii) Take such actions as the Commission determines to be necessary and in the public interest, which may include requiring the retaining of adequate margin or capital by parties to the swap, group, category, type, or class of swaps.{28}

A CCP is in the best position to determine if a particular derivative, if cleared, would pose undue risk to the CCP or its members. The FSB notes

"Authorities should determine which products should be subject to a mandatory clearing obligation; however, they should not require a particular CCP to clear any product that it cannot risk-manage effectively, and should not mandate CCP clearing in circumstances that are not consistent with the G-20 objectives."{29}

Market regulators may determine that a derivative is sufficiently standardized and meets the regulatory requirements for CCP clearing; however the determination to clear the derivative or not should be made by the CCP, based on its risk analysis (and not for anti-competitive reasons).

The top-down approach will ensure that market regulators develop and maintain an understanding of the derivatives being traded, the development of the market and the ongoing application of the G20 objectives. In addition it will provide market regulators an opportunity to initiate discussions related to clearing certain categories of derivatives where clearing would provide risk management or other benefits.

The Committee further recognizes that factors used to determine if a derivative can be cleared, such as market depth and liquidity, availability of efficient and accurate prices, and risk an OTC derivative contract brings to a CCP are always evolving and will change over time. Regulators will from time to time analyze these factors and use the top-down approach to determine if an OTC derivative contract is still suitable for mandatory clearing by a CCP. If the result of the analysis shows significant deterioration to the factors, rendering a derivative no longer suitable for CCP clearing, market regulators will publish the findings and request public comment before making a decision on whether to remove the mandatory clearing obligation for such a derivative.

3.3 Committee Recommendations

The Committee proposes that market regulators adopt rules for determining whether a derivative is eligible for CCP clearing which are based on international best practices, including those being developed by the US CFTC and ESMA. The Committee believes that a coordinated approach to determining which derivatives will be subject to mandatory clearing, using both bottom-up and top-down approaches, will provide clarity to the market, and will ensure consistent risk analysis.

Further, the Committee proposes that market regulators maintain a register of those derivatives which have been determined to be eligible for central clearing and subject to mandatory CCP clearing. This registry should be publicly available on Committee members' web sites.

The Committee proposes that market regulators adopt regulations that require CCPs to submit all derivatives or categories of derivatives for regulatory review and a possible determination that the derivative or category of derivatives must be cleared by all market participants who are not exempt from the mandatory clearing requirement. The Committee proposes that regulations should set out the processes which will be followed and the criteria that will be evaluated to make such determinations. The Committee also believes that the evaluation process should include a public comment period.

The Committee believes that a sixty day public comment period, consistent with that proposed by U.S. regulators, is sufficient time for interested participants to provide input. The Committee proposes that this comment period would be part of a prescribed regulatory review period to ensure that decisions made in relation to clearing are made within a reasonable timeframe. It is recommended that a communication protocol be established among CSA members to harmonize the review process.

For each approach, the Committee proposes to develop a clear process for publishing determinations which would include a sixty day public comment period and consultations with the CCPs that would clear the instrument. Should a CCP not accept a derivative for clearing that has been determined to be subject to mandatory clearing, the market regulator will conduct further analysis and publish a report of its findings. This analysis may lead to the determination of minimum capital or margin requirements for the derivative where bilaterally cleared, or other trading restrictions.

The Committee further proposes that the top-down approach be also used to determine if a derivative that is already subjected to mandatory clearing by a CCP continues to be suitable to be centrally cleared. Should such analysis support the removal of a derivative from mandatory clearing obligations, the regulators will publish the findings for public comment period before making the final evaluation and decision.

Further, work will need to continue on the development of international standards for the determination of which derivatives should be subject to mandatory CCP clearing. It is worth noting that due to confidentiality laws in some jurisdictions it may be difficult or impossible to obtain information regarding a derivative or its underlying market, further complicating this process.

4. BACK-LOADING OF PRE-EXISTING TRANSACTIONS

Derivatives that are uncleared or cleared bilaterally and that pre-exist the enactment of a clearing obligation may benefit from the CCP clearing process. However, there is considerable complexity involved in requiring such transactions to be centrally cleared or "backloaded" into a CCP, including the renegotiation of contract provisions and the unwinding of collateral arrangements.

The EU has proposed that derivatives entered into after the coming into effect of a clearing mandate, or those derivatives that are entered into or novated after the adoption of regulations but before the coming into effect of a clearing mandate, be mandated to be cleared through a recognized CCP if their maturity is beyond a specified date to be determined by ESMA.

The Committee understands that a requirement to clear pre-existing trades would result in substantial costs for market participants without, in some situations, material benefit. This is particularly true in cases where the OTC derivative contract will be concluded in the near future. The Committee believes that the costs of back-loading must be weighed against the benefits to determine what is best for our markets.

4.1 Committee Recommendations

The Committee proposes that participants be required to clear new OTC derivative transactions that have been determined to be subject to a CCP clearing obligation. The backloading of pre-existing trades should be done on a voluntary basis. However, when pre-existing trades in derivatives that are subject to a clearing obligation are novated or assigned (effectively becoming new trades ) they will be subject to the clearing obligation. As sufficient data become available in trade repositories and from other sources, the Committee proposes that market regulators review the data to determine whether additional back-loading obligations are appropriate.

Request for Comment

Question 1. Do you consider that product characteristics of any OTC derivative asset classes make them eligible for CCP clearing based on the factors set out herein? If so, what asset classes would you exclude, and for what reasons?

Question 2. For which asset classes do you consider CCP clearing is inappropriate or not currently feasible based on the factors described herein, and for what reasons?

Question 3. What are the costs and risks involved in moving particular derivatives or classes of derivatives transactions to CCP clearing that regulators should consider in determining if a derivative should be subject to a CCP clearing requirement?

5. CLEARING TIMEFRAMES

The prompt reporting of derivatives transactions to a CCP by counterparties to the transaction and the prompt review and acceptance or rejection of the transaction for clearing by the CCP are key elements in managing risk. This will reduce the chance that market risk results in undue losses if a significant change in value or other market event occurs before clearing.

The CFTC proposes:

As previously proposed, §39.12(b)(7)(ii) required DCOs to accept immediately upon execution all transactions executed on a [Designated Contract Market] or [Swap Execution Facility]. A number of DCOs and other commenters expressed concern that this requirement could expose DCOs to unwarranted risk because DCOs need to be able to screen trades for compliance with applicable clearinghouse rules related to product and credit filters. The Commission recognizes that while immediate acceptance for clearing upon execution currently occurs in some futures markets, it might not be feasible for all cleared markets at this time. For example, where the same cleared product is traded on multiple execution venues, a DCO needs to be able to aggregate the risk of trades coming in to ensure that a clearing member or customer has not exceeded its credit limits. Accordingly, the Commission is proposing to modify § 39.12(b)(7)(ii) to permit DCOs to screen trades against applicable product and credit criteria before accepting or rejecting them. Consistent with principles of open access, the proposal would require that such criteria be non-discriminatory with respect to trading venues and clearing participants. The Commission continues to believe that acceptance or rejection for clearing in close to real time is crucial both for effective risk management and for the efficient operation of trading venues. Rather than prescribe a specific length of time, the Commission is proposing as a standard that action be taken ''as quickly as would be technologically practicable if fully automated systems were used.'' The Commission anticipates that this standard would require action in a matter of milliseconds or seconds or, at most, a few minutes, not hours or days.{30}

5.1 Committee Recommendations

The Committee believes that Canadian counterparties should be required to submit their trades that are subject to a clearing obligation to a recognized CCP as soon as possible, in any case no later than the close of business on the day of execution. The Committee also believes that CCPs should be required to review each submitted transaction to ensure that it complies with CCP rules and does not represent an inappropriate risk to the CCP as quickly as possible. Communication of the CCP's acceptance or rejection of the transaction for clearing should be provided immediately after the CCP's review has been completed, and before the end of the CCP's business day.

For derivatives that are cleared voluntarily -- that is, for OTC derivatives trades not executed on an approved trading venue and not subject to the mandatory clearing, the Committee recommends that if such transactions are submitted to a CCP promptly, which would be no later than the close of business on the day of execution, the CCP would be subject to the same requirement to accept or reject the transaction by the end of the CCP's business day.

If a derivative that is subject to a clearing obligation is traded on a recognized trading venue, the counterparties (or the trading venue acting on behalf of the counterparties) must submit the trade as soon as possible. This process would preferably be fully automated, with integration between the trading venues and the CCPs' systems.

5.2 Request for Comment

Question 4. Does a deferred submission, be it measured in minutes, hours or days, engender significant counterparty or other risks that would make the imposition of a strict timeframe for submission to a CCP, and the acceptance by the CCP necessary?

6. EXEMPTIONS FROM CCP CLEARING

Although most derivatives transactions will be mandated to be cleared on a CCP, some transactions involving categories of participants will be exempt from the requirement.

6.1 End-users

The Committee proposes an exemption for certain end-users in CSA Consultation Paper 91-405 -- Derivatives: End-user Exemption,{31}published on April 13, 2012. This consultation outlined the proposed exemption and invited comments on a number of issues relating to such an exemption.

6.2 Intra-group transactions

The EU has proposed to exempt intra-group transactions from their clearing obligation.{32}Intra-group transactions are defined in the proposal,{33}and are essentially transactions between two related, affiliated or associated entities which, in the case of financial institutions, are included in the same consolidated financial statements on a fully consolidated basis and the counterparties are subject to the same risk evaluation, measurement and control procedures.{34}

Commenters in the U.S. have argued in favour of an exemption for such transactions. They explain that intra-group transactions as a class of swaps generally serve to consolidate risk into a single book or portfolio. Mandating the clearing of such transactions, they assert, would only serve to multiply the number of cleared transactions without resulting in any reduction in CCP risks. In a comment letter to the SEC and the CFTC, JP Morgan asserted that because of the risk mutualization feature inherent in CCPs the introduction of additional and in effect unnecessary swap transactions to the clearinghouse would result in increased systemic risk not the contrary.{35}Moreover, ISDA has argued that the resulting increased margin requirements would result in an unnecessary consumption of group liquidity.{36}Thus, if the counterparties are controlled by the same entity and the positions essentially net each other out, from an accounting perspective there may be no additional implicit risk in such transactions.

6.3 Request for Comment

The Committee believes that an exemption from a requirement to clear intra-group transactions should be considered in the context of two situations: (i) where the transaction occurs between two related entities that have access to the same capital within one of the entities or a parent; and (ii) where the transaction occurs between two related entities that are separately capitalized such that the transaction will result in a change in the risk exposure that either entity has to third-parties.

The Committee is concerned that a broad exemption from the CCP clearing obligation for intra-group transactions will result in a situation where some intra-group transactions could result in increased risk to the market or to a third-party and, as a result does not propose to provide a broad exemption for intra-group transactions.

Question 5. The Committee asks whether an exemption from mandatory CCP clearing for intra-group transactions is appropriate, including a description of the risks that they could pose to the marketplace and the costs of migrating such transactions to a CCP.

7. RECOGNITION OF CENTRAL COUNTERPARTIES

Due to the importance of CCPs in the fulfillment of Canada's G20 commitments, the Committee recommends that CCPs be recognized in order to operate within Canada.{37}Recognition by a Canadian market regulator will be mandatory where a CCP carries on business or otherwise offers clearing services to a person carrying on business or resident in that regulator's jurisdiction. This is not limited to the CCP's physical presence; a CCP located in one Canadian province or in a foreign country can carry on business in other jurisdictions of Canada where it offers services to persons residing in a jurisdiction or registered to carry on business in that jurisdiction. Some market regulators may provide exemptions from recognition, with conditions and subject to a determination that the CCP is adequately regulated by its home regulator and other factors.

In order to be recognized, a CCP would be required to demonstrate that it complies with the FMI Principles{38}and specified criteria related to governance, fees, access, rules, due process, risk management, systems and technology, financial viability and reporting, operational reliability, protection of assets, outsourcing, information sharing and regulatory co-operation.{39}

7.1 Committee Recommendations

The Committee proposes that market regulators provide for the recognition and regulation of CCPs. The Committee proposes that market regulators should have the ability to apply terms and conditions to the recognition or exemption from recognition of a CCP, approve or reject the CCP's rules and procedures, apply terms and conditions to such rules, including its risk management model, receive and review regular CCP filings including the CCP's financial statements, and conduct regular and ad hoc inspections.

8. CPSS -- IOSCO

In 2001, the Committee on Payment and Settlement Systems (CPSS) published Core Principles for Systemically Important Payment Systems.{40}In November 2004, CPSS and the IOSCO Technical Committee jointly published Recommendations for Central Counterparties (the "RCCP").{41}These papers became the global standards for CCP structure and oversight. In January 2010, a review of these standards was commenced, resulting in the publication for comment in March 2011 of a consultative report and the publication of the final FMI Principles in April 2012.

The FMI Principles describe the risks faced by financial market infrastructures ("FMIs") including CCPs. The FMI Principles are intended as broad but flexible guidance for addressing risks and efficiency. Some principles provide minimum requirements, others are proposed as best practices, while some "reference an important, common theme."{42}

Compared to the current standards, the FMI principles introduce a number of provisions on issues that were not addressed by the previous standards. For example, new principles have been introduced on segregation and portability, tiered participation and general business risk.

The Committee proposes to incorporate the FMI Principles when developing requirements applicable to CCPs recognized in Canada. Further analysis may be required where particularities of the Canadian market, such as transaction volumes, depth of liquidity or limited counterparties, may necessitate a more conservative or restrictive approach.

8.1 Governance

A CCP must ensure that its governance structure addresses any conflicts of interest, access standards, risk management, ownership concentration, management compensation, board representation and transparency while also providing reasonable representation of the public interest and the interests of key stakeholders. The FMI Principles state that:

An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.{43}

CFTC draft rules require specific governance constructs, limit ownership to no more than 20% of a Designated Clearing Organization ("DCO") by an "enumerated entity"{44}(see Dodd-Frank Act s. 726(a)), require 35% independent representation on the board of directors (and no fewer than two independent members), and require that remuneration of board members not be linked to the performance of the CCP. The board is required, annually, to review its performance. As well, the Board should be able to remove a board member if his or her actions could be prejudicial to the board. Where CFTC rules require sufficient expertise in financial services, risk management and clearing services, EU proposed rules{45}also require that a board member be "of sufficiently good repute and experience".

In Canada, Regulation 52-110 respecting Audit Committees ("Regulation 52-110") defines independence of directors to mean absence of any direct or indirect material relationship between a director and the issuer. A "material relationship" is a relationship which could, in the view of the issuer's board of directors, be reasonably expected to interfere with the exercise of a member's independent judgement. However, certain individuals are considered to have a material relationship with an issuer, such as an individual who is, or has been within the last three years, an employee or executive officer of the issuer.{46}

The Committee also believes that there may be situations where a CCP's directors must be independent from parties that have a material ownership interest in the CCP, particularly where the owners are industry participants.

8.2 Committee Recommendations

The Committee believes that CCPs must adopt corporate governance policies to ensure that an appropriate proportion of board members reflects its diverse stakeholders, including clearing members and persons clearing trades indirectly through clearing members. These independent board members should be:

• independent of the management of the CCP;

• independent of persons that have material ownership of the CCP, particularly in situations where owners of the CCP include financial institutions or other market intermediaries; and

• independent of the clearing members of the CCP.

To ensure independence from CCP management, the Committee believes that flexible language, similar to the meaning of independence in Regulation 52-110, mutatis mutandis, should be included in regulations that set out the test for independence of directors of a CCP. This would be consistent with the FMI Principles which state that the "board should contain suitable members with the appropriate skills and incentives to fulfil its multiple roles. This typically requires the inclusion of non-executive board member(s)."{47}The Committee agrees that non-executive members are necessary for the governance of a CCP.

The Committee believes that the board of a recognized CCP should consider, in its decision-making, the interests of other relevant stakeholders from different jurisdictions that it serves. This may be achieved by appropriate representation of Canadian users of the CCP on the board of directors or by having processes that require due consideration of unique circumstances/interests of users from different jurisdictions. An appropriate number or percentage of directors should represent Canadian market participants where possible.

8.3 Request for Comment

Question 6. Is it appropriate to ensure that Canadian market participants have meaningful input into operational decisions of a CCP operating in Canada?

Question 7. Do the Committee's proposals relating to corporate governance of a CCP address potential issues relating to conflicts of interest that may arise in the operation of a CCP? If not, what other measures would address such conflicts of interest?

8.4 Board Committees

Committees are a fundamental component of a CCP's governance structure. Through committees, clearing members and other relevant stakeholders of a CCP can influence the CCP's functions such as decisions that affect the risks taken on and managed by the CCP, margins, membership access, and executive remuneration. Committees also serve to mitigate any conflicts of interest, allowing for heterogeneous representation.

8.5 Committee Recommendation

The Committee proposes that regulations require that CCPs provide details regarding the structure and mandate of board committees as part of the recognition process. Committees could include: finance and audit; risk management; compensation or human resources, or other committees where appropriate, such as in relation to governance, product approval, information systems and strategic planning.

In addition to the committee structure and the oversight of the board of directors, a CCP will need to develop and implement procedures regarding the mitigation of conflicts of interest, fair and equitable access to the CCP, the confidentiality of information to which employees and directors have access, as well as the disclosure to regulators and to the public of information regarding governance, including decisions taken that have denied access to the CCP or rejected the clearing of a derivative.

8.6 Advisory Committees

Advisory committees provide an opportunity for persons or entities that are not members of a CCP's board of directors to have meaningful input into the operations of a CCP. An advisory committee will allow key stakeholders to represent additional interests and provide specialized expertise, particularly in relation to operational issues that may have a substantial impact on members and other users of a CCP.

8.7 Committee Recommendations

The Committee proposes that CCPs operating in Canada should establish advisory committees to allow Canadian direct and indirect participants of a CCP and other stakeholders to provide input into operational decisions, as appropriate. Such committees should have a transparent mandate which outlines the rights and obligations of the committee and thus provide Canadian users with a way of providing meaningful input into operational decisions made by a CCP that could materially impact those users.

The Committee believes that such advisory committees should have members representing a broad range of interests including CCP members, end-users and other relevant stakeholders, as appropriate.

8.8 Fees

The FMI Principles propose that fees be disclosed publicly, both by a CCP and its clearing members. It requires the disclosure of prices and fees of each service and function provided separately. The FMI Principles state that an "FMI should publicly disclose its fees at the level of individual services it offers, as well as its policies on any available discounts. The FMI should provide clear descriptions of priced services for comparability purposes."{48}

The CFTC has proposed that CCPs shall be "required to make available to market participants information concerning ... each clearing and other fee charged to members."{49}

EU proposed regulations would also require that:

A CCP and its clearing members shall publicly disclose the prices and fees associated with the services provided. They shall disclose the prices and fees of each service and function provided separately, including discounts and rebates and the conditions to benefit from those reductions. A CCP shall allow its clearing members and, where relevant, their clients, separate access to the specific services provided. A CCP shall account separately for costs and revenues of the services provided and shall disclose that information to the competent authority.{50}

The disclosure of all fees (including direct costs that will be incurred by users of a CCP) ensures that fair and equitable access is afforded to all participants, and CCP users understand the business model of the CCP.

8.9 Committee Recommendations

The Committee recommends that a CCP's fees must be disclosed to clearing members, their customers and regulators as well as to the public, as described in the FMI Principles.

8.10 Participant Access

Without limiting the ability and responsibility of a CCP to develop robust access requirements to ensure that a clearing member does not bring undue risk to the CCP and is able to fulfill its obligations both to the CCP and its customers, a CCP must not impose access restrictions for non-competitive ends. In this respect the CFTC's Core Principle C:

... mandates that participation requirements must ''permit fair and open access.'' It also mandates that clearing members must have ''sufficient financial resources and operational capacity to meet obligations arising from participation in the derivatives clearing organization.''

... Proposed § 39.12 is designed to ensure that participation requirements do not unreasonably restrict any entity from becoming a clearing member while, at the same time, limiting risk to the DCO and its clearing members. The Commission believes that more widespread participation could reduce the concentration of clearing member portfolios and diversify risk. It could also increase competition by allowing more entities to become clearing members. ... Proposed § 39.12(a)(1)(iii) would prohibit participation requirements that have the effect of excluding or limiting clearing membership of certain types of market participants unless the DCO can demonstrate that the restriction is necessary to address credit risk or deficiencies in the participants' operational capabilities that would prevent them from fulfilling their obligations as clearing members.{51}

The CFTC has set out other concerns regarding impediments to indirect access to the CCP in commentary to the proposed rulemaking, noting:

Some clearinghouses have indicated that they intend to require that, for a transaction to be eligible for clearing, one of the executing parties must be a clearing member. This has the effect of preventing trades between two parties who are not clearing members from being cleared. Such a restriction of open access serves no apparent risk management purpose and operates to keep certain trades out of the clearing process and to constrain liquidity for cleared trades.{52}

The SEC has proposed rule 17Ad-22(b)(5), which would prohibit membership restrictions based on dealer status.{53}

As a way to promote greater access to clearing, the SEC is proposing to prohibit denial of CCP membership based on whether a person offers OTC derivative dealer services. Through this rule the SEC is attempting to ensure access to client clearing (correspondent clearing) firms who are non-dealers and could be discriminated against through a CCP's access criteria. For example, a client clearing firm not offering dealer services might not have the certain operational capabilities and could have significantly less financial resources given the nature of their operations.{54}

As well, the SEC proposes to prohibit access limitations based on minimum volume or transaction thresholds:

The proposed rule would prohibit the establishment of minimum portfolio sizes or transaction volumes that by themselves would act as barriers to participation by new participants in clearing. This speaks to the relevant size of market participants and whether or not the membership criteria should reflect the amount of risk they bring to the CCP instead of establishing large arbitrary values such as minimum volume and transaction thresholds.{55}

The SEC further proposes that access should not be denied based on minimum net capital requirements of $50 million or more:

The SEC proposed rule limits the ability for CCPs clearing OTC derivatives to deny membership access to participants with 50 million or more in net capital. Under the proposed rule, a CCP wishing to raise the net capital above 50 million minimum would have to demonstrate to the commission through a rule filing or in its application, that any other measures would be unable to effectively mitigate the risks to the CCP.{56}

The FMI Principles acknowledge the importance of risk-based and equitable access requirements:

An FMI should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.{57}

These proposals underscore the concerns regulators have regarding CCP access and governance, and the Committee shares such concerns. The Committee feels, however, that prescriptive rules that limit a CCP's ability to determine access rules and thresholds that are appropriate within its risk management policy can serve to increase rather than reduce systemic risk.

Market regulator approval of CCP access policies and ongoing monitoring of compliance therewith can reduce the risk that a CCP is unduly limiting access.

8.11 Committee Recommendation

The Committee proposes that regulations include an obligation for a CCP to develop and comply with published access rules that are objective, risk-based and justified in terms of the safety and efficiency of the CCP and the market it serves. The access policy should consider a potential clearing member's ability to meet its financial and operational responsibilities arising from its participation in the central counterparty but should not unduly discriminate against certain classes of participants or introduce competitive distortions. These policies will be subject to regulatory approval during the recognition or approval process of a CCP and ongoing review by market regulators.

In addition, CCPs will be required to maintain records of all applications for access including records relating to each grant of access and denial of access.

8.12 Open Access to Trading Platforms

A vertical silo structure, where a trading venue feeds directly into the CCP, may force market participants who wish to transact and clear a particular derivative to use the captive trading venue. Open access to the CCP from multiple trading venues could remove this potential monopoly.

In this regard, the EU proposes the following:

A CCP that has been authorized to clear [OTC] derivative contracts shall accept clearing such contracts on a non-discriminatory and transparent basis, regardless of the venue of execution. Without prejudice to Article 32a, a CCP may require that those venues of execution comply with the operational and technical requirements established by the CCP. ... A venue of execution shall provide trade feeds on a non-discriminatory and transparent basis to any CCP that has been authorised to clear [OTC] derivative contracts traded on the venue of execution upon request by the CCP.{58}

Some commenters in Europe have suggested that the ability of a CCP to require compliance with their technical requirements "could allow exchanges to monopolise trading of derivatives by restricting access to the clearing houses they operate."{59}

The CFTC states:

Proposed §39.12(b)(7)(i) would establish general standards for the adoption of rules that establish a time frame for clearing. The DCO would have to coordinate with each [Swap Execution Facility] and [Designated Contract Market] that lists for trading a product that is cleared by the DCO, in developing rules and procedures to facilitate prompt and efficient processing of all contracts, agreements, and transactions submitted to the DCO for clearing. For prompt and efficient clearing to occur, the rules, procedures, and operational systems of the trading platform and the clearinghouse must mesh. Vertically integrated trading and clearing systems currently process high volumes of transactions quickly and efficiently. The Commission believes that trading platforms and DCOs under separate control should be able to coordinate with one another to achieve similar results. The Commission also recognizes that there may be issues of connectivity between and among trading platforms and clearinghouses.{60}

As the markets evolve to comply with clearing and trading obligations, models may develop that differ considerably from the traditional vertical silo. For the present, the development of trading venues and their relationships with CCPs remains speculative.

8.13 Committee Recommendations

The Committee proposes that regulations be adopted that require CCPs develop access policies that facilitate fair and open access and which do not unreasonably prohibit or limit access to its services regardless of how the derivatives transaction is executed. The access requirements established by a CCP or services offered by a CCP should not create a competitive advantage for any trading facility.

8.14 Request for Comment

Question 8. The Committee seeks public comment on the relevance of developing rules allowing for access to CCPs regardless of trading venue. Is this of concern in the Canadian marketplace at this time or in the future?

8.15 CCP Rules

As a regulated entity, a CCP's rules,{61}operating procedures and by-laws (collectively, rules) should be subject to regulatory review and approval. It is through its rules that a CCP builds its clearing framework. Rules govern how the CCP staff and management perform their duties, how the CCP's governance structure operates and how clearing members and their customers fulfil their obligations.

The Dodd-Frank Act states:

A designated financial market utility shall provide 60 days advance notice to its Supervisory Agency of any proposed change to its rules, procedures, or operations that could, as defined in rules of each Supervisory Agency, materially affect, the nature or level of risks presented by the designated financial market utility.{62}

The FMI Principles explain:

An FMI should adopt clear and comprehensive rules and procedures that are fully disclosed to participants and relevant rules and key procedures should be publicly disclosed. An FMI's rules and procedures are typically the foundation of the FMI and provide the basis for participants' understanding of the risks they incur by participating in the FMI. As such, these rules and procedures should include clear descriptions of the system's design and operations, as well as the rights, obligations, and risks participants incur by participating in the FMI. They should clearly outline the respective roles of participants and the FMI, as well as the procedures that will be followed in routine and non-routine circumstances. In particular, an FMI should have clear and comprehensive rules and procedures for addressing financial and operational problems within the system. An FMI should publicly disclose all relevant rules and key procedures, including key aspects of its participant-default rules and procedures (principle 13), so that all market participants and relevant authorities can quickly assess potential risks in periods of market stress.{63}

CCPs should have comprehensive and transparent policies outlining their operations that relate to clearing and risk management. It is expected that these policies would identify risks related to the operation of the CCP and describe how the CCP proposes to manage such risks both during the ordinary course of business and in stress situations.

It is important that, in the event of a crisis, trades or positions cleared by the CCP not revert to bilateral exposures without prior consent of market regulators and non-defaulting participants. The use of emergency powers should be restrictive and should not allow the CCP to void or refuse to perform previously cleared contracts on the grounds that market events or industry protocols have made the managing of associated risk exposures difficult for the CCP. A CCP's policies and procedures should clearly specify the scope of such emergency powers and under what circumstances they would be exercised.{64}

CCP rules should also cover the obligations of its clearing members to maintain sufficient capital, specify margin requirements and how margin is to be managed operationally and ensure that clearing members' operational capacity and capability is sufficient to meet customer and CCP needs. The CFTC requires in rule §39.12(a)(3) that:

a DCO establish participation requirements that ensure that clearing members have adequate operational capacity to meet obligations arising from participation in the DCO. The requirements would have to include, at a minimum, the ability to process expected volumes and values of transactions cleared by the clearing member within required time frames, including at peak times and on peak days; the ability to fulfill collateral, payment, and delivery obligations imposed by the DCO; and the ability to participate in default management activities under the rules of the DCO. ...{65}

A CCP's rules provide a legal, predictable framework for the operations of the CCP, the obligations of its members and the adjudication of disputes, the orderly treatment of a default and, in the extreme, the orderly winding-down of its operations. For the rules to have merit, they must be enforced by the CCP, which should have the authority to sanction or otherwise discipline its members and maintain resources to monitor and apply the rules.

8.16 Committee Recommendations

The rules and procedures of a CCP, including its default procedures, must be clear and comprehensive. Market regulators, clearing members and other market participants must have certainty that such rules will be followed during a period of market stress. Accordingly, a CCP's rules should clearly define and limit the range of circumstances in which the CCP has the ability to invoke emergency powers so that participants understand and manage the risk associated with their participation in the CCP as well as their contingent liabilities. CCPs should ensure compliance with published default procedures in all situations except as directed by regulators in accordance with protocols accepted by all regulators of the CCP.

Although it should be each clearing member's responsibility to ensure that it complies with the rules of a CCP, the Committee believes the CCP should have processes in place to monitor compliance and deal with situations where a member does not or cannot comply. These processes should include a mechanism for appeal from the decisions of the CCP, where appropriate.

The Committee further recommends that a CCP must put in place a process for the adoption of rule modifications. This process must be in accordance with the legislation under which it operates, including any requirements for obtaining regulatory approval from all applicable regulators, as well as appropriate board and clearing member approvals.

9. RISK MANAGEMENT

Risk management is at the core of the CCP's operations. Every aspect of its business must take into account risk management and risk mitigation. The FMI Principles set out the major sources of risk to a CCP: systemic risk, legal risk, credit and counterparty risk, liquidity risk, and general business and operational risk. A CCP should establish and ensure compliance with decision-making processes for its board of directors, committees and management. A CCP should recognize that its actions could have adverse economic circumstances for participants and for the broader markets and that conflicts of interest among CCP owners, operators, participants and the broader market may arise, and must be considered, when making such decisions. In general, the CCP should be following the policies and procedures described in their published documents; however CCPs may be required to depart from standard procedures, in extraordinary circumstances. In all such circumstances, the CCP must seek and comply with the directions of the CCP's regulators. The default rules and procedures of a CCP should be clear as to when the CCP can exercise its discretion to declare a clearing member in default.

In applying for recognition or exemption of a CCP, the Committee expects that a CCP will provide a detailed analysis of risks relating to its operations and a description of how they are mitigated. For example, CCPs must address the risk of default by one or more of its key clearing members and undertake appropriate stress testing of the adequacy of its total financial resources. The FMI Principles suggest that stress tests should involve the analysis of the impact of a concurrent default of a CCP's two largest participants and their affiliates if the CCP is involved in activities with a more-complex risk profile or is systemically important in multiple jurisdictions.{66}

In addition, a CCP operating in Canada should be required to implement accurate, ongoing risk analysis in relation to the CCP's obligations. The CCP should impose margining obligations on its members to appropriately manage all types of risks to the CCP with the objective of avoiding recourse to default funds. Should a defaulting participant's margin not meet the obligations of the CCP for closing out that participant's default positions, the CCP's fully-transparent default process should clearly identify the resources that will be made available to satisfy the defaulting participant's obligations and the order in which these resources will be used -- the default waterfall.

9.1 Default Management

As each level of resources is exhausted in the case of a default of a member or members, the next level in the waterfall is tapped until the obligations have been fulfilled and positions are balanced. Rules pertaining to the differing sources of assets in the default waterfall which clearly outline who will have to contribute to the waterfall (in what order and under what circumstances) and include details of any auction process, at what point a default fund and other backstops will be accessed and what will occur should all resources be exhausted will provide certainty to clearing members as to their obligations and clarity to market regulators.

In Rule 39.11(b)(1), the CFTC enumerates a list of the types of financial resources that would be available to a Designated Clearing Organization ("DCO") to satisfy financial requirements: "(1) The margin of the defaulting clearing member; (2) The DCO's own capital; (3) the guaranty fund deposits of the defaulting clearing member and non-defaulting clearing members; (4) default insurance; (5) if permitted by the DCO's rules, potential assessments for additional guaranty fund contributions on non-defaulting clearing members; and (6) any other financial resource deemed acceptable by the Commission."{67}

The CFTC will require that a "derivatives clearing organization shall maintain cash, U.S. Treasury obligations, or high quality, liquid, general obligations of a sovereign nation, in an amount greater than or equal to an amount calculated as follows: (A) Calculate the average daily settlement pay for each clearing member over the last fiscal quarter; (B) Calculate the sum of those average daily settlement pays; and (C) Using that sum, calculate the average of its clearing members' average pays."{68}The CFTC indicated that it may revisit this issue after it is determined what international standard will be adopted.

9.2 Framework for Comprehensive Management of Risks

The EU proposals require that:

A CCP shall have procedures in place to be followed where a clearing member does not comply with the participation requirements of the CCP within the time limit and according to the procedures established by the CCP. The CCP shall outline the procedures to be followed in the event the default of a clearing member is not declared by the CCP.

A CCP shall take prompt action to contain losses and liquidity pressures resulting from defaults and shall ensure that the closing out of any clearing member's positions does not disrupt its operations or expose the non-defaulting clearing members to losses that they cannot anticipate or control. The CCP shall promptly inform the competent authority where it considers that the clearing member will not be able to meet its future obligations and before it declares its default.{69}

Ensuring novel derivatives do not bring undue risk to the CCP should be a fundamental part of a CCP's risk management. The CFTC in its proposed rule §39.12(b)(1)

would require a DCO to establish appropriate requirements for determining the eligibility of agreements, contracts, or transactions submitted to the DCO for clearing, taking into account the DCO's ability to manage the risks associated with such agreements, contracts, or transactions. Factors to be considered in determining product eligibility would include, but would not be limited to: (i) trading volume; (ii) liquidity; (iii) availability of reliable prices; (iv) ability of market participants to use portfolio compression with respect to a particular swap product; (v) ability of the DCO and clearing members to gain access to the relevant market for purposes of creating and liquidating positions; (vi) ability of the DCO to measure risk for purposes of setting margin requirements; and (vii) operational capacity of the DCO and clearing members to address any unique risk characteristics of a product.{70}

The CFTC has also proposed that a DCO have both a Chief Risk Officer ("CRO") and a Chief Compliance Officer ("CCO"), and that these be two different individuals. The CRO would report to the risk committee or board of directors and would be responsible for the implementation of the risk management framework and for making appropriate recommendations regarding the CCP's risk management functions.

The CFTC further proposes that:

... a DCO [would] impose risk limits on each clearing member, by customer origin and house origin, in order to prevent a clearing member from carrying positions where the risk exposure of those positions exceeds a threshold set by the DCO relative to the clearing member's financial resources, the DCO's financial resources, or both. The DCO would have reasonable discretion in determining: (A) the method of computing risk exposure; (B) the applicable threshold(s); and (C) the applicable financial resources, provided however, that the ratio of exposure to capital would have to remain the same across all capital levels. The Commission could review any of these determinations and require different methods, thresholds, or financial resources, as appropriate.{71}

The EU proposes that CCPs undertake regular reviews and perform stress testing:

A CCP shall regularly review the models and parameters adopted to calculate its margin requirements, default fund contributions, collateral requirements and other risk control mechanisms. It shall subject the models to rigorous and frequent stress tests to assess their resilience in extreme but plausible market conditions and shall perform back tests to assess the reliability of the methodology adopted.

... A CCP shall regularly test the key aspects of its default procedures and take all the reasonable steps to ensure that all clearing members understand them and have appropriate arrangements in place to respond to a default event. A CCP shall publicly disclose key information on its risk management model and assumptions adopted to perform the stress tests referred to in paragraph 1.

Powers are delegated to the Commission to adopt regulatory technical standards specifying the following:

(a) the type of tests to be undertaken for different classes of financial instruments and portfolios;

(b) the involvement of clearing members or other parties in the tests;

(c) the frequency of tests;

(d) the time horizons of tests;

(e) the key information referred to in paragraph 3.{72}

FMI Principle 3 requires that an FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.

The CFTC's proposed regulation §39.13(a) would require a CCP to ensure that it possesses the ability to manage the risks associated with discharging its responsibilities through the use of appropriate tools and procedures.

The CFTC proposed rules would require a DCO to establish and maintain written policies, procedures, and controls, approved by its board of directors, which establish an appropriate risk management framework that, at a minimum, clearly identifies and documents the range of risks to which the DCO is exposed, addresses the monitoring and management of the entirety of those risks, and provides a mechanism for internal audit. Those risks may include, but are not limited to, legal risk, credit risk, liquidity risk, custody and investment risk, concentration risk, default risk, operational risk, market risk, and business risk. The entity would be required to regularly review its risk management framework and update it as necessary.

Other tools enumerated by the CFTC in its proposed rulemaking include: measurement and monitoring of current and potential credit exposures to clearing members; models for determining initial margin that are risk-based and regularly reviewed; independent review and validation of the CCP's systems for generating initial margin requirements, including the CCP's theoretical models; regular review of spread margins that permit a CCP to allow reductions in initial margin requirements for related positions; having a reliable source of timely price data to support both initial margin and variation margin calculations, and having written procedures and sound valuation models for addressing circumstances where pricing data is not readily available or reliable because there is no continuous liquid market or if bid-ask spreads are volatile; and daily review and periodic back testing to enable a CCP to ensure that its margin models continue to provide adequate coverage of the CCP's risk exposures to its clearing members.{73}

9.3 Committee Recommendation

The Committee proposes that regulations be developed to require that a CCP develop and implement a robust risk management program, in accordance with international best practices such as the FMI Principles. The Committee proposes that the regulations set out specific requirements, including that:

1. a CCP have in place an effective, multi-level contingency structure that includes accurate risk analysis and member margining, a default waterfall that sets out clearly the funding events that will occur in the case of a member default and the contributions that will be required of members and the CCP's own capital (if any) and any further financial backstops or insurance that can be accessed;

2. a CCP conduct a full analysis of all relevant risks and has in place appropriate risk management procedures, such as margin and haircut adjustments and provide the result of such analysis to its market regulator(s);

3. a CCP impose transparent risk limits on individual clearing members;

4. a CCP inform its regulator or regulators when a clearing member is at risk of default and when any default procedures are triggered;

5. a CCP undertake regular stress testing of the adequacy of the CCP's financial resources, including risk and pricing models and default procedures, and of clearing member procedures and systems, and provide the results of such tests to its market regulator(s). These stress tests should involve extreme but plausible as well as hypothetical stress situations;

6. a CCP maintain and utilize accurate pricing and valuation procedures;

7. a CCP maintain and utilize product approval procedures to ensure that new clearing products do not bring undue risk to the CCP and its members;

8. a CCP have a chief risk officer who is responsible for the implementation of risk management procedures and who reports to the CCP's board of directors or risk committee, as appropriate;

9. a CCP's models, including those for valuation and margin calculations, be subject to independent review and validation;

10. all CCPs provide the applicable Canadian regulators with periodic and ad hoc reports relating to the risks applicable to the CCP and a description of how such risks are managed; and

11. regular financial reports relating to the CCP, which should include aggregated risk exposures, are provided to the market regulator of the CCP.

10. SYSTEMS AND TECHNOLOGY

A stable, robust and scalable technological infrastructure is a prerequisite for any CCP seeking recognition or exemption of recognition in Canada. The proposed FMI Principles provide that:

A critical service provider should have a robust information security framework that appropriately manages its information security risks. The framework should include sound policies and procedures to protect information from unauthorized disclosure, ensure data integrity, and guarantee the availability of its services. In addition, a critical service provider should have policies and procedures for monitoring its compliance with its information security framework. This framework should also include capacity planning policies and change-management practices.{74}

The CFTC proposes that a CCP implement a risk analysis and oversight program with respect to its operations and automated systems. Adequate maintenance of resources that would allow the CCP to fulfill its obligations in this respect is also required. Risk analysis would be required in six categories: information security, business continuity and disaster recovery, capacity and performance planning, systems operations, systems development and quality assurance, and physical security and environmental controls. This last category would include the maintenance of buildings and generators as well as technological infrastructure and personnel resources sufficient to enable timely recovery and resumption of operations in the event of disruption.{75}

The FMI Principles require a CCP to:

identify all plausible sources of operational risk, both internal and external, and mitigate their impact through the deployment of appropriate systems, policies, procedures and controls. Systems should be designed to ensure a high degree of security and operational reliability, and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the FMI's obligations, including in the event of a wide-scale or major disruption.{76}

The EU similarly proposes that:

A CCP shall maintain information technology systems adequate to deal with the complexity, variety and type of services and activities performed so as to ensure high standards of security and the integrity and confidentiality of the information maintained.{77}

10.1 Committee Recommendations

The Committee believes that regulations for CCPs in Canada should require a program of risk analysis and oversight in order to identify and minimize sources of operational risk, particularly systems and technology. This would be achieved through the development of appropriate controls and procedures to ensure that technological systems are reliable, secure, and have adequate scalability.

The Committee acknowledges that Regulation 21-101 respecting Marketplace Operation ("Regulation 21-101") addresses systems requirements for marketplaces, and recommends that comparable regulations be developed for CCPs. In particular, the Committee proposes that a CCP be required to "develop and maintain reasonable business continuity and disaster recovery plans; an adequate system of internal control over those systems; and adequate information technology general controls, including without limitation, controls relating to information systems operations, information security, change management, problem management, network support and system software support."{78}

The Committee also proposes that CCPs be required to test their system requirements regularly in accordance with regulation standards that will be substantially similar to those in Regulation 21-101 which requires testing "in accordance with prudent business practice, on a reasonably frequent basis and, in any event, at least annually, make reasonable current and future capacity estimates; conduct capacity stress tests to determine the ability of those systems to process transactions in an accurate, timely and efficient manner; and test its business continuity and disaster recovery plans."{79}Further, any failure would have to be immediately reported to the market regulator.

Finally the Committee proposes that the CCP be required to publish system specifications which will allow its users, including clearing members and their clients, to develop their technology systems to allow them to efficiently access the CCP's systems. In addition, the CCP will allow all such users with reasonable access to a test environment provided by the CCP which will allow the users to undertake testing of their systems.

11. PROTECTION OF ASSETS

The clearing of OTC derivative transactions will cause certain market participants who are not clearing members at CCP to indirectly clear their OTC derivatives transactions through intermediaries. Effective segregation and portability mechanisms at CCPs will help to ensure that indirect clearing is done in a manner that protects customer positions and collateral and potentially improves a CCP's resilience to a clearing member default. This issue is specifically discussed in Consultation Paper 91-404 -- Derivatives: Segregation and Portability in OTC Derivatives Clearings{80}which was published on February 10, 2012.

12. REPORTING

Although information related to derivatives transactions will be collected in a trade repository or trade repositories, CCPs will improve market transparency by allowing the central collection of information on general market characteristics and activity with respect to transactions cleared by CCP, and aggregate information on the types of participants and concentration of participants' exposures within CCPs.

The information disclosed to regulators will help them to evaluate risks, including risks particular to a CCP and broader systemic risks. The FMI Principles state that:

Authorities should have appropriate powers or other authority consistent with their relevant responsibilities to obtain timely information necessary for effective regulation, supervision, and oversight. In particular, authorities should use these powers to access information that enables them to understand and assess (a) an FMI's various functions, activities, and overall financial condition; (b) the risks borne or created by an FMI and, where appropriate, the participants; (c) an FMI's impact on its participants and the broader economy; and (d) an FMI's adherence to relevant regulations and policies. Key sources of information include official system documents and records, regular or ad-hoc reporting, internal reports from board meetings and internal auditors, on-site visits and inspections, information on operations outsourced to third parties, and dialogue with an FMI's board, management, or participants. Authorities should have appropriate legal safeguards to protect all confidential and non-public information obtained from an FMI. Authorities, however, should be able to share relevant confidential or non-public information with other authorities, as appropriate, to minimise gaps and reduce duplication in regulation, supervision, and oversight.{81}

CCPs should also divulge detailed information for market participants to evaluate the risks, costs and benefits associated with their participation in CCPs. As such, complete information on margin-setting methodologies, risk management arrangements and fee structure should be disclosed to actual and prospective users of a CCP.

The CFTC proposes details regarding reports that must be made regularly, because of a determined event or on request:

Proposed §39.19 would require certain reports to be made by the DCO to the Commission: (1) On a periodic basis (daily, quarterly or annually), (2) where the reporting requirement is triggered by the occurrence of a significant event; and (3) upon request by the Commission. Unless otherwise specified by the Commission or its designee, each DCO would have to submit the information required by this section to the Commission electronically and in a form and manner prescribed by the Commission.

Currently, the Commission receives initial margin data from several, but not all DCOs and not necessarily on a daily basis. . . . The Commission is therefore proposing regulations that would require reporting by all DCOs on a daily basis. By requiring both sets of data as well as intraday initial margin calls to be reported directly to the Commission, the Commission would be better positioned to conduct risk surveillance activities efficiently, to monitor the financial health of the DCO, and to detect any unusual activity in a timely manner.

Proposed §39.19(c)(1)(i) would require a DCO to report both the initial margin requirement for each clearing member, by customer origin and house origin, and the initial margin on deposit for each clearing member, by origin. Proposed §39.19(c)(1)(ii) would require a DCO to report the daily variation margin collected and paid by the DCO. The report would separately list the mark-to-market amount collected from or paid to each clearing member, by origin.{82}

The SEC has proposed rule 17Ad-22(c)(1) which would require a CCP to calculate and maintain a record of the financial resources necessary to withstand, at a minimum, a default by the participant to which it has the largest exposure in extreme, but plausible, market conditions, and sufficient documentation to explain the methodology it uses to compute such financial resource requirement.{83}

As well, the SEC addresses public dissemination of information to aid market participants in their risk evaluations:

The proposed rule would require dissemination of pricing and valuation information by CCPs . . . to the public on terms that are fair, reasonable, and not unreasonably discriminatory,[including] all end of day settlement prices and any other prices for OTC derivatives that the CCP may establish to calculate its participants' mark-to-market margin requirements.

12.1 Committee Recommendations

The Committee recommends that each CSA jurisdiction seek the legislative authority to require the transmission to its market regulator by a CCP of the information required for oversight purposes. This information will be set out in regulations that will also specify the frequency and format of the information. Such information may include, but not be limited to, transaction level details, margin requirements, guarantee fund contributions, financial statements, risk models, financial resources that must be available for a market stress situation, board decisions and reports, rule and procedural modifications, information regarding outsourcing arrangements, including any agreements and oversight programs, and details of any emergency or disciplinary actions.

12.2 Request for Comment

Question 9. The Committee asks for comment on the type of information that a CCP should provide and that should be made publicly available.

13. FOREIGN-BASED CCPS AND REGULATORY COOPERATION

As stated earlier, the Committee proposes that each CSA jurisdiction enact legislation that will require all CCPs that perform CCP clearing of OTC derivatives in its jurisdiction to be recognized as a clearing agency, or exempted from recognition. This obligation is already in force in Quebec,{84}Ontario{85}and Alberta.{86}This obligation would apply not only to local CCPs, but CCPs from outside a CSA jurisdiction that wish to exercise clearing activity with an entity from a CSA jurisdiction.

In this respect, the FMI Principles state that:

Central banks, market regulators, and other relevant authorities should cooperate with each other, domestically and internationally (that is, on a cross border basis), in order to support each other in fulfilling their respective regulatory, supervisory, or oversight mandates with respect to FMIs. Relevant authorities should explore, and where appropriate, develop cooperative arrangements that take into consideration (a) their statutory responsibilities, (b) the systemic importance of the FMI to their respective jurisdictions, (c) the FMI's comprehensive risk profile (including consideration of risks that may arise from interdependent entities), and (d) the FMI's participants. The objective of such arrangements is to facilitate comprehensive regulation, supervision, and oversight and provide a mechanism whereby the responsibilities of multiple authorities can be fulfilled efficiently and effectively. Authorities are encouraged to cooperate with each other to reduce the probability of gaps in regulation, supervision, and oversight that could arise if they did not coordinate and to minimise the potential duplication of effort and the burden on the FMIs or the cooperating authorities. Relevant authorities should also cooperate with resolution authorities and the supervisors of direct participants, as appropriate and necessary, to enable each to fulfil its respective responsibilities{87}.

The importance of cooperative arrangements is underscored in IOSCO's Principles Regarding Cross-Border Supervision:

While regulators often respond by mandating that a regulated entity's overseas operations must comply with domestic standards and oversight requirements prior to being permitted to engage in domestic business, confirmation and enforcement of these requirements can prove challenging. Even where securities regulators have in place enforcement cooperation mechanisms such as the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (IOSCO MMOU), the day-to-day information outside of an enforcement context that a regulator needs in order to exercise effective oversight may be difficult to access without the assistance and cooperation of the relevant counterpart. While regulators have different supervisory approaches, each has a common interest in information-sharing and cooperation based on earned trust in each other's regulatory and supervisory systems.{88}

The EU proposes that:

A CCP established in a third country can be used by clearing members established within the Union for the purpose of clearing OTC derivatives including for the purpose of the clearing obligation ... provided that the CCP is recognised by ESMA in accordance with the procedure laid down in the following paragraphs.

(ESMA or the local regulator) may recognise a CCP established in a third country that has applied for recognition to provide certain clearing services or activities only where the following conditions are met:

(a) the Commission has adopted a Decision in accordance with paragraph 3;

(b) the CCP is authorised in, and is subject to, effective supervision ensuring a full compliance with the prudential requirements applicable in that third country;

(c) co-operation arrangements have been established pursuant to paragraph 4.{89}

The FMI Principles state that the conflicts of law issues that can arise in a multinational scenario should be addressed by a CCP:

Legal risk due to conflicts of law may arise if an FMI is, or reasonably may become, subject to the laws of various other jurisdictions (for example, when it accepts participants established in those jurisdictions, when assets are held in multiple jurisdictions, or when business is conducted in multiple jurisdictions). In such cases, an FMI should identify and analyse potential conflict-of-laws issues and develop rules and procedures to mitigate this risk. For example, the rules governing its activities should clearly indicate the law that is intended to apply to each aspect of an FMI's operations. The FMI and its participants should be aware of applicable constraints on their abilities to choose the law that will govern the FMI's activities when there is a difference in the substantive laws of the relevant jurisdictions. A jurisdiction ordinarily does not permit contractual choices of law that would circumvent that jurisdiction's fundamental public policy. Thus, when uncertainty exists regarding the enforceability of an FMI's choice of law in relevant jurisdictions, the FMI should obtain reasoned and independent legal opinions and analysis in order to address properly such uncertainty.{90}

As a majority of counterparties to derivatives trades entered into by Canadian participants are resident outside of Canada, it is clear that Canadian market participants will require access to foreign CCPs to clear at least some OTC derivatives transactions. The Committee believes that the review and recognition (or exemption from recognition) of foreign-based CCPs is a priority to ensure that Canada meets its G20 commitments. Recognition of non-Canadian CCPs will require that Canadian regulators be comfortable that they can exert appropriate and effective regulatory powers over the foreign CCP, which in many cases will require Canadian regulators to develop cooperative regulation regimes with regulators outside of Canada. Work on developing memoranda of understanding with these non-Canadian regulators needs to be undertaken immediately to ensure that Canadian regulators receive the information and co-operation required to oversee the non-Canadian CCPs that they have recognized or exempted from recognition. As well, ongoing work with international bodies to set data standards and continue to develop best practices must continue apace.

The Committee believes that regulators of a CCP, both domestic and foreign, should develop and commit to a clear, co-operative oversight framework that deals with the regulation of CCPs that are subject to multi-jurisdictional regulation. This framework should clarify the role of regulators in monitoring and directing the governance model, the rule-making process and the operations of a CCP during the ordinary course of a CCPs business and during periods of stress. The framework should clarify the rights and responsibilities of all relevant regulators and outline the ability of the regulators to take steps to address issues of local public interest while not prejudicing the rights of other regulators.

The recognition process for a foreign CCP will include the additional review of its home regulatory structure, to ensure it is comparable to Canadian CCP oversight, as well as a review of legal issues that are particular to cross-border clearing. Examples would include bankruptcy regimes, collateral requirements, ongoing information sharing, oversight and enforcement co-operation and mutual reliance. Canadian market regulators would seek to enter into appropriate memoranda of understanding with foreign regulatory agencies to deal with matters such as information sharing, cooperation in enforcement actions and investigations, consultation on rule modifications at the CCP, notice of regulatory or legislative changes, dedicated contact persons and communications procedures during periods of stress.

13.1 CCP Infrastructure

In Consultation Paper 91-401, the Committee presented three possibilities for clearing OTC derivatives for Canadian market participants: a foreign access model, a domestic stand-alone solution, and a domestic solution with international links or interoperability.

Regardless of the infrastructure that emerges, and noting that such infrastructure can evolve over time, the Committee believes that regulatory oversight requirements must be developed that ensure that Canadian market regulators are comfortable that there will be adequate oversight over the operations of the CCP. This report and its recommendations should be read to apply to each or any possible infrastructure, and rule drafting will need to provide such flexibility as the determination of the most appropriate infrastructure is beyond the scope of this document.

14. FURTHER QUESTIONS FOR PUBLIC COMMENT

Question 10. Generally, the Committee has endeavoured to follow international recommendations in the development of the recommendations for Canada in this paper. Are there recommendations that are inappropriate for the Canadian market?

Question 11. Are there changes to the existing regulatory framework that would be desirable to accommodate a move to CCP clearing?

Question 12. Do you consider that any changes need to be made to Canadian law to facilitate the efficiency of OTC derivatives clearing, either through a domestic or a foreign CCP? If so, what changes and for what reasons?

{1} See http://www.lautorite.qc.ca/files//pdf/consultations/derives/2010nov02-91-401-doc-consultation-en.pdf.

{2} Comment letters publicly available at http://www.osc.gov.on.ca/en/30430.htm and http://www.lautorite.qc.ca/en/regulation-derivatives-markets-qc.html.

{3} See http://www.lautorite.qc.ca/files//pdf/consultations/derives/2010nov02-91-401-doc-consultation-en.pdf.

{4} Monitoring and coordinating the implementation of OTCD reforms are being carried out by the FSB, in co-operation with IOSCO and the Committee on Payment and Settlement Systems. See Implementing OTC Derivatives Market Reforms, October 2010 ("FSB Implementing Reforms") http://www.financialstabilityboard.org/publications/r_101025.pdf and Overview of Progress in the Implementation of the G20 Recommendations for Strengthening Financial Stability, Report of the Financial Stability Board to G20 Leaders, November 2011 http://www.financialstabilityboard.org/publications/r_111104.pdf.

{5} The Committee will be publishing a consultation paper on trading in the months to come.

{6} Australia is proposing to set up legislation to mandate CCP clearing of OTC derivatives, but enact mandates through regulation only if necessary. In the March 2012 report by their council of regulators (OTC Derivatives Market Reform Considerations), Australia's council of financial regulators stated that the capital incentives should be sufficient to encourage central clearing, but that they will monitor developments closely to see if mandates are necessary. Other countries such as Argentina have indicated that they do not feel their OTC derivatives markets are significant enough to warrant legislation.

{7} Canadian Bankers Association Comment Letter to the CSA, 2011. ("CBA Comment Letter").

{8} ISDA comment letter to the CSA, January 14, 2011 ("ISDA Comment Letter").

{9} TMX Comment letter to the CSA. Toronto, Ontario, 24 January 24, 2011.

{10} In bilateral contracts between a financial institution ("FI") and a non financial institution, the FI may extend credit without collateral arrangements to its client to cover initial margin. The cost associated with obtaining credit will be priced into the derivatives contract, but it may not be transparent to the client that there is a credit arrangement behind their trade. Mandated CCP clearing could result in increased collateral requirements, as the client will now be responsible for meeting initial and variation margin.

{11} Initial margin in a CCP clearing environment is typically posted in the form of cash or highly -liquid securities -- a narrower range of collateral than that typically accepted in a bilateral clearing environment. This could be a significant issue for participants such as insurers and long-only asset managers who are accustomed to posting collateral in a broader range of securities. 13 See Section 0 Exemptions from Central Clearing.

{12} Le Mouvement des caisses Desjardins comment letter 13 January 2011 ("Desjardins Comment Letter").

{13} See Section 0 Exemptions from Central Clearing.

{14} As further noted below, this assessment is distinct from the rule adoption procedures for clearing new derivatives products on a CCP. Should the assessment not determine that the submitted derivative should be subject to mandatory clearing, the CCP will nonetheless be able to continue to offer the derivative for clearing on a voluntary basis, subject to the separate rule-adoption procedures.

{15} FSB Implementing Reforms, page 3.

{16} For a discussion of Canadian STP initiatives, see CSA Discussion Paper 24-401 on Straight-through Processing and Request for Comments, Supplement to the Bulletin concerning securities of the Autoritè des marchès financiers, 2004-06-11 vol. 1, No. 19, June 11, 2004 (Discussion Paper 24-401); and CSA Notice 24-301 -- Responses to Comments Received on Discussion Paper 24-401 on Straight-through Processing, Draft Regulation 24-101 respecting Post-trade Matching and Settlement, and Draft Policy Statement to Regulation 24-101 respecting Post-trade Matching and Settlement, Supplement to the Bulletin concerning securities of the Autoritè des marchès financiers, 2005-06-11 vol. 2, No. 6, February 11, 2005.

{17} ISDA Comment Letter.

{18} Dodd-Frank Act, Section 723 (h)(2)(D).

{19} CBA Comment Letter.

{20} Desjardins Comment Letter.

{21} In Ontario, clearing agencies must submit rule changes to the OSC; in Quebec, clearinghouses can certify that rule modifications respect the Derivatives Act but such self-certification is subject to review at any time by the AMF.

{22} Federal Register / Vol. 76, No. 143 / Tuesday, July 26, 2011 / Page 44464 et seq. http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-18663a.pdf.

{23} Working Group of Commercial Energy Firms comment letter to the CSA, January 14, 2011. http://www.osc.gov.on.ca/documents/en/Securities-Category9-Comments/com 20110114 91-401 mcindoed menezesm sweeneyr.pdf. p.4.

{24} Federal Register / Vol. 76, No. 143 / Tuesday, July 26, 2011 / Page 44464 et seq. http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-18663a.pdf.

{25} Federal Register / Vol. 75, No. 250 / Thursday, December 30, 2010 / Proposed Rules p. 82490 et seq. http://www.gpo.gov/fdsys/pkg/FR-2010-12-30/pdf/2010-32085.pdf, p.82495.

{26} It has been proposed that once a CCP receives approval to clear a derivative, it would notify ESMA which would then have six months to determine if the relevant class of derivatives should be subject to a clearing obligation. ESMA must assess: reduction of systemic risk in the financial system; liquidity of contracts; availability of pricing information; ability of the CCP to handle the volume; and level of client protection provided by the CCP. There would be a public consultation.

{27} Council of the European Union, June 6, 2011 Proposals for a Regulation of the European Parliament and of the Council on OTC derivative transactions, central counterparties and trade repositories ("COE June 6, 2011", p. 31.

{28} Federal Register / Vol. 76, No. 143 / Tuesday, July 26, 2011 / Page 44464 et seq.http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-18663a.pdf, p.44474

{29} FSB Implementing Reforms, p. 4.

{30} Federal Register / Vol. 76, No. 147 / Monday, August 1, 2011 / Proposed Rules, pp. 45732-3 http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-19365a.pdf, p.45732-3

{31} See http://www.lautorite.qc.ca/files/pdf/consultations/derives/2012avril13-91-405-cons-en.pdf.

{32} COE June 6, 2011, Art. 3(a).

{33} Ibid, Art 2(a).

{34} The EU also addresses the requirements for exempting counterparties who are part of the same "Institutional Protection Schemes" in Ibid, Section 2a.

{35} See comment letter to CFTC and SEC from J.P. Morgan, June 3, 2011.

{36} See comment letter to CFTC from ISDA, December 22, 2010, p. 9.

{37} Currently, only Alberta, Quebec and Ontario require the recognition, or exemption from recognition, of CCPs (in Quebec, a "clearing house", in Ontario and Alberta, a "clearing agency"). Other jurisdictions have proposed or will propose legislative amendments to require recognition of a CCP.

{38} See section 8 CPSS-IOSCO.

{39} See Ontario Securities Commission Staff Notice 24-702 Regulatory Approach To Recognition and Exemption From Recognition of Clearing Agencies p. (2010) 33 OSCB 2325 http://www.osc.gov.on.ca/documents/en/Securities-Category2/sn_20100319_24-702_clearing-agencies.pdf.

{40} See http://www.bis.org/publ/cpss43.pdf.

{41} See http://www.bis.org/publ/cpss61.pdf.

{42} FMI Principles, p. 12.

{43} Ibid. p. 26.

{44} The "enumerated entities" include: (i) bank holding companies with over $50,000,000,000 in total consolidated assets; (ii) a nonbank financial company supervised by the Board of Governors of the Federal Reserve System; (iii) an affiliate of (i) or (ii); (iv) a swap dealer; (v) a major swap participant; or (vi) an associated person of (iv) or (v).

{45} COE June 6, 2011, Art. 25.

{46} See http://www.msc.gov.mb.ca/legal_docs/legislation/notices/4_52_110_prop.pdf.

{47} FMI Principles p. 121.

{48} FMI Principles p. 121.

{49} Federal Register/Vol.75, No. 240/ Wednesday, Dec. 15, 2010/Proposed Rules p. 78192. http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-31131a.pdf.

{50} COE June 6, 2011, Art. 36.

{51} Federal Register / Vol. 76, No. 216 / Tuesday, November 8, 2011 http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-27536a.pdf.

{52}Section§ 39 (b)(4) " would prohibit a DCO from requiring one of the original executing parties to be a clearing member in order for a contract, agreement, or transaction to be eligible for clearing." This provision was adopted on November 8, 2011. Federal Register / Vol. 76, No. 216 / Tuesday, November 8, 2011, p. 69360. http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-27536a.pdf.

{53} This proposal is not universally supported. Concerns have been expressed regarding non-dealers' ability to fully participate in a default auction, for example.

{54} Federal Register / Vol. 76, No. 51 / Wednesday, March 16, 2011 / Proposed Rules http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-20337a.pdf.

{55} Ibid.

{56} Ibid.

{57} FMI Principles, p. 101.

{58} COE June 6, 2011 , Art. 8.

{59} Price, Michelle. "Fresh clash looms over new OTC rules." Financial News, November 29, 2010.

{60} Federal Register / Vol. 76, No. 47 / Thursday, March 10, 2011 / Proposed Rules 13105 http://www.cftc.gov/LawRegulation/FederalRegister/FinalRules/2011-27536.

{61} This may consist of participant obligations and rights.

{62} See Dodd-Frank, § 806(e)(1).

{63} FMI Principles, page 122.

{64} Forthcoming CPSS-IOSCO work will focus specifically on the resolution of FMIs.

{65} Federal Register Vol. 76, No. 13/Thursday, January 20, 2011/Proposed Rules, p. 3701 et seq. http://www.cftc.gov/LawRegulation/FederalRegister/ProposedRules/2011-690.

{66} FMI Principles; Principle 4 " An FMI should effectively measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions. All other CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions."

{67} Federal Register / Vol. 76, No. 216 / Tuesday, November 8, 2011, p. 69346 www.cftc.gov/LawRegulation/FederalRegister/FinalRules/2011- 27536.

{68} Ibid, p. 69351.

{69} COE June 6, 2011, Art. 45.

{70} Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011, p. 3702 http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-690a.pdf.

{71} Federal Register/ Vol. 76, No. 13/ Thursday, January 20, 2011, p. 3707 http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-690a.pdf.

{72} COE June 6, 2011, Art.46.

{73} See Federal Register / Vol. 76, No. 13 / Thursday, January 20, 2011 / Proposed Rules, p. 3698 et seq. http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-690a.pdf.

{74} FMI Principles, p. 170-71.

{75} See Federal register/Vol. 76, No. 13/Thursday, January 20, 2011/ Proposed Rules, 39.18(b)(c)(e), p. 3713 http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-690a.pdf.

{76} FMI Principles, p. 94.

{77} COE June 6, 2011, Art.24 (6).

{78} Regulation 21-101, §12.1(a) http://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20101210_21-101_unofficial-consolidated.htm.

{79} Ibid, §12.1(b).

{80} http://www.lautorite.qc.ca/files//pdf/consultations/derives/2012fev10-91-404-cons-en.pdf.

{81} FMI Principles, p.128.

{82} Federal Register / Volume 75, Number 240 / December 15, 2010 http://www.cftc.gov/LawRegulation/FederalRegister/ProposedRules/2010-31130.

{83} See Federal Register / Vol. 76, No. 51 / Wednesday, March 16, 2011 / Proposed Rules, p. 14476 http://www.gpo.gov/fdsys/pkg/FR-2011- 03-16/pdf/2011-5182.pdf.

{84} Derivatives Act (Québec), R.S.Q., c. I-14.01, s. 12 http://www2.publicationsduquebec.gouv.qc.ca/dynamicSearch/telecharge.php?type=2&file=/I_14_01/I14_01_A.html.

{85} Securities Act (Ontario), R.S.O. 1990, c. S.5, s. 21.2 (0.1) http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_90s05_e.htm.

{86} Securities Act (Alberta), RSA 2000, C S-4, s. 67(1) http://www.qp.alberta.ca/documents/Acts/s04.pdf.

{87} FMI Principles, p.134.

{88} http://www.iosco.org/library/pubdocs/pdf/IOSCOPD322.pdf.

{89} COE June 6, 2011, Art.23 ¶1-2.

{90} FMI Principles, p. 25.

Appendix

Principles for Financial Markets Infrastructures: Summary of Principles{91}

Principle 1: Legal basis

An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

Key considerations

1. The legal basis should provide a high degree of certainty for each material aspect of an FMI's activities in all relevant jurisdictions.

2. An FMI should have rules, procedures, and contracts that are clear, understandable, and consistent with relevant laws and regulations.

3. An FMI should be able to articulate the legal basis for its activities to relevant authorities, participants, and, where relevant, participants' customers, in a clear and understandable way.

4. An FMI should have rules, procedures, and contracts that are enforceable in all relevant jurisdictions. There should be a high degree of certainty that actions taken by the FMI under such rules and procedures will not be voided, reversed, or subject to stays.

5. An FMI conducting business in multiple jurisdictions should identify and mitigate the risks arising from any potential conflict of laws across jurisdictions.

Principle 2: Governance

An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.

Key considerations

1. An FMI should have objectives that place a high priority on the safety and efficiency of the FMI and explicitly support financial stability and other relevant public interest considerations.

2. An FMI should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, relevant authorities, participants, and, at a more general level, the public.

3. The roles and responsibilities of an FMI's board of directors (or equivalent) should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address, and manage member conflicts of interest. The board should review both its overall performance and the performance of its individual board members regularly.

4. The board should contain suitable members with the appropriate skills and incentives to fulfil its multiple roles. This typically requires the inclusion of non-executive board member(s).

5. The roles and responsibilities of management should be clearly specified. An FMI's management should have the appropriate experience, a mix of skills, and the integrity necessary to discharge their responsibilities for the operation and risk management of the FMI.

6. The board should establish a clear, documented risk-management framework that includes the FMI's risk-tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision making in crises and emergencies. Governance arrangements should ensure that the risk-management and internal control functions have sufficient authority, independence, resources, and access to the board.

7. The board should ensure that the FMI's design, rules, overall strategy, and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public.

Principle 3: Framework for the comprehensive management of risks

An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.

Key considerations

1. An FMI should have risk-management policies, procedures, and systems that enable it to identify, measure, monitor, and manage the range of risks that arise in or are borne by the FMI. Risk-management frameworks should be subject to periodic review.

2. An FMI should provide incentives to participants and, where relevant, their customers to manage and contain the risks they pose to the FMI.

3. An FMI should regularly review the material risks it bears from and poses to other entities (such as other FMIs, settlement banks, liquidity providers, and service providers) as a result of interdependencies and develop appropriate risk-management tools to address these risks.

4. An FMI should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down. An FMI should prepare appropriate plans for its recovery or orderly wind-down based on the results of that assessment. Where applicable, an FMI should also provide relevant authorities with the information needed for purposes of resolution planning.

Principle 4: Credit risk

An FMI should effectively measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions. All other CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions.

Key considerations

1. An FMI should establish a robust framework to manage its credit exposures to its participants and the credit risks arising from its payment, clearing, and settlement processes. Credit exposure may arise from current exposures, potential future exposures, or both. An FMI should identify sources of credit risk, routinely measure and monitor credit exposures, and use appropriate risk-management tools to control these risks.

2. A payment system or SSS should cover its current and, where they exist, potential future exposures to each participant fully with a high degree of confidence using collateral and other equivalent financial resources (see Principle 5 on collateral). In the case of a DNS payment system or DNS SSS in which there is no settlement guarantee but where its participants face credit exposures arising from its payment, clearing, and settlement processes, such an FMI should maintain, at a minimum, sufficient resources to cover the exposures of the two participants and their affiliates that would create the largest aggregate credit exposure in the system.

3. A CCP should cover its current and potential future exposures to each participant fully with a high degree of confidence using margin and other prefunded financial resources (see Principle 5 on collateral and Principle 6 on margin). In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure for the CCP in extreme but plausible market conditions. All other CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure for the CCP in extreme but plausible market conditions. In all cases, a CCP should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount of total financial resources it maintains.

4. A CCP should determine the amount and regularly test the sufficiency of its total financial resources available in the event of a default or multiple defaults in extreme but plausible market conditions through rigorous stress testing. A CCP should have clear procedures to report the results of its stress tests to appropriate decision makers at the CCP and to use these results to evaluate the adequacy of and adjust its total financial resources. Stress tests should be performed daily using standard and predetermined parameters and assumptions. On at least a monthly basis, a CCP should perform a comprehensive and thorough analysis of stress testing scenarios, models, and underlying parameters and assumptions used to ensure they are appropriate for determining the CCP's required level of default protection in light of current and evolving market conditions. A CCP should perform this analysis of stress testing more frequently when the products cleared or markets served display high volatility, become less liquid, or when the size or concentration of positions held by a CCP's participants increases significantly. A full validation of a CCP's risk-management model should be performed at least annually.

5. In conducting stress testing, a CCP should consider the effect of a wide range of relevant stress scenarios in terms of both defaulters' positions and possible price changes in liquidation periods. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions.

6. An FMI should establish explicit rules and procedures that address fully any credit losses it may face as a result of any individual or combined default among its participants with respect to any of their obligations to the FMI. These rules and procedures should address how potentially uncovered credit losses would be allocated, including the repayment of any funds an FMI may borrow from liquidity providers. These rules and procedures should also indicate the FMI's process to replenish any financial resources that the FMI may employ during a stress event, so that the FMI can continue to operate in a safe and sound manner.

Principle 5: Collateral

An FMI that requires collateral to manage its or its participants' credit exposure should accept collateral with low credit, liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits.

Key considerations

1. An FMI should generally limit the assets it (routinely) accepts as collateral to those with low credit, liquidity, and market risks.

2. An FMI should establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions.

3. In order to reduce the need for procyclical adjustments, an FMI should establish stable and conservative haircuts that are calibrated to include periods of stressed market conditions, to the extent practicable and prudent.

4. An FMI should avoid concentrated holdings of certain assets where this would significantly impair the ability to liquidate such assets quickly without significant adverse price effects.

5. An FMI that accepts cross-border collateral should mitigate the risks associated with its use and ensure that the collateral can be used in a timely manner.

6. An FMI should use a collateral management system that is well-designed and operationally flexible.

Principle 6: Margin

A CCP should cover its credit exposures to its participants for all products through an effective margin system that is risk-based and regularly reviewed.

Key considerations

1. A CCP should have a margin system that establishes margin levels commensurate with the risks and particular attributes of each product, portfolio, and market it serves.

2. A CCP should have a reliable source of timely price data for its margin system. A CCP should also have procedures and sound valuation models for addressing circumstances in which pricing data are not readily available or reliable.

3. A CCP should adopt initial margin models and parameters that are risk-based and generate margin requirements sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default. Initial margin should meet an established single-tailed confidence level of at least 99 percent with respect to the estimated distribution of future exposure. For a CCP that calculates margin at the portfolio level, this requirement applies to each portfolio's distribution of future exposure. For a CCP that calculates margin at more-granular levels, such as at the subportfolio level or by product, the requirement must be met for the corresponding distributions of future exposure. The model should (a) use a conservative estimate of the time horizons for the effective hedging or close out of the particular types of products cleared by the CCP (including in stressed market conditions), (b) have an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products, and (c) to the extent practicable and prudent, limit the need for destabilising, procyclical changes.

4. A CCP should mark participant positions to market and collect variation margin at least daily to limit the build-up of current exposures. A CCP should have the authority and operational capacity to make intraday margin calls and payments, both scheduled and unscheduled, to participants.

5. In calculating margin requirements, a CCP may allow offsets or reductions in required margin across products that it clears or between products that it and another CCP clear, if the risk of one product is significantly and reliably correlated with the risk of the other product. Where two or more CCPs are authorised to offer cross-margining, they must have appropriate safeguards and harmonised overall risk-management systems.

6. A CCP should analyse and monitor its model performance and overall margin coverage by conducting rigorous daily backtesting and at least monthly, and more-frequent where appropriate, sensitivity analysis. A CCP should regularly conduct an assessment of the theoretical and empirical properties of its margin model for all products it clears. In conducting sensitivity analysis of the model's coverage, a CCP should take into account a wide range of parameters and assumptions that reflect possible market conditions, including the most-volatile periods that have been experienced by the markets it serves and extreme changes in the correlations between prices.

7. A CCP should regularly review and validate its margin system.

Principle 7: Liquidity risk

An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the FMI in extreme but plausible market conditions.

Key considerations

1. An FMI should have a robust framework to manage its liquidity risks from its participants, settlement banks, nostro agents, custodian banks, liquidity providers, and other entities.

2. An FMI should have effective operational and analytical tools to identify, measure, and monitor its settlement and funding flows on an ongoing and timely basis, including its use of intraday liquidity.

3. A payment system or SSS, including one employing a DNS mechanism, should maintain sufficient liquid resources in all relevant currencies to effect same-day settlement, and where appropriate intraday or multiday settlement, of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation in extreme but plausible market conditions.

4. A CCP should maintain sufficient liquid resources in all relevant currencies to settle securities-related payments, make required variation margin payments, and meet other payment obligations on time with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation to the CCP in extreme but plausible market conditions. In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should consider maintaining additional liquidity resources sufficient to cover a wider range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would generate the largest aggregate payment obligation to the CCP in extreme but plausible market conditions.

5. For the purpose of meeting its minimum liquid resource requirement, an FMI's qualifying liquid resources in each currency include cash at the central bank of issue and at creditworthy commercial banks, committed lines of credit, committed foreign exchange swaps, and committed repos, as well as highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions. If an FMI has access to routine credit at the central bank of issue, the FMI may count such access as part of the minimum requirement to the extent it has collateral that is eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank. All such resources should be available when needed.

6. An FMI may supplement its qualifying liquid resources with other forms of liquid resources. If the FMI does so, then these liquid resources should be in the form of assets that are likely to be saleable or acceptable as collateral for lines of credit, swaps, or repos on an ad hoc basis following a default, even if this cannot be reliably prearranged or guaranteed in extreme market conditions. Even if an FMI does not have access to routine central bank credit, it should still take account of what collateral is typically accepted by the relevant central bank, as such assets may be more likely to be liquid in stressed circumstances. An FMI should not assume the availability of emergency central bank credit as a part of its liquidity plan.

7. An FMI should obtain a high degree of confidence, through rigorous due diligence, that each provider of its minimum required qualifying liquid resources, whether a participant of the FMI or an external party, has sufficient information to understand and to manage its associated liquidity risks, and that it has the capacity to perform as required under its commitment. Where relevant to assessing a liquidity provider's performance reliability with respect to a particular currency, a liquidity provider's potential access to credit from the central bank of issue may be taken into account. An FMI should regularly test its procedures for accessing its liquid resources at a liquidity provider.

8. An FMI with access to central bank accounts, payment services, or securities services should use these services, where practical, to enhance its management of liquidity risk.

9. An FMI should determine the amount and regularly test the sufficiency of its liquid resources through rigorous stress testing. An FMI should have clear procedures to report the results of its stress tests to appropriate decision makers at the FMI and to use these results to evaluate the adequacy of and adjust its liquidity risk-management framework. In conducting stress testing, an FMI should consider a wide range of relevant scenarios. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions. Scenarios should also take into account the design and operation of the FMI, include all entities that might pose material liquidity risks to the FMI (such as settlement banks, nostro agents, custodian banks, liquidity providers, and linked FMIs), and where appropriate, cover a multiday period. In all cases, an FMI should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount and form of total liquid resources it maintains.

10. An FMI should establish explicit rules and procedures that enable the FMI to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants. These rules and procedures should address unforeseen and potentially uncovered liquidity shortfalls and should aim to avoid unwinding, revoking, or delaying the same-day settlement of payment obligations. These rules and procedures should also indicate the FMI's process to replenish any liquidity resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner.

Principle 8: Settlement finality

An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time.

Key considerations

1. An FMI's rules and procedures should clearly define the point at which settlement is final.

2. An FMI should complete final settlement no later than the end of the value date, and preferably intraday or in real time, to reduce settlement risk. An LVPS or SSS should consider adopting RTGS or multiple-batch processing during the settlement day.

3. An FMI should clearly define the point after which unsettled payments, transfer instructions, or other obligations may not be revoked by a participant.

Principle 9: Money settlements

An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.

Key considerations

1. An FMI should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks.

2. If central bank money is not used, an FMI should conduct its money settlements using a settlement asset with little or no credit or liquidity risk.

3. If an FMI settles in commercial bank money, it should monitor, manage, and limit its credit and liquidity risks arising from the commercial settlement banks. In particular, an FMI should establish and monitor adherence to strict criteria for its settlement banks that take account of, among other things, their regulation and supervision, creditworthiness, capitalisation, access to liquidity, and operational reliability. An FMI should also monitor and manage the concentration of credit and liquidity exposures to its commercial settlement banks.

4. If an FMI conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks.

5. An FMI's legal agreements with any settlement banks should state clearly when transfers on the books of individual settlement banks are expected to occur, that transfers are to be final when effected, and that funds received should be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the FMI and its participants to manage credit and liquidity risks.

Principle 10: Physical deliveries

An FMI should clearly state its obligations with respect to the delivery of physical instruments or commodities and should identify, monitor, and manage the risks associated with such physical deliveries.

Key considerations

1. An FMI's rules should clearly state its obligations with respect to the delivery of physical instruments or commodities.

2. An FMI should identify, monitor, and manage the risks and costs associated with the storage and delivery of physical instruments or commodities.

(Principle 11: Central Securities Depositories is not applicable to OTC Derivatives)

Principle 12: Exchange-of-value settlement systems

If an FMI settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.

Key consideration

1. An FMI that is an exchange-of-value settlement system should eliminate principal risk by ensuring that the final settlement of one obligation occurs if and only if the final settlement of the linked obligation also occurs, regardless of whether the FMI settles on a gross or net basis and when finality occurs.

Principle 13: Participant-default rules and procedures

An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations.

Key considerations

1. An FMI should have default rules and procedures that enable the FMI to continue to meet its obligations in the event of a participant default and that address the replenishment of resources following a default.

2. An FMI should be well prepared to implement its default rules and procedures, including any appropriate discretionary procedures provided for in its rules.

3. An FMI should publicly disclose key aspects of its default rules and procedures.

4. An FMI should involve its participants and other stakeholders in the testing and review of the FMI's default procedures, including any close-out procedures. Such testing and review should be conducted at least annually or following material changes to the rules and procedures to ensure that they are practical and effective.

Principle 14: Segregation and portability

A CCP should have rules and procedures that enable the segregation and portability of positions of a participant's customers and the collateral provided to the CCP with respect to those positions.

Key considerations

1. A CCP should, at a minimum, have segregation and portability arrangements that effectively protect a participant's customers' positions and related collateral from the default or insolvency of that participant. If the CCP additionally offers protection of such customer positions and collateral against the concurrent default of the participant and a fellow customer, the CCP should take steps to ensure that such protection is effective.

2. A CCP should employ an account structure that enables it readily to identify positions of a participant's customers and to segregate related collateral. A CCP should maintain customer positions and collateral in individual customer accounts or in omnibus customer accounts.

3. A CCP should structure its portability arrangements in a way that makes it highly likely that the positions and collateral of a defaulting participant's customers will be transferred to one or more other participants.

4. A CCP should disclose its rules, policies, and procedures relating to the segregation and portability of a participant's customers' positions and related collateral. In particular, the CCP should disclose whether customer collateral is protected on an individual or omnibus basis. In addition, a CCP should disclose any constraints, such as legal or operational constraints, that may impair its ability to segregate or port a participant's customers' positions and related collateral.

Principle 15: General business risk

An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.

Key considerations

1. An FMI should have robust management and control systems to identify, monitor, and manage general business risks, including losses from poor execution of business strategy, negative cash flows, or unexpected and excessively large operating expenses.

2. An FMI should hold liquid net assets funded by equity (such as common stock, disclosed reserves, or other retained earnings) so that it can continue operations and services as a going concern if it incurs general business losses. The amount of liquid net assets funded by equity an FMI should hold should be determined by its general business risk profile and the length of time required to achieve a recovery or orderly wind-down, as appropriate, of its critical operations and services if such action is taken.

3. An FMI should maintain a viable recovery or orderly wind-down plan and should hold sufficient liquid net assets funded by equity to implement this plan. At a minimum, an FMI should hold liquid net assets funded by equity equal to at least six months of current operating expenses. These assets are in addition to resources held to cover participant defaults or other risks covered under the financial resources principles. However, equity held under international risk-based capital standards can be included where relevant and appropriate to avoid duplicate capital requirements.

4. Assets held to cover general business risk should be of high quality and sufficiently liquid in order to allow the FMI to meet its current and projected operating expenses under a range of scenarios, including in adverse market conditions.

5. An FMI should maintain a viable plan for raising additional equity should its equity fall close to or below the amount needed. This plan should be approved by the board of directors and updated regularly.

Principle 16: Custody and investment risks

An FMI should safeguard its own and its participants' assets and minimise the risk of loss on and delay in access to these assets. An FMI's investments should be in instruments with minimal credit, market, and liquidity risks.

Key considerations

1. An FMI should hold its own and its participants' assets at supervised and regulated entities that have robust accounting practices, safekeeping procedures, and internal controls that fully protect these assets.

2. An FMI should have prompt access to its assets and the assets provided by participants, when required.

3. An FMI should evaluate and understand its exposures to its custodian banks, taking into account the full scope of its relationships with each.

4. An FMI's investment strategy should be consistent with its overall risk-management strategy and fully disclosed to its participants, and investments should be secured by, or be claims on, high-quality obligors. These investments should allow for quick liquidation with little, if any, adverse price effect.

Principle 17: Operational risk

An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the FMI's obligations, including in the event of a wide-scale or major disruption.

Key considerations

1. An FMI should establish a robust operational risk-management framework with appropriate systems, policies, procedures, and controls to identify, monitor, and manage operational risks.

2. An FMI's board of directors should clearly define the roles and responsibilities for addressing operational risk and should endorse the FMI's operational risk-management framework. Systems, operational policies, procedures, and controls should be reviewed, audited, and tested periodically and after significant changes.

3. An FMI should have clearly defined operational reliability objectives and should have policies in place that are designed to achieve those objectives.

4. An FMI should ensure that it has scalable capacity adequate to handle increasing stress volumes and to achieve its service-level objectives.

5. An FMI should have comprehensive physical and information security policies that address all potential vulnerabilities and threats.

6. An FMI should have a business continuity plan that addresses events posing a significant risk of disrupting operations, including events that could cause a wide-scale or major disruption. The plan should incorporate the use of a secondary site and should be designed to ensure that critical information technology (IT) systems can resume operations within two hours following disruptive events. The plan should be designed to enable the FMI to complete settlement by the end of the day of the disruption, even in case of extreme circumstances. The FMI should regularly test these arrangements.

7. An FMI should identify, monitor, and manage the risks that key participants, other FMIs, and service and utility providers might pose to its operations. In addition, an FMI should identify, monitor, and manage the risks its operations might pose to other FMIs.

Principle 18: Access and participation requirements

An FMI should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.

Key considerations

1. An FMI should allow for fair and open access to its services, including by direct and, where relevant, indirect participants and other FMIs, based on reasonable risk-related participation requirements.

2. An FMI's participation requirements should be justified in terms of the safety and efficiency of the FMI and the markets it serves, be tailored to and commensurate with the FMI's specific risks, and be publicly disclosed. Subject to maintaining acceptable risk control standards, an FMI should endeavour to set requirements that have the least-restrictive impact on access that circumstances permit.

3. An FMI should monitor compliance with its participation requirements on an ongoing basis and have clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements.

Principle 19: Tiered participation arrangements

An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements.

Key considerations

1. An FMI should ensure that its rules, procedures, and agreements allow it to gather basic information about indirect participation in order to identify, monitor, and manage any material risks to the FMI arising from such tiered participation arrangements.

2. An FMI should identify material dependencies between direct and indirect participants that might affect the FMI.

3. An FMI should identify indirect participants responsible for a significant proportion of transactions processed by the FMI and indirect participants whose transaction volumes or values are large relative to the capacity of the direct participants through which they access the FMI in order to manage the risks arising from these transactions.

4. An FMI should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.

Principle 20: FMI links

An FMI that establishes a link with one or more FMIs should identify, monitor, and manage link-related risks.

Key considerations

1. Before entering into a link arrangement and on an ongoing basis once the link is established, an FMI should identify, monitor, and manage all potential sources of risk arising from the link arrangement. Link arrangements should be designed such that each FMI is able to observe the other principles in this report.

2. A link should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the FMIs involved in the link.

3. Linked CSDs should measure, monitor, and manage the credit and liquidity risks arising from each other. Any credit extensions between CSDs should be covered fully with high-quality collateral and be subject to limits.

4. Provisional transfers of securities between linked CSDs should be prohibited or, at a minimum, the retransfer of provisionally transferred securities should be prohibited prior to the transfer becoming final.

5. An investor CSD should only establish a link with an issuer CSD if the arrangement provides a high level of protection for the rights of the investor CSD's participants.

6. An investor CSD that uses an intermediary to operate a link with an issuer CSD should measure, monitor, and manage the additional risks (including custody, credit, legal, and operational risks) arising from the use of the intermediary.

7. Before entering into a link with another CCP, a CCP should identify and manage the potential spill-over effects from the default of the linked CCP. If a link has three or more CCPs, each CCP should identify, assess, and manage the risks of the collective link arrangement.

8. Each CCP in a CCP link arrangement should be able to cover, at least on a daily basis, its current and potential future exposures to the linked CCP and its participants, if any, fully with a high degree of confidence without reducing the CCP's ability to fulfil its obligations to its own participants at any time.

9. A TR should carefully assess the additional operational risks related to its links to ensure the scalability and reliability of IT and related resources.

Principle 21: Efficiency and effectiveness

An FMI should be efficient and effective in meeting the requirements of its participants and the markets it serves.

Key considerations

1. An FMI should be designed to meet the needs of its participants and the markets it serves, in particular, with regard to choice of a clearing and settlement arrangement; operating structure; scope of products cleared, settled, or recorded; and use of technology and procedures.

2. An FMI should have clearly defined goals and objectives that are measurable and achievable, such as in the areas of minimum service levels, risk-management expectations, and business priorities.

3. An FMI should have established mechanisms for the regular review of its efficiency and effectiveness.

Principle 22: Communication procedures and standards

An FMI should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording.

Key consideration

1. An FMI should use, or at a minimum accommodate, internationally accepted communication procedures and standards.

Principle 23: Disclosure of rules, key procedures, and market data

An FMI should have clear and comprehensive rules and procedures and should provide sufficient information to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the FMI. All relevant rules and key procedures should be publicly disclosed.

Key considerations

1. An FMI should adopt clear and comprehensive rules and procedures that are fully disclosed to participants. Relevant rules and key procedures should also be publicly disclosed.

2. An FMI should disclose clear descriptions of the system's design and operations, as well as the FMI's and participants' rights and obligations, so that participants can assess the risks they would incur by participating in the FMI.

3. An FMI should provide all necessary and appropriate documentation and training to facilitate participants' understanding of the FMI's rules and procedures and the risks they face from participating in the FMI.

4. An FMI should publicly disclose its fees at the level of individual services it offers as well as its policies on any available discounts. The FMI should provide clear descriptions of priced services for comparability purposes.

5. An FMI should complete regularly and disclose publicly responses to the CPSS-IOSCO Disclosure framework for financial market infrastructures. An FMI also should, at a minimum, disclose basic data on transaction volumes and values.

{91} http://www.bis.org/publ/cpss101a.pdf.

OSC Notice 11-767 -- Notice of Statement of Priorities for Financial Year to End March 31, 2013

OSC NOTICE 11-767 -- NOTICE OF STATEMENT OF PRIORITIES

FOR FINANCIAL YEAR TO END MARCH 31, 2013

The Securities Act requires the Commission to deliver to the Minister by June 30th of each year a statement of the Commission setting out its priorities for its current financial year in connection with the administration of the Act, the regulations and rules, together with a summary of the reasons for the adoption of the priorities.

In the notice published by the Commission on March 30, 2012, the Commission set out its draft Statement of Priorities and invited public input in advance of finalizing and publishing the 2012 -- 2013 Statement of Priorities. One hundred-five (105) responses were received. Many of the comments we received confirmed support for our recently completed strategic plan and the various initiatives we plan to undertake in order to achieve our goals.

The responses commended the overall direction of the OSC goals and priorities and included:

(a) Strong support for the creation of the Office of the Investor and increased focus on investor concerns

(b) Endorsement of OSC's commitment for expansion of the research and data analysis capabilities in order to adopt a data-based approach to identifying issues, decision making and policy development

(c) Positive acknowledgement of the OSC's dedication to keeping pace with national and international developments

(d) Encouragement to move towards better identification, prioritization and coordination of specific initiatives and policy development.

The comments focussed on a wide range of issues. We address notable comments in the following discussion:

(a) Increased accountability was noted as an area that requires further clarity and transparency. It was recommended that the Commission clearly define performance metrics and use these measures to report on the progress of achieving its goals. In addition it was suggested that further information be provided regarding the timing, plans, and performance criteria for the deliverables contained in the Statement of Priorities.

We agree with this comment and wish to note that the Statement of Priorities includes a key priority to improve our accountability. In the coming year we will finalize key performance indicators (KPIs) to better track the outcomes of OSC activities and plan to report more clearly on progress. We have modified the Statement of Priorities to indicate the implementation of KPIs will occur by fiscal year end.

(b) A number of respondents commented on our initiative to re-evaluate the adviser-client relationship to consider whether an explicit statutory fiduciary duty or other standards should apply to all advisers and dealers in Ontario. While some respondents were quite supportive of this initiative, others noted the current common law fiduciary regime is effective and no further work is required.

In consultation with the CSA, we plan to complete a thorough analysis of this issue and a research paper will be published for comment.

(c) While there is overall support for the establishment of the Office of the Investor ("Office"), we received requests for more detailed information about the Office, such as: disclosure of the mandate, goals, composition, and future initiatives. There were also some suggestions regarding the focus and mandate of the Office.

We are in the early stages in establishing the Office including finalizing the terms of reference and mandate. The comments received will be considered as part of this process.

(d) We received comments regarding a mechanism by which the OSC could award compensation to Ontario investors who suffer losses because of violations of the Securities Act (Ontario).

We recognize the importance of this matter and have revised the Statement of Priorities to include more focus on applications under s.128 of the Securities Act (Ontario).

(e) A significant number of comments focussed on the need to adopt an offering memorandum exemption in Ontario to increase and expand the capital raising capabilities of exempt market dealers.

On June 7, 2012, we published OSC Staff Notice 45-707 -- OSC Broadening Scope of Review of Prospectus Exemptions (available on the OSC website at www.osc.gov.on.ca) indicating our decision to broaden the scope of our exempt market review to consider alternative capital raising exemptions, including the offering memorandum exemption.

(f) Several respondents commented on the initiative to "conduct research and analysis, and publish a discussion paper on the cost of ownership of mutual funds in Canada, identifying investor protection and public interest issues". They noted that the cost of ownership of mutual funds is transparent; however, the same cannot be said about other financial products such as market securities, insurance products, GICs, etc. It was suggested that the OSC collaborate with other regulators for those products that do not come under its jurisdiction. It is our intention to apply our findings to comparable investment fund products.

(g) Many respondents commended the OSC's efforts regarding consultation on regulatory initiatives with market participants and industry, working with the Canadian Securities Administrators (CSA), and with other regulators in Canada and internationally. It was noted that as long as multiple securities regulators exist, it is important to work together to ensure the regulatory process remains cooperative and harmonized to promote effective capital markets, an investor focus and financial stability.

Some comments suggested that more consultation and opportunities for input from market participants and investors is also required. To improve collaboration and consultation we have recently established a number of committees with broad industry participation. We will continue to include market participants on our various advisory committees, consult with industry and other regulators on various securities regulatory matters, and develop stronger relationships with other financial service regulators in Canada and internationally.

In addition, we are pleased to note that the OSC Investor Advisory Panel (IAP) will continue to add the investors' viewpoints and comments on significant policy initiatives.

We considered all of the comments received and have reviewed our draft Statement of Priorities to determine whether any significant initiatives should be added. As noted above, we have revised the Statement of Priorities to include that where appropriate the OSC will make application under s.128 of the Securities Act (Ontario) to compensate investors.

We recognize many of the comment letters include useful actions that could be taken while working towards our priorities. Many of these comments will be considered in the course of undertaking the identified initiatives. However, due to a lengthy list of priority issues we had to make some difficult decisions on where we should focus our limited resources in order to achieve our mandate and strategic goals during the coming year.

All of the comment letters and our responses to the comments are available on our website www.osc.gov.on.ca.

The Statement of Priorities will serve as the guide for the Commission's operations. Following delivery of the Statement of Priorities to the Minister, we will also publish on our website a report on our progress against our 2011 -- 2012 priorities.

June 28, 2012

ONTARIO SECURITIES COMMISSION

2012-2013

STATEMENT OF PRIORITIES

INTRODUCTION

The Securities Act (Ontario) requires the Ontario Securities Commission (OSC) to publish in its Bulletin, and to deliver to the Minister by June 30 of each year, a statement by the Chair setting out the proposed priorities for the Commission for the current financial year.

This Statement of Priorities sets out the OSC's strategic goals and the specific initiatives that will be pursued in support of each of these goals in the fiscal year commencing April 1, 2012. It also discusses the environmental factors that the OSC considered in setting these goals.

The OSC remains committed to delivering its regulatory services effectively and with accountability. The recent ruling from the Supreme Court stated that the federal government did not have the authority under the constitution to enact the proposed Canadian Securities Act. Therefore, the OSC continues to work closely with its colleagues in the Canadian Securities Administrators (CSA), and to ensure that the Canadian regulatory system continues to function efficiently and remains responsive to changing market circumstances.

Our Vision

To be an effective and responsive securities regulator -- fostering a culture of integrity and compliance and instilling investor confidence in the capital markets.

Our Mandate

The OSC's mandate is to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets. The mandate is established by statute.

OUR ENVIRONMENT

Each year, the OSC develops its business plan and sets goals and priorities to promote the achievement of its vision and the fulfillment of its mandate. The OSC does this in the context of current and forecast economic conditions, evolving market practices, developing trends and issues, as well as changes in public expectations. This year's planning exercise has the benefit of recent internal efforts to develop a vision and a strategic plan for the OSC as a 21st century regulator. The plan focuses on how the OSC sets its policy priorities, conducts its compliance programs and interacts with its stakeholders. This statement of priorities reflects some of these changes.

Today's market reality

Capital markets have changed fundamentally in recent years. We have experienced sharp increases in the breadth of activity as well as changes in the nature of business models and the complexity of products. Securities, insurance and banking products have become more interchangeable and global markets more interconnected than ever before.

The current market reality requires the OSC to address many new issues that have international implications, such as multi-jurisdictional enforcement investigations, a regulatory framework for the over-the-counter (OTC) derivatives, oversight of credit rating agencies and hedge funds, the regulation of emerging market reporting issuers, the proliferation of complex exchange-traded funds (ETFs) and structured products and an ever-changing market infrastructure. These raise complex regulatory, jurisdictional and operational challenges for the OSC.

There continue to be instances where retail and institutional investors have been sold products that were not adequately explained, were not suitable and did not meet their needs. These problems resulted in investor harm and have shone a spotlight on the inadequacies of the existing disclosure regimes and on the need for financial advisers to appropriately inform investors to enable them to make good investment decisions.

One of the greatest challenges now facing the OSC and other securities regulators is to strengthen the capacity and expertise to keep pace with ongoing market developments and risks that are emerging as a result of innovation and global market stresses.

International response

Given the changes to the markets and the lessons learned from the global financial crisis, expectations for financial services regulators have changed quite significantly. The unprecedented use of taxpayer dollars in many jurisdictions to bail out large financial institutions and to protect the local capital markets has created new accountability for regulators to a constituency with little interest in underwriting unnecessarily or overly risky behaviour.

In an effort to fix the underlying causes of the crisis, the G20 countries, along with the Financial Stability Board (FSB) and international standard-setters, such as IOSCO and the Basel Committee on Banking Supervision, are focussed on global support for regulation by way of additional investments in regulatory processes, development of new financial market infrastructures, expanding the perimeter of regulation and strengthening cooperation and regulatory oversight. The call for increased regulation has been challenged by those who question whether regulators can develop the agility required to keep pace with developments in the markets they regulate.

Implications for securities regulation in Ontario

Commitments made to the G20 will require the introduction of a broad set of new policies that cannot simply be imported from other jurisdictions, but will require careful analysis of their impact in the Canadian market. In addition, the implications and consequences of policies introduced in other jurisdictions will need to be carefully monitored and their impact considered in Canada.

The effects of all new policies and changes in other markets will be two-fold in Canada. First, direct compliance with these new rules by either domestic subsidiaries of foreign headquartered players or by local players transacting with foreign entities will cause shifts in the competitive landscape resulting in the potential for regulatory arbitrage. Second, it is possible that initiatives such as the EU Tobin tax and the US Volcker rule, or the application of lower position limits for commodity traders could drive high-frequency trading, proprietary trading and broker activity, or commodities speculation further into Canada's markets.

The greatest challenge facing regulators will not merely be the effective implementation of new rules, but also the development of the regulatory capacity to keep current with new market developments that will emerge over time as a result of financial innovation, or as unforeseen consequences of the implementation of the current proposed rules.

Whether as a result of innovation in the industry, or as required by global events, the OSC faces a fast-changing operating environment and rising stakeholder and public expectations. As the regulator of the largest share of Canada's capital markets, the OSC has an obligation to take these challenges seriously and demonstrate leadership.

The recent Supreme Court of Canada decision on the national securities regulator means that the OSC will continue to meet its mandate by working in the best interests of investors and market participants of Ontario. The OSC will continue to work cooperatively with its CSA colleagues and other regulators to make the regulatory system more efficient.

KEY REGULATORY PRIORITIES FOR 2012 -- 2013

In light of the environmental factors outlined above, the OSC has reviewed and affirmed its broad strategic goals as set out below. A three year OSC strategic plan released on February 29, 2012 outlined a number of initiatives and operational programs in order to achieve its mandate.

The OSC has five regulatory goals for 2012 -- 2013. Four of the goals remain the same as in previous years with a fifth goal added to respond to the systemic risk concerns raised as part of the global response to the market issues that emerged in 2008.

Goal #1 -- Deliver Responsive Regulation

The OSC strives to identify the important issues and deal with them in a timely way. The OSC will continue to be proactive in pursuing regulatory standards that discourage or pre-empt regulatory arbitrage, maintain or improve market confidence, reduce financial crime and safeguard investors. Expanding OSC research and analytical capabilities in support of policy making and operational decisions will better inform policy development.

Key initiatives the OSC plans to undertake in the coming year are to:

• Facilitate shareholder empowerment in director elections by advocating for the elimination of slate voting, the adoption of majority voting policies for director elections and enhancing disclosure of voting results for shareholder meetings

• Improve the proxy voting system by:

• conducting an empirical analysis to review concerns raised about the accountability, transparency and efficiency of the voting system

• facilitating discussions amongst market participants on improving the functioning of the proxy system, taking into account the needs and concerns of retail investors, and

• working with the CSA to review the role of proxy advisers in our capital markets by soliciting feedback from issuers, investors and other market participants

• Develop and publish a consultation paper addressing issues associated with market data in a multi-marketplace environment

• Undertake comparative research on capital raising regimes in other jurisdictions, including gathering economic data focussing specifically on approaches to raising capital for start-up and small businesses. This work will include consultation with issuers, investors, dealers, academics and others

• Consider and consult on alternate capital raising exemptions in Ontario in addition to the accredited investor and $150,000 exemption

• Conduct research and analysis, and publish a discussion paper on the cost of ownership of mutual funds in Canada, identifying investor protection and public interest issues

• Re-evaluate the regulatory and operational requirements associated with closed-end funds (non-redeemable investment funds) by assessing the rationale for rules that differ from the rules governing the more common open-end mutual funds. This work will include consultations with issuers and investors with a view to publishing new rules for comment

• Undertake research and analysis of increasingly complex financial products and investment strategies and collaborate closely with other regulators and exchanges to ensure regulatory approaches towards investment products are consistent and opportunities for regulatory arbitrage minimized.

Goal #2 -- Deliver Effective Enforcement and Compliance

Timely and appropriate compliance oversight and enforcement actions are integral to fostering confidence in capital markets and preventing harm to investors. The OSC's compliance and enforcement regimes are dynamic; however, greater focus is needed on preventing non-compliance by issuers and registrants, rather than finding non-compliance after the fact. To address these issues, the OSC will:

• Work with other regulators, oversight bodies, exchanges, emerging markets issuers, auditors, underwriters and investors to address the principal concerns identified in the Emerging Markets Issuer Review (EMIR) completed in 2011 -- 2012, as outlined in the OSC Staff Notice 51-719 dated March 20, 2012. This work will include:

• developing and/or enhancing guidance and practices for boards, auditors and underwriters to address the principal concerns described in the Staff Notice

• examining listing requirements applicable to Emerging Market issuers

• Conduct more targeted compliance reviews (i.e. "sweeps") and desk reviews of registrants by focussing on high risk areas, know your client and suitability obligations, new registrants and on major issues of concern that have been identified through compliance reviews

• Conduct compliance reviews of website and marketing disclosures by smaller issuers

• Promote vigorous and timely enforcement action by reducing timelines for completing investigations and initiating regulatory proceedings

• Continue to work with national and international enforcement regulators to develop a comprehensive response to emerging market issues

• Increase the use of stronger enforcement mechanisms and increase quasi-criminal prosecutions

• Further develop and implement a more effective, risk-based and proactive approach to both issuer regulation and compliance oversight

• Conduct educational seminars and publish a variety of practice directives and guidance to small and medium enterprises to provide direction on understanding our expectations regarding filings, and to alert them to issues we are focussing on in our review programs.

Goal #3 -- Deliver Strong Investor Protection

Key initiatives the OSC plans to undertake to champion investor protection are as follows.

• The OSC will create an Office of the Investor to establish a stronger investor focus and understanding. This Office will:

• deepen the OSC's understanding of investor issues

• act as the focus for investor concerns and ensure investor issues are considered in policy and operational activities within the OSC

• work with the OSC Research and Data Analysis Group to conduct specific research into investor issues and the implications for regulatory responses

• work with investor advocacy groups and regulators to enhance OSC understanding of investor issues

• work with the Investor Advisory Panel to support its mandate, and

• work with the Investor Education Fund to support its efforts

• Re-evaluate the adviser-client relationship to consider whether an explicit statutory fiduciary duty or other standards should apply to all advisers and dealers in Ontario. The research underway will be completed, and a paper on the adviser's duty to clients will be prepared and published in consultation with the CSA

• Where appropriate the OSC will make application under s.128 of theSecurities Act (Ontario) to compensate investors

• The OSC will help investors get the necessary information to enable them to make better investment decisions by:

• applying high standards of disclosure through robust prospectus and continuous disclosure reviews

• developing alternative, tailored disclosure documents -- such as: re-examining risk disclosure in the 'Fund Facts' as part of the Point of Sale initiative, and developing similar disclosure documents for other types of investment funds and scholarship plans

• publishing rules that ensure investors receive from their dealers/advisers reports on the ongoing costs and performance of their investments

• Continue to work with OBSI and the CSA to support a sustainable and robust system of informal dispute resolution for investors.

The need to assist and protect investors is critical given the availability of complex products, greater reliance on the exempt market for distribution, and potential intermediary conflicts of interest in the distribution of products. The OSC will:

• Examine the exempt market to obtain a better understanding of how and why individual investors participate not only in terms of direct investment in issuers, but also through structured investments sold through exempt market dealers

• Re-consider the current regulatory requirements governing shareholders' rights plans to reflect recent market and governance developments.

Goal #4 -- Run a Modern, Accountable and Efficient Organization

The OSC continues to pursue its mandate and efforts to improve the efficiency and effectiveness of its operational and policy work. In its efforts to become a more performance-based and accountable organization, the OSC will:

• Prioritize and coordinate policy development. A dedicated committee will be established for the control and prioritization of policy initiatives, to ensure they are aligned with the goals and objectives of the organization and that investors' concerns and operational issues are considered early in the policy process. Greater emphasis will be placed on assessing the implications of policies, testing implementation of regulations and on collaboration with other domestic and international regulators

• Establish an Emerging Risk Committee that will develop a framework for the identification and analysis of risk

• Expand its research and data analysis capabilities to adopt a data-based approach to identifying issues, decision making and policy development. A dedicated group will be created to further enhance the research and analytical functions to bring about a more disciplined approach to policy development, a better understanding of investor behaviour and needs, and improved and timely identification of risks and issues in order to react faster

• Build an attractive, modern, high-performing workplace where every manager is a great talent manager and every employee is fully engaged

• Incorporate more sophisticated analytical tools to improve the efficiency, quality and timeliness of investigation efforts. Expand the use of technology and e-discovery tools to assist in insider trading investigations

• Improve the adjudicative process by moving to electronic hearings. This will facilitate more efficient management of the increased numbers of hearings and related documents

• Develop IT tools to assist in gathering, monitoring and analyzing data, automating areas of work that are now manually intensive and not efficient -- e.g. creating online information submission (eForms) to capture submissions electronically to reduce data entry and errors, expedite analysis, and improve the quality of information submitted through initial validation

• Review the existing OSC fee model and propose a new Fee Rule for implementation in April 2013

• Further develop key performance measures to track the outcomes of OSC activities to be implemented by fiscal year end

• Improve internal work processes -- such as: a more effective approach to issuer regulation by continuing to improve screening and review protocols for prospectuses and compliance oversight; plus enhancing the risk-based approach to licensing registrants.

Goal #5 -- Support and Promote Financial Stability

The OSC aims to build the capabilities required to play a more active role in assessing risks to its own objectives and to financial stability arising from the interaction between securities and other financial services activities. The OSC will:

• Continue the work on the creation of a framework to regulate OTC derivatives participants in order to meet the G20 requirements:

• complete and publish various concept papers in consultation with the CSA

• roll-out proposed rules regarding oversight of trade repositories and a requirement to report all derivative trades to an approved trade repository, and

• publish rules for comment in late 2012

• Increase cooperation by developing more formal and regular working relationships with the CSA and other financial service regulators in Canada and internationally

• Work with IOSCO and the CSA Systemic Risk Committee to implement IOSCO Principle 6 regarding systemic risk, and Principle 7 regarding perimeter of regulation.

2012 -- 2013 FINANCIAL OUTLOOK

OSC Revenues and Surplus

Overall, the OSC is forecasting revenues in 2012-2013 to increase by 9.2% from 2011-2012 actual revenues. This forecast reflects the fee increases in place for the coming year and a market growth assumption of 5%. When the OSC reset fee rates for three years in April 2010, fees were set at levels to generate revenues that would be below expected costs. The intent was to reduce the surplus that had been accumulated in the prior three year period. Based on the projected revenues and proposed 2012-2013 OSC Budget, the OSC expects to operate at a deficit in 2012-2013. As a result, the OSC surplus is projected to be $7.0 million as at March 31, 2013.

2012 -- 2013 Budget Approach

The 2012-2013 OSC Budget is focused on investment in the key strategies identified in its recently completed three year OSC Strategic Plan. While these initiatives will be staffed in part through redeployment of existing resources, the scope of the initiatives is such that more resources will be needed and are reflected in the budget.

The budget reflects a projected increase of $10.0 million or 11.1% over 2011-2012 spending and 10.2% above the 2011-2012 budget. Salaries and benefits, which comprise $74.8 million or 74.8% of the budget, reflect an increase of $5.4 million or 7.7% over 2011-2012 spending. The increase in salaries and benefits cost reflects:

• new positions approved to achieve the strategic initiatives

• full-year costs for vacancies and staff hired throughout 2011-2012, and

• higher projected restructuring costs.

The 2012-2013 budget includes funding for new staff focused in the following areas to:

• address market structure issues that are increasing both in number and complexity

• establish and staff a new Office of the Investor

• set up an accredited chartered accountant training program, and

• provide analytical and research support to allow the OSC to undertake a more fact based approach.

These initiatives will support the regulatory results the OSC is seeking. The OSC is committed to becoming a 21st century regulator and needs to attract, retain and motivate staff with the required skills and experience. The OSC believes that becoming a leading employer will help it attract skilled staff. Therefore, resources have been allocated to various human resources initiatives with the goal to create the appropriate organizational structure and development environment.

The significant increase in the capital budget primarily reflects the build-out of recently acquired additional space as well as the realignment and refurbishment of the OSC's existing space. The budget also includes considerable investments to support upgrading and expansion of our information technology which will help to facilitate excellence in the execution of the OSC's operations.

OSC Staff Notice 33-737 -- Enhanced Transparency of Communications with Registrants

OSC STAFF NOTICE 33-737:

ENHANCED TRANSPARENCY OF COMMUNICATIONS WITH REGISTRANTS

Background

The mandate of the Ontario Securities Commission (the OSC) is to protect investors from unfair, improper and fraudulent practices, and to foster fair and efficient capital markets and confidence in capital markets. Staff of the OSC is committed to increasing the transparency with which it interacts with its stakeholders, including firms registered under the Securities Act (Ontario) (the Act), as part of an ongoing effort to further its mandate.

Under Part XI of the Act, the Director is responsible for making decisions concerning the registration status of individuals and firms who are required to be registered under the Act or who are seeking registration under the Act (registrants). The Director is an administrative official, and is defined in subsection 1(1) of the Act as the Executive Director of the Commission, a Director or Deputy Director of the Commission, or a person employed by the Commission in a position designated by the Executive Director as a Director.

When staff recommends that the Director refuse, amend, or suspend an individual's registration, or impose terms and conditions on an individual's registration, staff will send the registrant a letter providing written notice of its recommendation and brief reasons for it (the Letter of Brief Reasons). Section 31 of the Act then gives the registrant the right to be heard by the Director before a decision is made concerning staff's recommendation.

Historically, the OSC would send the Letter of Brief Reasons only to the individual registrant. The OSC would send a brief written notice to the registrant's sponsoring firm indicating staff's recommendation and advising the firm of the individual's right to be heard. In these notices, staff did not include any of the reasons underlying its recommendation, noting only that reasons had been communicated to the individual registrant.

What's New

Registrants are advised that, effective immediately, staff will now also be sending a copy of the Letter of Brief Reasons to the sponsoring firm. This copy will be sent to the sponsoring firm at the same time that the Letter of Brief Reasons is sent to the registrant.

Reason for Change in Process

In staff's view, providing registered firms with the Letter of Brief Reasons will promote the accuracy and completeness of information provided in respect of individuals they sponsor, thereby assisting firms in fulfilling their obligations under s. 5.1 of National Instrument 33-109 Registration Information.

Staff is of the view that investor protection will be enhanced by communicating important information about individual registrants and applicants to the registered firms responsible under Ontario securities law for supervising these individuals.

Questions

If you have any questions regarding the contents of this notice, please refer them to any of the following:

June 28, 2012

Peter Beck et al.

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

PETER BECK, SWIFT TRADE INC. (continued as

7722656 Canada Inc.), BIREMIS, CORP.,

OPAL STONE FINANCIAL SERVICES S.A.,

BARKA CO. LIMITED, TRIEME CORPORATION and

CALM OCEANS L.P.

AMENDED NOTICE OF HEARING

TAKE NOTICE THAT the Ontario Securities Commission (the "Commission") will hold a hearing pursuant to sections 127(1) and 127.1 of the Ontario Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act") at the offices of the Commission at 20 Queen Street West, 17th Floor Hearing Room on a date to be determined by the Commission:

TO CONSIDER whether, in the opinion of the Commission, it is in the public interest, pursuant to sections 127 and 127.1 of the Act, for the Commission to order that:

a. trading in any securities by the Respondents cease permanently or for such period as the Commission may order, pursuant to paragraph 2 of section 127(1);

b. acquisition of any securities by the Respondents is prohibited permanently or for such period as the Commission may order, pursuant to paragraph 2.1 of section 127(1);

c. any exemptions contained in Ontario securities law do not apply to the Respondents permanently or for such period as the Commission may order, pursuant to paragraph 3 of section 127(1);

d. the Respondents submit to a review of their practices and procedures and institute such changes as may be ordered by the Commission, pursuant to paragraph 4 of section 127(1);

e. the Respondents be reprimanded, pursuant to paragraph 6 of section 127(1);

f. Peter Beck resign any and all positions that he holds as a director or officer of an issuer or registrant pursuant to paragraph 7 and 8.1 of section 127(1);

g. Peter Beck be prohibited from becoming or acting as a director or officer of any issuer or registrant pursuant to paragraph 8 and 8.2 of section 127(1);

h. the Respondents be prohibited from becoming or acting as a registrant or as a promoter, pursuant to paragraph 8.5 of section 127(1);

i. each Respondent pay an administrative penalty of not more than $1 million for each failure by that Respondent to comply with Ontario securities law, pursuant to paragraph 9 of section 127(1);

j. each Respondent disgorge to the Commission any amounts obtained as a result of non-compliance by that Respondent with Ontario securities law, pursuant to paragraph 10 of section 127(1);

k. the Respondents be ordered to pay the costs of the Commission investigation and hearing, pursuant to section 127.1; and

l. such other orders as the Commission deems appropriate.

BY REASON OF the allegations set out in the Amended Statement of Allegations of Staff of the Commission dated June 19, 2012 and such additional allegations as counsel may advise and the Commission may permit;

AND TAKE FURTHER NOTICE that any party to the proceedings may be represented by counsel at the hearing;

AND TAKE FURTHER NOTICE that upon failure of any party to attend at the time and place aforesaid, the hearing may proceed in the absence of that party and such party is not entitled to any further notice of the proceedings.

DATED at Toronto this 19th day of June, 2012.

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

PETER BECK, SWIFT TRADE INC. (continued as

7722656 Canada Inc.), BIREMIS, CORP.,

OPAL STONE FINANCIAL SERVICES S.A.,

BARKA CO. LIMITED, TRIEME CORPORATION and

CALM OCEANS L.P.

AMENDED STATEMENT OF ALLEGATIONS OF STAFF

OF THE ONTARIO SECURITIES COMMISSION

1. Staff of the Ontario Securities Commission ("Staff") make the following allegations with respect to Peter Beck ("Beck"); Swift Trade Inc. (continued as 7722656 Canada Inc.)("Swift Trade"); Biremis, Corp. ("Biremis"); Opal Stone Financial Services S.A. ("Opal Stone"); Barka Co. Limited ("Barka"); Trieme Corporation ("Trieme"); and Calm Oceans L.P. (a limited partnership referred to herein as "Anguilla LP") (collectively, the "Swift Trade Group" or "Group").

I. Overview of Allegations

2. Beck is the directing mind of the Swift Trade Group which operates a high-volume, multi-national, securities day-trading business with a culture of regulatory non-compliance. Beck and his family incorporated or otherwise constituted each of the members of the Group, and organized their business operations using a complex, repeatedly changing structure. The organization of the Group's business operations inhibits transparency and impedes regulatory oversight of the Group's trading activities. The Group has operated with a deficient system of controls and supervision, and in breach of the requirement to be registered under Ontario securities law. Members of the Group have also failed to comply with other obligations applicable to them as registrants under Ontario securities law.

3. The Swift Trade Group has, according to Swift Trade, rapidly expanded the size of its day-trading operations. Beck started his day-trading operations in 1998, from a single office in Toronto. In 2008, the Group traded approximately 22 billion shares on global markets, using 4,500 (unregistered) individuals as its traders, operating from 190 offices around the world (including Canada, China, Europe, India, Israel, Kazakhstan, Nicaragua, Panama, and Russia). The Group directs its trading activities through technology located in Toronto. Key personnel in Toronto facilitate and support trading activities of the Group.

4. The lack of transparency in the Swift Trade Group's trading operations was exemplified in Swift Trade's interactions with Staff in connection with a compliance review by Staff (the "Compliance Review") and a review (the "Consultant's Review") by a consultant retained by Staff (the "Consultant"). Swift Trade failed to produce, or facilitate the production of, complete and accurate records pertaining to the trading operations of the Group, in response to repeated requests by Staff, and by the Consultant, even though it had been given lengthy periods of time to do so.

(i) The Compliance Review occurred in and around March, 2009 and related to compliance by Swift Trade, in 2008, with Ontario securities law. During the Compliance Review, Staff identified a number of significant deficiencies related to Swift Trade's compliance, many of which had the effect of obscuring Staff's regulatory oversight of Swift Trade's securities trading operations. These deficiencies included: instances where Swift Trade's records of fund transfers conflicted with Swift Trade's contractual arrangements for the flow of funds between members of the Swift Trade Group; failures by Swift Trade to reconcile its accounting records with the records of third-parties; and business transactions of Swift Trade that were incorrectly recorded.

(ii) The Consultant's Review was initiated in response to deficiencies identified in the Compliance Review and the lack of transparency in the Swift Trade Group's operations. The purpose of the Consultant's Review was to obtain a comprehensive understanding of the Group's business operations and affairs. The nature and scope of the Consultant's Review was specified in terms and conditions (the "ST Terms and Conditions") that were imposed on Swift Trade's registration by Staff, on December 21, 2009, for an aggregate period of 12 months. Pursuant to the ST Terms and Conditions, the Consultant repeatedly requested certain critical information about the Group's operations (detailed below) -- but this information was not produced.

5. In December 2010, Swift Trade participated in a series of corporate actions that resulted in its dissolution one week prior to the expiry of the ST Terms and Conditions. It did so without giving Staff advance notice -- and without completing the production of information requested by the Consultant pursuant to the ST Terms and Conditions.

6. The results of the Compliance Review, the Consultant's Review and the investigation conducted by Staff have disclosed that Beck and other members of the Swift Trade Group operate with a culture of non-compliance, in breach of Ontario securities law and contrary to the public interest as follows:

(i) Since at least 2008, and up to its dissolution, Swift Trade failed to establish, maintain and enforce policies and procedures necessary to establish a system of adequate controls and supervision to provide reasonable assurance that it complies with Ontario securities law, and to manage its risks in accordance with prudent business practices. The following deficiencies were specifically noted:

(a) In 2008, Swift Trade was deficient in the management of its financial affairs in that it failed to record its business transactions and financial affairs completely and accurately.

(b) Swift Trade failed to perform adequate monitoring of client trading activities for possible abusive or deceptive trading.

(c) Swift Trade failed to maintain or produce, upon request, complete and accurate financial records, including records which were necessary for Staff and the Consultant to complete their respective reviews.

(d) Swift Trade failed to implement adequate supervisory controls over the activities of its successive Directors of Finance, its designated compliance officer and its Chief Compliance Officer.

(ii) Since at least 2007, members of the Swift Trade Group have been engaging in extensive day-trading activities in breach of the dealer registration requirement (the "Dealer Registration Requirement") contained in section 25 of the Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act"){1}.

(iii) Since September 28, 2009, certain members of the Swift Trade Group have repeatedly extended credit or provided margin to their clients, contrary to section 13.12 of National Instrument 31-103 Registration Requirements and Exemptions ("NI 31-103").

II. The Respondents

7. What follows is a description of each of the members comprising the Swift Trade Group:

Peter Beck

8. From December, 2009 up until Swift Trade's dissolution in December, 2010, Beck was registered under the Act as the ultimate designated person (the "UDP") and dealing representative for Swift Trade.{2}Before that, Beck had been registered under the Act as the trading officer for Swift Trade since September, 2002, and he was also the designated compliance officer of Swift Trade from November 2004 to August 2006. Beck resides in Ontario.

9. Since 1998, Beck has been registered with the Financial Industry Regulatory Authority ("FINRA") or its predecessor, the National Association of Securities Dealers ("NASD"). Beck has been registered as a General Securities Representative and General Securities Principal of Biremis since 2004.

10. Beck has been the subject of two regulatory proceedings in the U.S. The first proceeding related to the involvement of Beck and an affiliate of Swift Trade (Swift Trade Securities USA Inc.) in certain "wash trading" activity. The second proceeding related to Beck's failure to investigate the employment history of an individual who was employed as the Controller for Biremis and who was subsequently convicted for crimes committed in Ontario. This individual also served as the Director of Finance for Swift Trade in 2008 (the "2008 Director of Finance").

Swift Trade Inc.

11. Swift Trade was a corporation incorporated under the laws of Ontario in 2002. Swift Trade was registered under the Act as an "exempt market dealer" (an "EMD") from September 28, 2009 until its dissolution in December, 2010. Before that, Swift Trade had been registered under the Act as a "limited market dealer" ("LMD") since September 18, 2002.

12. In December 2010, Swift Trade dissolved. Immediately prior to its dissolution, Swift Trade participated in a series of corporate actions which resulted in its continuation as 7722656 Canada Inc. On December 13, 2010, 7722656 Canada Inc. dissolved itself.

13. Until its dissolution, Swift Trade facilitated extensive day-trading operations from its office in Toronto (the "ST Toronto Office").{3}Since at least March, 2007, Swift Trade has had only two clients, Barka and Trieme (collectively "ST Related Clients"), neither of whom was at arm's-length with Swift Trade. Swift Trade is a subsidiary of a holding company, BRMS Holdings Inc. ("BRMS"). Beck is the Director and majority shareholder of BRMS. Beck was also the President and Director of Swift Trade.

Biremis, Corp.

14. Biremis is a corporation incorporated under the laws of Massachusetts in 2004. It does not maintain a functioning office in the U.S. Instead, Biremis operates out of the ST Toronto Office.{4}Biremis is registered with the U.S. Securities and Exchange Commission as a "broker-dealer" and is a licensed member of FINRA. Biremis day-trades large volumes of securities for its only client, Opal Stone, on Canadian marketplaces (the "Canadian Marketplaces"), and on marketplaces located outside of Canada (the "International Marketplaces"), which are predominantly located in the U.S. Swift Trade was a client of Biremis up until May, 2009. Biremis was an affiliate of Swift Trade prior to Swift Trade's dissolution. Biremis is a subsidiary of BRMS. Beck is the President and Director of Biremis. Beck and other senior officers of Biremis, including the current Controller and the current Chief Compliance Officer of Biremis, all reside in Ontario and maintain offices at the ST Toronto Office.

15. From 2008 to 2010, inclusive, Biremis has been the subject of four regulatory proceedings in the U.S. where it settled allegations made by FINRA. One of the proceedings related to the failure to investigate the employment history of its Controller as referred to in paragraph 10 above. The other three matters related to deficiencies in Biremis' transmission of certain electronic trade related data that it was required to send to FINRA.

Opal Stone Financial Services S.A.

16. Opal Stone is a corporation incorporated under the laws of Uruguay in 2007. It facilitates securities day-trading by clients who trade from locations in Ontario, across Canada and in countries around the world. Opal Stone is not registered under the Act or with any securities regulatory authority. Although it has an office located in Costa Rica, it retains the services of three non-arm's length administrative services companies that operate out of the ST Toronto Office (and also other locations): Orbixa, Omira Corporation S.A. (an affiliate of Biremis, incorporated in Costa Rica) and BlueChive. Swift Trade was a client of Opal Stone from May, 2009 up until its dissolution in December, 2010. Beck's father settled a private family trust which wholly owns Opal Stone. In or around 2007, Beck was the President of Opal Stone.

Barka Co. Limited

17. Barka is a corporation incorporated under the laws of Cyprus in 2004. Beck established Barka for his father. Barka was a non-arm's length client of Swift Trade. The sole purpose of Barka is to engage in the business of securities day-trading. In 2009, Barka retained 355 (unregistered) individual traders to trade on its behalf from 18 trading offices located in Ontario and across Canada. Beck's wife was the sole beneficial shareholder of Barka upon its incorporation. Since then, beneficial ownership of Barka has been held, at different times, by Beck's father, a trust that had no beneficiaries, and the estate of Beck's father.

Trieme Corporation

18. Trieme is a corporation incorporated under the laws of Ontario in 2005. Trieme was incorporated for the sole purpose of trading securities on its own behalf. It was a non-arm's length client of Swift Trade. Trieme has operated at least two trading offices and retained at least 24 individual (unregistered) traders to trade on its behalf. Trieme ceased all trading activities on November 30, 2010. Beck is the Director and sole shareholder of Trieme.

Anguilla LP

19. Calm Oceans L.P. (referred to herein as "Anguilla LP") is a limited partnership organized under the laws of Anguilla.{5}Barka is a limited partner. Anguilla LP has retained the individual traders in Ontario who previously traded on behalf of Barka and Trieme, to trade on its behalf.

III. Breaches of Ontario Securities Law and Conduct Contrary to the Public Interest

20. The Swift Trade Group's culture of non-compliance exposes parties with whom it trades, and the capital markets in which it trades, to potential harm. In this regard, the results of the Compliance Review, the Consultant's Review and Staff's investigation have disclosed that, since at least 2008, members of the Swift Trade Group have operated contrary to Ontario securities law.

A. Financial Management Deficiencies

21. Since at least 2008, and up to its dissolution, Swift Trade failed to establish, maintain and enforce policies and procedures necessary to establish a system of adequate controls and supervision to provide reasonable assurance that it complies with Ontario securities law, and also to manage its risks in accordance with prudent business practices. In failing to establish, maintain and enforce such system of controls and supervision, Swift Trade breached Ontario securities law and acted contrary to the public interest.

22. Swift Trade's conduct was contrary to the requirements of Ontario securities law and in particular, sections 1.2, 1.3 and 3.1 of the then applicable OSC Rule 31-505Conditions of Registration ("OSC Rule 31-505"). Since September 28, 2009, requirements for registered firms to establish, maintain and enforce adequate policies and procedures that establish a system of controls and supervision have been set out in section 11.1 of NI 31-103. Swift Trade's conduct was also contrary to the public interest.

23. In 2008, Swift Trade failed to properly record its business transactions and financial affairs completely and accurately and thereby inhibited regulatory oversight. These failures included:

(i) Failure to reconcile its accounting records with those of third-party service providers. In particular, the 2008 Director of Finance failed to reconcile:

(a) Its records of settlement amounts for trades executed by it for its ST Related Clients with its own bank statements;

(b) Records of amounts actually paid to the individual traders, and their trade location managers, for ST Related Clients with internal records showing amounts owed to such traders and their managers;

(c) Its records of ST Related Client security deposits with the actual amounts shown in its bank statements;

(d) Bank balances recorded in its general ledger with the actual balances shown in its bank statements.

(ii) Incorrect accounting entries. In particular: investments totalling approximately $550,000 actually belonging to Swift Trade's parent company, BRMS, were recorded in Swift Trade's accounting records as belonging to Swift Trade.

24. Until its dissolution, Swift Trade had a high rate of turn-over in its finance personnel. In the six years prior to its dissolution, Swift Trade had four different Directors of Finance.

25. In 2009 and 2010, Swift Trade's policies and procedures and supervisory controls remained deficient. In those two years, Swift Trade had two successive Directors of Finance. Neither of these Directors of Finance was able to provide complete or satisfactory responses when questioned about the Swift Trade Group's structure and operations by Staff and the Consultant during the Compliance Review and the Consultant's Review.

26. With respect to the matters referred to in paragraphs 23 to 25 above, Swift Trade and Beck also failed to adequately supervise Swift Trade's Directors of Finance.

27. Beck also failed to adequately supervise Swift Trade's process for hiring the 2008 Director of Finance, who had resigned from his previous employment where his conduct had been under investigation by his employer. This individual was subsequently convicted in Ontario of two counts of breach of public trust and one count of theft. At the same time, Beck also hired this individual to act as the Controller for Biremis, without adequately investigating his employment history.

28. Beck's failure to investigate this individual's employment history before hiring him as Biremis' Controller was the subject of FINRA's proceedings against Beck in late 2010. FINRA alleged that Biremis, acting through Beck, failed to establish, maintain and enforce a supervisory system and/or written supervisory procedures that were reasonably designed to investigate the background of prospective employees, follow-up on any red flags and achieve compliance with its registration and reporting obligations.

B. Failure to Perform Adequate Trade Reviews

29. In 2008, Swift Trade failed to perform adequate reviews of trading by ST Related Clients for possible instances of manipulative or deceptive trading activities, contrary to the requirements of Ontario securities law, and in particular, the then applicable OSC Rule 31-505 -- sections 1.2, 1.3 and 3.1 of the Rule -- and contrary to the public interest. In particular:

(i) In 2008, Swift Trade's compliance personnel were inadequately staffed to monitor trade orders involving billions of shares submitted by hundreds of individual traders for execution on Canadian Marketplaces and International Marketplaces. The compliance personnel consisted of only two individuals, each with limited compliance experience. One of these individuals served as the designated compliance officer (the "2008 CCO") of Swift Trade, and also as the Chief Compliance Officer for Biremis.

(ii) Swift Trade's 2008 CCO performed inadequate trade reviews for potential illegal trades known as "wash trades".{6}She relied upon reports with incorrect time stamps, despite the fact that such time stamps are critical for a wash trade analysis. She also limited her reviews by examining possible illegal trade patterns occurring within one trading day, instead of over multiple trading days.

(iii) Swift Trade's compliance personnel maintained unclear and insufficient records of trade review findings, including findings that may have suggested the occurrence of "spoofing", "layering"{7}or other questionable trading being executed by Swift Trade on behalf of the hundreds of individual traders trading on behalf of its ST Related Clients.

30. Swift Trade had a high rate of turn-over in compliance personnel. In the six years preceding its dissolution, Swift Trade had six different individuals act as its designated or registered chief compliance officer.{8}

31. During the Compliance Review, the 2008 CCO (who continued in that role during the Compliance Review) could not demonstrate to Staff that she possessed adequate knowledge about the complex structure and operations of the Swift Trade Group or the trade supervision issues noted above.

32. For the period from 2009 to 2010, compliance personnel in Toronto performed certain trade reviews for Swift Trade and Biremis and, in some instances, Opal Stone. Again, these trade reviews were inadequate for the purpose of identifying possible illegal and abusive trading on Canadian Marketplaces. By failing to perform adequate trade reviews, Swift Trade was in breach of the requirements of Ontario securities law, and in particular, the provisions of the then applicable OSC Rule 31-505 (referred to in paragraph 29 above) and/or section 11.1 of NI 31-103.{9}By failing to perform adequate trade reviews, Swift Trade also acted contrary to the public interest. Similarly, by failing to perform adequate trade reviews, Biremis and Opal Stone also acted contrary to the public interest.

33. In particular, in response to certain complaints received by Staff, Staff identified for Swift Trade patterns of irregular trading activity in relation to 11 securities originating from the Swift Trade Group on Canadian Marketplaces which occurred in the period from January, 2009 to March, 2010. This activity included possible spoofing and layering.

34. The compliance personnel in Toronto had failed to detect these patterns of irregular trading activity in 10 of the 11 securities identified by Staff. In the one instance where the compliance personnel had detected irregular trading, they limited the scope of their enquiries and also failed to adequately record the results of these limited enquiries.

35. Swift Trade was unable, upon the request of Staff, to demonstrate that it performed adequate trade reviews for specific periods in 2009 and 2010.

36. With respect to the matters referred to in paragraphs 29 to 35 above, Swift Trade and Beck also failed to supervise Swift Trade's designated compliance officer and registered compliance officer from 2008 to 2010.

37. By failing to perform adequate trade reviews, Swift Trade, and other members of the Swift Trade Group increase the risk that they also failed to detect and prevent possible abusive and illegal trading activity in the billions of shares that were traded annually, by the thousands of (unregistered) traders, on behalf of their clients. This risk, in turn, undermines the integrity of the capital markets in Ontario and elsewhere.

C. Failure to Maintain or Produce Complete and Accurate Records

38. Swift Trade was unable to produce any of the following records that were requested by Staff in their Compliance Review or by the Consultant in the Consultant's Review (the "Missing Records"):

(i) Any brokerage statements pertaining to trades on European and Asian Marketplaces, and certain brokerage statements pertaining to trades on Canadian Marketplaces;

(ii) Documents supporting or explaining fund transfers from and to bank accounts of the Swift Trade Group and payments to individual traders;

(iii) Records relating to the performance of accounting reconciliations of trading profits attributable to the individual traders and their trading office managers, who act on behalf of the ST Related Clients and clients of Opal Stone, as detailed above; and

(iv) Certain financial statements and general ledgers for Swift Trade, Barka, Trieme, Opal Stone, Orbixa and BlueChive.

39. By failing to produce the Missing Records, which it was required to keep under section 19 of the Act, Swift Trade failed to comply with subsection 19(3) of the Act.

40. Under the ST Terms and Conditions, Swift Trade was required to provide and facilitate access to the books, records and documents of the Swift Trade Group and also Orbixa and BlueChive. During the Consultant's Review, the Consultant was limited by Swift Trade's failure to provide the Missing Records that were requested by the Consultant.

41. With respect to the matters referred to in paragraph 38 above, during the corresponding periods from 2008 to 2010, Swift Trade and Beck also failed to supervise Swift Trade's designated compliance officer and chief compliance officer in the performance by these officers of their regulatory obligations.

D. Breach of the Dealer Registration Requirement in Section 25 of the Act

42. Since at least 2008, the Swift Trade Group has engaged, and certain members of the Group continue to engage in, the trading of billions of shares based on trade orders submitted by thousands of (unregistered) individual day-traders located around the world. All trade orders of these individual traders are transmitted and received electronically through servers in Toronto and routed for execution on Canadian Marketplaces and on International Marketplaces.

43. The allegations below concern the transmission and execution of sale orders by members of the Swift Trade Group on International Marketplaces, where such sale orders were not transmitted and executed through appropriately registered dealers under the Act. Such trading activity continues to be conducted by certain members of the Group. None of the members of the Group were then ? or are now ? appropriately registered under the Act to engage in these trading activities.

Changing Trade Flows

44. Members of the Swift Trade Group have entered into agreements setting out the relationships and responsibilities for the transmission and execution of trade orders (the "Trade Flows") on Canadian Marketplaces and on International Marketplaces. Through the technology involved, these Trade Flows happen on a virtually instantaneous basis. The diagrams below depict the Group's repeatedly changing Trade Flows.

Prior to September, 2007

45. Prior to September, 2007, all trade orders were transmitted by the individual traders for each client to Swift Trade (operating from the ST Toronto Office) and then by Swift Trade to Biremis (also operating from the ST Toronto Office) for execution on International Marketplaces, as follows:

Trade routing technology operating in Ontario

September, 2007 to May, 2009

46. Between September, 2007 and May, 2009, the Trade Flows involved Opal Stone, and included trades that were executed on Canadian Marketplaces, as follows:

Trade routing technology operating in Ontario

May, 2009 to December, 2010

47. Between May, 2009 and December, 2010, the Trade Flows changed again, as follows:

Trade routing technology operating in Ontario

Since December, 2010

48. In or about December, 2010, the ST Related Clients terminated their trading relationship with Swift Trade and entered into direct relationships with Opal Stone.

49. In or about December, 2010, Barka discontinued using individual traders to trade on its behalf and its former traders began trading on behalf of a new limited partnership, Anguilla LP. As noted above, Barka is a limited partner in Anguilla LP. Trieme also ceased its trading activities, and its former traders were retained by Anguilla LP to trade on its behalf.

50. Staff understands that, as of December, 2010, the Trade Flows changed again, as follows:

Trade routing technology operating in Ontario

51. In all of the above Trade Flows, regardless of the location of the traders submitting the trade orders, the trade orders were transmitted by traders to servers located in Ontario used by Biremis. Biremis then routed these trade orders for execution on either Canadian Marketplaces or International Marketplaces. In each case, Biremis attached its electronic identification marker on the trade orders.

Breaches of the Dealer Registration Requirement in Particular

52. The nature of the breaches of the Dealer Registration Requirement by the various members of the Swift Trade Group associated with the various Trade Flows are as follows:

(i) Biremis

(a) Since at least 2007, Biremis has been receiving sale orders from clients, including clients with trading offices located in Ontario, using electronic day-trading systems located in Ontario. Biremis has then been executing these orders on International Marketplaces in circumstances for which it had no exemption from the Dealer Registration Requirement.

(b) Biremis is not and has never been registered under the Act. By engaging in these trading activities, Biremis is in breach of the Dealer Registration Requirement.

(ii) Opal Stone

(a) Since at least 2007, Opal Stone has been receiving sale orders from its clients, (including, since May, 2009, clients with trading offices located in Ontario), using electronic day-trading systems located in Ontario. Such sale orders have then been processed through Biremis in Ontario for execution over International Marketplaces in circumstances for which Opal Stone has had no exemption from the Dealer Registration Requirement.

(b) Opal Stone is not and has never been registered under the Act. By engaging in these trading activities, Opal Stone is in breach of the Dealer Registration Requirement.

(iii) Swift Trade

(a) From May, 2009 until its dissolution in December, 2010, Swift Trade was a client of Opal Stone. Swift Trade received and transmitted orders to sell securities from ST Related Clients for execution on International Marketplaces. Swift Trade then processed these orders through Opal Stone and Biremis for execution on International Marketplaces in circumstances for which it had no exemption from the Dealer Registration Requirement.

(b) By engaging in these trading activities, Swift Trade acted outside the scope of its registration and breached the Dealer Registration Requirement.

(iv) ST Related Clients: Barka and Trieme

(a) From May, 2009 (when Swift Trade became a client of Opal Stone) until just prior to Swift Trade's dissolution in December, 2010, the ST Related Clients transmitted to Swift Trade orders to sell securities which were executed on International Marketplaces. Swift Trade processed these orders through Opal Stone and Biremis for execution on International Marketplaces in circumstances for which neither the ST Related Clients nor Swift Trade had any available exemption from the Dealer Registration Requirement.

(b) Neither Barka nor Trieme has ever been registered under the Act. By engaging in these trading activities, these ST Related Clients breached the Dealer Registration Requirement.

(v) Anguilla LP

(a) Since December, 2010, Anguilla LP has been transmitting orders to sell securities which are eventually executed through Biremis on International Marketplaces. Staff understands that Opal Stone has been processing these orders for execution through Biremis on International Marketplaces in circumstances for which Anguilla LP has no available exemption from the dealer registration requirement in the Act.

(b) Anguilla LP has never been registered under the Act. By engaging in these trading activities, Anguilla LP is in breach of the Dealer Registration Requirement.

E. Prohibited Conduct in Extending Credit or Providing Margin to a Client

53. During the period from September 28, 2009 to November 30, 2010, shortly before Swift Trade's dissolution, Swift Trade, while registered as an EMD, extended credit or provided margin to clients on a frequent and daily basis. Such conduct is contrary to section 13.12 of NI 31-103, which prohibits a registrant from lending money, extending credit or providing margin to a client. This prohibition came into effect on September 28, 2009 and is intended to prevent registrants from exposing themselves to associated solvency risks. These solvency risks may detrimentally impact clients, counterparties and the integrity of the capital markets.

54. It is Staff's position, as detailed above, that Biremis and Opal Stone were required to be registered under the Act and, as such, were subject to the prohibition against extending credit or providing margin to clients contained in section 13.12 of NI 31-103.{10}Since September 28, 2009, Biremis and Opal Stone have extended credit or provided margin to clients in breach of section 13.12 of NI 31-103.

55. For certain trades that were directed in accordance with the Trade Flow depicted in paragraph 47, above, Biremis extended credit to its client, Opal Stone, in breach of section 13.12 of NI 31-103. Opal Stone, in turn, extended credit to its client, Swift Trade, in breach of section 13.12 of NI 31-103. Swift Trade, in turn, extended credit to the ST Related Clients, in breach of section 13.12 of NI 31-103. They did so by allowing their respective clients to engage in trading activities that resulted in exposure to open security positions for each firm. In each case, this exposure was in excess of the value of amounts held on account of each of their respective clients.

F. Beck's Non-Compliance with Ontario Securities Law

56. Beck has not complied with Ontario securities law because:

(i) as a director or officer of each of Swift Trade, Biremis and Trieme, Beck authorized, permitted or acquiesced in the non-compliance with Ontario securities law by these companies in the circumstances described above, and as such is deemed by section 129.2 of the Act to also have not complied with Ontario securities law; and

(ii) as the registered UDP of Swift Trade, in the period from December, 2009 until the dissolution of Swift Trade in December, 2010, Beck failed to adequately supervise the activities of Swift Trade and each individual acting on its behalf to ensure their compliance with Ontario securities law, contrary to section 5.1 of NI 31-103.

IV. Conclusion

57. By reason of the foregoing, Beck, Swift Trade, Biremis, Opal Stone, Barka, Trieme and Anguilla LP engaged in significant breaches of Ontario securities law and engaged in conduct contrary to the public interest.

58. Staff reserve the right to make such other allegations as Staff may advise and the Commission may permit.

DATED AT TORONTO this 19th day of June, 2012

{1} Effective September 28, 2009, subsection 25(1) of the Act prohibits a person or company from engaging in the business of trading in securities unless the person or company is registered in accordance with Ontario securities law. Before that, subsection 25(1) of the Act prohibited a person or company from trading in a security unless the person or company was registered.

{2} The registration category of UDP came into effect on September 28, 2009 with the coming into force of NI 31-103. Swift Trade was first registered under its previous name, "Biremis Corporation", but subsequently changed its name to "Swift Trade Inc."

{3} Swift Trade uses equipment located at the ST Toronto Office and elsewhere in Toronto. Swift Trade retained the services of two Ontario companies that also operate out of the ST Toronto Office: an affiliate, Orbixa Management Services Inc. ("Orbixa"), and BlueChive Processing Corporation ("BlueChive"). Orbixa is a subsidiary of BRMS Holdings Inc. Beck is the Director and the majority shareholder of BRMS Holdings Inc. Although his mother-in-law is its President and owner, Beck controls BlueChive.

{4} Biremis used and continues to use equipment located at the ST Toronto Office and elsewhere in Toronto. Biremis retained and continues to retain the services of Orbixa, which operates out of the ST Toronto Office.

{5} The General Counsel for members of the Swift Trade Group has referred to this entity as "Anguilla LP".

{6} "Wash trade" is the term commonly used to describe a trade where, following the trade, there is no change in beneficial or economic ownership of the securities traded, resulting in a misleading appearance of trading activity.

{7} "Spoofing" and "layering" are terms commonly used to describe activities that aim to affect the "bid" and/or "offer" price for a security. Such activities are designed to temporarily manipulate the price of a security in order to deceive other market participants into executing disadvantageous trades.

{8} The registration category of chief compliance officer came into force on September 28, 2009 with the coming into force of NI 31-103. Before that, registered dealers were required to designate a registered partner or officer of the dealer to perform this function.

{9} Requirements for registered firms to establish and enforce adequate supervisory controls and policies and procedures are set out in Part 11 of NI 31-103, which came into effect on September 28, 2009.

{10} Subsection 1(1) of the Act defines a "registrant" as a person or company registered or required to be registered under the Act. As a result, a person or company required to be registered under the Act is also subject to requirements of Ontario securities law that apply to registrants.

Peter Beck et al. -- ss. 127, 127.1

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

PETER BECK, SWIFT TRADE INC. (continued as

7722656 Canada Inc.), BIREMIS, CORP.,

OPAL STONE FINANCIAL SERVICES S.A.,

BARKA CO. LIMITED, TRIEME CORPORATION and

CALM OCEANS L.P.

AND

IN THE MATTER OF

A SETTLEMENT AGREEMENT

BETWEEN STAFF AND THE RESPONDENTS

NOTICE OF HEARING

(Sections 127 and 127.1 of the Securities Act)

TAKE NOTICE THAT the Ontario Securities Commission (the "Commission") will hold a hearing pursuant to sections 127 and 127.1 of the Ontario Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act") at the offices of the Commission at 20 Queen Street West, 17th Floor Hearing Room on Thursday, June 21, 2012 at 9:00 a.m., or as soon thereafter as the hearing can be held:

TO CONSIDER whether, in the opinion of the Commission, it is in the public interest, pursuant to sections 127 and 127.1 of the Act, for the Commission to order that:

AND TAKE NOTICE that the purpose of the hearing is for the Commission to consider whether it is in the public interest to approve the Settlement Agreement between Staff of the Commission and Swift Trade Inc. (continued as 7722656 Canada Inc.), Biremis, Corp., Opal Stone Financial Services S.A., Barka Co. Limited, Trieme Corporation and Calm Oceans L.P. (the "Respondents");

BY REASON OF the allegations set out in the Amended Statement of Allegations of Staff of the Commission dated June 19, 2012 and such additional allegations as counsel may advise and the Commission may permit;

AND TAKE FURTHER NOTICE that any party to the proceedings may be represented by counsel at the hearing;

AND TAKE FURTHER NOTICE that upon failure of any party to attend at the time and place aforesaid, the hearing may proceed in the absence of that party and such party is not entitled to any further notice of the proceedings.

DATED at Toronto this 20th day of June, 2012.

Peter Beck et al. -- ss. 127, 127.1

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

PETER BECK, SWIFT TRADE INC. (continued as

7722656 Canada Inc.), BIREMIS, CORP.,

OPAL STONE FINANCIAL SERVICES S.A.,

BARKA CO. LIMITED, TRIEME CORPORATION and

CALM OCEANS L.P.

AND

IN THE MATTER OF

A SETTLEMENT AGREEMENT

BETWEEN STAFF AND THE RESPONDENTS

AMENDED NOTICE OF HEARING

(Sections 127 and 127.1 of the Securities Act)

TAKE NOTICE THAT the Ontario Securities Commission (the "Commission") will hold a hearing pursuant to sections 127 and 127.1 of the Ontario Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act") at the offices of the Commission at 20 Queen Street West, 17th Floor Hearing Room on Thursday, June 21, 2012 at 9:00 a.m., or as soon thereafter as the hearing can be held:

TO CONSIDER whether, in the opinion of the Commission, it is in the public interest, pursuant to sections 127 and 127.1 of the Act, for the Commission to order that:

AND TAKE NOTICE that the purpose of the hearing is for the Commission to consider whether it is in the public interest to approve the Settlement Agreement between Staff of the Commission and Peter Beck, Swift Trade Inc. (continued as 7722656 Canada Inc.), Biremis, Corp., Opal Stone Financial Services S.A., Barka Co. Limited, Trieme Corporation and Calm Oceans L.P. (the "Respondents");

BY REASON OF the allegations set out in the Amended Statement of Allegations of Staff of the Commission dated June 19, 2012 and such additional allegations as counsel may advise and the Commission may permit;

AND TAKE FURTHER NOTICE that any party to the proceedings may be represented by counsel at the hearing;

AND TAKE FURTHER NOTICE that upon failure of any party to attend at the time and place aforesaid, the hearing may proceed in the absence of that party and such party is not entitled to any further notice of the proceedings.

DATED at Toronto this 20th day of June, 2012.

Canadian Securities Regulators Seek Comments on OTC Central Counterparty Derivatives Clearing Framework

FOR IMMEDIATE RELEASE

June 20, 2012

CANADIAN SECURITIES REGULATORS SEEK COMMENTS ON

OTC CENTRAL COUNTERPARTY DERIVATIVES CLEARING FRAMEWORK

Montréal -- The Canadian Securities Administrators (CSA) published today for comment CSA Consultation Paper 91-406 Derivatives: OTC Central Counterparty Clearing, which sets out the CSA Derivatives Committee's recommendations for central counterparty clearing of over-the-counter (OTC) derivatives transactions through regulated central counterparties (CCPs).

The paper details recommendations on issues such as: the process for determining which OTC derivatives should be subject to mandatory CCP clearing; the regulation and governance of CCPs; clearing member access; and risk management.

"The importance of bringing central clearing to OTC markets has been recognized by the G-20 as one of the reform elements in the ongoing effort to reduce systemic risk in the financial markets," said Bill Rice, Chairman of the CSA and Chairman and CEO of the Alberta Securities Commission. "This paper is part of the CSA's commitment to creating a Canadian solution to the question of central clearing,"

The paper is part of a series of papers by the CSA outlining policies designed to reduce systemic risk and improve the regulatory framework for OTC derivatives in Canada, Market participants are invited to submit their comments until September 21, 2012. All responses received will be published on the Autorité des marchés financiers (www.lautorite.qc.ca) and the Ontario Securities Commission (www.osc.gov.on.ca) websites.

Copies of the Consultation Paper are available on the following websites: Alberta Securities Commission, Autorité des marchés financiers, British Columbia Securities Commission, Manitoba Securities Commission, New Brunswick Securities Commission, Nova Scotia Securities Commission, Ontario Securities Commission and Saskatchewan Financial Services Commission.

The CSA, the council of the securities regulators of Canada's provinces and territories, co-ordinates and harmonizes regulation for the Canadian capital markets.

For more information:

Canadian Securities Regulators Seek Comments on the Potential Regulation of Proxy Advisory Firms

FOR IMMEDIATE RELEASE

June 21, 2012

CANADIAN SECURITIES REGULATORS SEEK COMMENTS ON

THE POTENTIAL REGULATION OF PROXY ADVISORY FIRMS

Montréal -- The Canadian Securities Administrators (CSA) today published for comment CSA Consultation Paper 25-401 Potential Regulation of Proxy Advisory Firms. The purpose of this consultation paper is to address specific concerns about the services provided by proxy advisory firms and their potential impact on Canadian capital markets, and to determine if, and how, these concerns should be addressed by Canadian securities regulators.

The CSA is seeking feedback on the following concerns that market participants, primary issuers and their advisors raised about proxy advisory firms:

• potential conflicts of interest;

• potential perceived lack of transparency;

• potential inaccuracies and limited engagement with issuers;

• potential corporate governance implications; and

• the extent of reliance by institutional investors on the recommendations provided by proxy advisory firms.

"This consultation is aimed at providing the CSA with more information from market participants to assist us in our analysis into the need for potential regulation of proxy advisory firms," said Bill Rice, Chair of the CSA and Chair and CEO of the Alberta Securities Commission. "The feedback will help us determine the validity of the concerns raised, consider their impact on the integrity of Canadian capital markets, and assess whether there is a need for a securities regulatory response."

The CSA also seeks comments on a range of possible securities regulatory responses and frameworks, if it is determined that a securities regulatory response is warranted.

The CSA Consultation Paper 25-401 is available on CSA members' websites. The comment period is open until August 20, 2012.

The CSA, the council of the securities regulators of Canada's provinces and territories, co-ordinates and harmonizes regulation for the Canadian capital markets.

For more information:

Peter Beck, Swift Trade et al. Settle with the Ontario Securities Commission

FOR IMMEDIATE RELEASE

June 21, 2012

PETER BECK, SWIFT TRADE ET AL. SETTLE

WITH THE ONTARIO SECURITIES COMMISSION

TORONTO -- The Ontario Securities Commission (OSC) today approved a settlement agreement reached between Staff and Peter Beck (Beck), Swift Trade Inc. (continued as 7722656 Canada Inc.) (Swift Trade), Biremis Corp. (Biremis), Opal Stone Financial Services S.A. (Opal Stone), Barka Co. Limited (Barka), Trieme Corporation (Trieme) and Calm Oceans L.P. (Calm Oceans) (collectively, the Swift Trade Group).

Beck was the co-founder and President of Swift Trade. He was the directing mind of the company and at various times, he, or a member of his family, had a direct or indirect ownership interest in each of the other Respondents.

In the settlement agreement, Swift Trade, under the direction of Beck, admitted to breaching the Securities Act (Ontario) in relation to supervisory, internal control and other compliance obligations, as well as requirements to provide information to the Commission. Beck also admitted to having not complied with Ontario securities law as a director or officer of Swift Trade.

In particular, admissions were made to the following breaches of Ontario securities law:

• Beck and Swift Trade failed to hire, retain and supervise adequate finance and compliance personnel;

• Swift Trade was deficient in the management of its financial affairs; and,

• Swift Trade had inadequate compliance practices for the period of 2008 to 2010, and it failed to perform, or demonstrate that it had performed, adequate reviews of trading for possible instances of manipulative or deceptive trading activities.

Beck and the other members of the Swift Trade Group also acknowledged that, at various times, from 2007 until 2011, they acted contrary to the public interest in relation to the dealer registration requirement by receiving and/or transmitting sale orders for execution on international marketplaces without the use of appropriately registered dealers.

Under the terms of the settlement agreement, Beck and the other members of the Swift Trade Group must pay an administrative penalty of $100,000, plus $300,000 towards the costs of Staff's investigation. Furthermore, each member of the Swift Trade Group is banned from becoming or acting as a registrant for periods varying from two to six years, and Swift Trade, Biremis, Opal Stone, Barka and Trieme are banned from trading or acquiring securities for periods varying from four to six years. Beck was reprimanded and is banned, for a period of two years, from becoming or acting as a director or officer of a registrant.

Beck and other members of the Swift Trade Group have also given an undertaking to the Commission that any orders to purchase or sell securities that pass through Ontario will proceed directly through a registered investment dealer. Additionally, none of the members will use, from any location in Ontario, their own trading related servers to receive or transmit orders to purchase or sell securities. They have also undertaken to abide by certain restrictions relating to the control of any Ontario registrants for periods that correspond to their respective prohibitions.

A copy of the Settlement Agreement and Order of the Commission in this matter are available on the OSC website at www.osc.gov.on.ca.

The mandate of the OSC is to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets. Investors are urged to check the registration of any person or company offering an investment opportunity and to review the OSC's investor materials available at www.osc.gov.on.ca.

For Media Inquiries:

For Investor Inquiries:

Peter Beck et al.

FOR IMMEDIATE RELEASE

June 20, 2012

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

PETER BECK, SWIFT TRADE INC. (continued as

7722656 Canada Inc.), BIREMIS, CORP.,

OPAL STONE FINANCIAL SERVICES S.A.,

BARKA CO. LIMITED, TRIEME CORPORATION and

CALM OCEANS L.P.

TORONTO -- The Office of the Secretary issued an Amended Notice of Hearing on July 19, 2012 setting the matter down to be heard on a date to be determined by the Commission.

A copy of the Amended Notice of Hearing dated June 19, 2012 and the Amended Statement of Allegations filed by Staff of the Ontario Securities Commission dated June 19, 2012 are available at www.osc.gov.on.ca.

For media inquiries:

For investor inquiries:

Peter Beck et al.

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

PETER BECK, SWIFT TRADE INC. (continued as

7722656 Canada Inc.), BIREMIS, CORP.,

OPAL STONE FINANCIAL SERVICES S.A.,

BARKA CO. LIMITED, TRIEME CORPORATION and

CALM OCEANS L.P.

TORONTO -- The Office of the Secretary issued an Amended Notice of Hearing for a hearing to consider whether it is in the public interest to approve a settlement agreement entered into by Staff of the Commission and Peter Beck, Swift Trade Inc. (continued as 7722656 Canada Inc.), Biremis, Corp., Opal Stone Financial Services S.A., Barka Co. Limited, Trieme Corporation and Calm Oceans L.P.

The hearing will be held on June 21, 2012 at 9:00 a.m. in Hearing Room B on the 17th floor of the Commission's offices located at 20 Queen Street West, Toronto.

A copy of the Amended Notice of Hearing dated June 20, 2012 and Notice of Hearing dated June 20, 2012 are available at www.osc.gov.on.ca.

For media inquiries:

For investor inquiries:

Peter Beck et al.

FOR IMMEDIATE RELEASE

June 21, 2012

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

PETER BECK, SWIFT TRADE INC. (continued as

7722656 Canada Inc.), BIREMIS, CORP.,

OPAL STONE FINANCIAL SERVICES S.A.,

BARKA CO. LIMITED, TRIEME CORPORATION and

CALM OCEANS L.P.

TORONTO -- Following a hearing held today, the Commission issued an Order in the above named matter approving the Settlement Agreement reached between Staff of the Commission and Peter Beck, Swift Trade Inc. (continued as 7722656 Canada Inc.), Biremis, Corp., Opal Stone Financial Services S.A., Barka Co. Limited, Trieme Corporation and Calm Oceans L.P..

A copy of the Order dated June 21, 2012 and the Settlement Agreement dated June 20, 2012 are available at www.osc.gov.on.ca.

For media inquiries:

For investor inquiries:

Firestar Capital Management Corp. et al.

FOR IMMEDIATE RELEASE

June 22, 2012

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

FIRESTAR CAPITAL MANAGEMENT CORP.,

KAMPOSSE FINANCIAL CORP.,

FIRESTAR INVESTMENT MANAGEMENT GROUP,

MICHAEL CIAVARELLA AND MICHAEL MITTON

TORONTO -- The Commission issued an Order in the above named matter which provides that (i) the hearing be adjourned to August 15, 2012 at 2:00 p.m., or such other date and time as agreed to by the parties and confirmed by the Office of the Secretary, for the purpose of continuing the confidential pre-hearing conference; and (ii) the Temporary Orders currently in place as against Firestar Capital, Kamposse, and Firestar Investment be further continued until August 16, 2012, or until further order of the Commission.

A copy of the Order dated June 20, 2012 is available at www.osc.gov.on.ca.

For media inquiries:

For investor inquiries:

Bunting & Waddington Inc. et al.

FOR IMMEDIATE RELEASE

June 22, 2012

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

BUNTING & WADDINGTON INC.,

ARVIND SANMUGAM, JULIE WINGET and

JENIFER BREKELMANS

TORONTO -- The Commission issued an Order in the above named matter which provides that this matter be adjourned to October 18, 2012 at 10:00 a.m. for continuation of the confidential pre-hearing conference to provide the panel with a status update and, if necessary, to hear any proper motions of Sanmugam.

The pre-hearing conference will be held in camera.

A copy of the Order dated June 19, 2012 is available at www.osc.gov.on.ca.

For media inquiries:

media_inquiries@osc.gov.on.ca

For investor inquiries:

New Hudson Television Corporation et al.

FOR IMMEDIATE RELEASE

June 25, 2012

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

NEW HUDSON TELEVISION CORPORATION,

NEW HUDSON TELEVISION L.L.C. &

JAMES DMITRY SALGANOV

TORONTO -- The Commission issued an Order in the above named matter which provides that (i) pursuant to subsection 127(8) of the Act, the Amended Temporary Order is extended to December 21, 2012; and (ii) the hearing to consider any further extension of the Amended Temporary Order will be held on December 20, 2012 at 10:00 a.m., or such other date and time as set by the Office of the Secretary.

A copy of the Temporary Order dated June 22, 2012 is available at www.osc.gov.on.ca.

For media inquiries:

For investor inquiries:

Simply Wealth Financial Group Inc. et al.

FOR IMMEDIATE RELEASE

June 25, 2012

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

SIMPLY WEALTH FINANCIAL GROUP INC.,

NAIDA ALLARDE, BERNARDO GIANGROSSO,

K&S GLOBAL WEALTH CREATIVE STRATEGIES INC.,

KEVIN PERSAUD, MAXINE LOBBAN AND

WAYNE LOBBAN

TORONTO -- Following the hearing on the merits, the Commission released its Reasons and Decision in the above named matter.

A copy of the Reasons and Decision dated June 21, 2012 is available at www.osc.gov.on.ca.

For media inquiries:

For investor inquiries:

David Charles Phillips and John Russell Wilson

FOR IMMEDIATE RELEASE

June 25, 2012

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF

DAVID CHARLES PHILLIPS AND

JOHN RUSSELL WILSON

TORONTO -- The Commission issued an Order in the above named matter which provides that the hearing of this matter is adjourned to Tuesday, August 28, 2012 at 2:30 p.m.

A copy of the Order dated June 25, 2012 is available at www.osc.gov.on.ca.

For media inquiries:

For investor inquiries:

Chapter 2 -- Decisions, Orders and Rulings

Wand Capital Corporation -- s. 1(10)

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Issuer deemed to no longer be a reporting issuer under securities legislation.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., s. 1(10).

June 20, 2012

Dear Sir:

The Applicant has applied to the local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions for a decision under the securities legislation (the Legislation) of the Jurisdictions that the Applicant is not a reporting issuer.

As the Applicant has represented to the Decision Makers that:

(a) the outstanding securities of the Applicant, including debt securities, are beneficially owned, directly or indirectly, by fewer than 15 security holders in each of the jurisdictions in Canada and fewer than 51 security holders in total in Canada;

(b) no securities of the Applicant are traded on a marketplace as defined in National Instrument 21-101 Marketplace Operation;

(c) the Applicant is applying for a decision that it is not a reporting issuer in all of the jurisdictions in Canada in which it is currently a reporting issuer; and

(d) the Applicant is not in default of any of its obligations under the Legislation as a reporting issuer,

each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met and orders that the Applicant is not a reporting issuer.

BMO Investments Inc. et al.

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted from the requirements of paragraphs 2.5(2)(a), and 2.5(2)(c) of National Instrument 81-102 to allow four specified top NI 81-102 mutual funds to invest up to 10% of their net assets in bottom fund. Bottom fund is an Ontario-domiciled mutual fund that has Qualified Foreign Institutional Investor status in China. Relief is analogous to the exemption provided in paragraph 2.5(3)(b) of NI 81-102. Exemption granted on the basis that bottom fund will comply with Parts 2, 4 and 6 of NI 81-102 and Part 14 of NI 81-106, concentration restriction for top funds and bottom fund portfolio disclosure available to top fund securityholders.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

National Instrument 81-102 Mutual Funds, ss. 2.5(2)(a), 2.5(2)(c), 2.5(3)(3)(b), 19.1.

National Instrument 81-106 Investment Fund Continuous Disclosure.

June 14, 2012

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the "Jurisdiction")

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

BMO INVESTMENTS INC. (the "Manager"),

BMO GREATER CHINA CLASS,

BMO EMERGING MARKETS FUND and

BMO HARRIS INTERNATIONAL EQUITY

PORTFOLIO and BMO HARRIS EMERGING

MARKETS EQUITY PORTFOLIO

(individually, a "Top Fund" and collectively, the

"Top Funds", together with the Manager, the "Filers")

DECISION

Background

1. The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") exempting the Top Funds from the prohibition contained in paragraphs 2.5(2)(a) and (c) of National Instrument 81-102 Mutual Funds ("NI 81-102") to permit each Top Fund to invest in BMO China A-Share Fund (the "Pooled Fund"), a mutual fund trust that is governed under the laws of Ontario, the units of which will be offered for sale in reliance upon applicable prospectus exemptions (the "Exemption Sought").

2. The conditions contained in paragraphs 2.5(2)(a) and (c) of NI 81-102 prevent a mutual fund from investing in another mutual fund the securities of which are not, and never have been, offered under a simplified prospectus in accordance with NI 81-101 Mutual Fund Prospectus Disclosure ("NI 81-101") or that is not governed by NI 81-102.

3. Under the Process of Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(i) the Ontario Securities Commission ("OSC") is the principal regulator for this application in accordance with section 4.2(a) of Multilateral Instrument 11-102 Passport System ("MI 11-102") and section 3.6(3)(a) of National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions ("NP 11-203"); and

(ii) the Filers have provided notice that section 4.7(1) of MI 11-102 is intended to be relied upon in each of the other jurisdictions in which relief is sought, namely British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.

Exemption Requested

4. In keeping with its investment objective, any Top Fund wishing to gain indirect exposure to the China A-share market may do so by investing in units of the Pooled Fund, provided the Exemption Sought is granted.

Interpretation

5. Defined terms contained in National Instrument 14-101 Definitions, National Instrument 31-103 Registration Requirements and Exemptions and Ongoing Registration Obligations, the Securities Act (Ontario) (the "OSA") or the securities legislation of each of the provinces and territories of Canada (individually, a "Jurisdiction" and collectively, the "Jurisdictions") have the same meaning if used in this decision, unless otherwise defined.

Representations

6. This decision is based on the following facts represented by the Filers:

BMO Investments Inc.

7. The Manager is a corporation amalgamated under the laws of Canada and is a wholly-owned indirect subsidiary of Bank of Montreal.

8. The Manager is registered as an investment fund manager in Ontario. It is registered as a mutual fund dealer in each jurisdiction of Canada and is a member of the Mutual Fund Dealers Association of Canada.

Top Funds

9. The Manager, or an affiliate of the Manager, is or will be the investment fund manager of the Top Funds and the trustee of the Top Funds that are organized as trusts. Unless it has received exemptive relief therefrom, each of the Top Funds complies with NI 81-102 and has prepared and filed fund facts, a simplified prospectus and an annual information form prepared in accordance with NI 81-101.

10. Securities of the various series of each of BMO Greater China Class and BMO Emerging Markets Fund are currently qualified for sale by fund facts, an amended and restated simplified prospectus, and amended and restated annual information form dated April 11, 2012 amended the fund facts, simplified prospectus and annual information form dated March 26, 2012 and the fund facts, simplified prospectus and annual information form dated May 28, 2012. Securities of the various series of each of the BMO Harris International Equity Portfolio and BMO Harris Emerging Markets Equity Portfolio are currently qualified for sale by fund facts, simplified prospectus and annual information form dated October 24, 2011, each as may be amended from time to time, and which have been filed and receipted in each jurisdiction of Canada.

11. Each of the Top Funds is a reporting issuer in each jurisdiction of Canada and is not in default under the securities legislation in force in any jurisdiction of Canada.

12. The investment objective of each of the Top Funds is set forth below:

BMO Greater China Class -- "to achieve long-term capital growth by investing primarily in equity securities of companies in Greater China, which includes the People's Republic of China, Hong Kong SAR and Taiwan, as well as in equity securities of companies that benefit from exposure to Greater China."

BMO Emerging Markets Fund -- "to increase the value of your investment over the long term by investing in companies located in countries undergoing rapid industrialization. As part of this fund's investment objective, it invests primarily in equities of companies in emerging countries like Brazil, Chile, Greece, India, Malaysia, Mexico, Pakistan, South Africa, South Korea, Taiwan and Turkey. It may also invest in fixed income securities."

BMO Harris International Equity Portfolio -- "to provide long-term capital appreciation by investing in a diversified portfolio of primarily equity securities of issuers throughout the world, other than in Canada and the United States."

BMO Harris Emerging Markets Equity Portfolio -- "to achieve long-term growth through capital appreciation through primarily investing in securities of companies in emerging markets or companies with a connection to emerging markets."

13. The Filers are seeking to permit the Top Funds to invest in the Pooled Fund.

14. Section 2.5 of NI 81-102 would permit the Top Funds to invest in the Pooled Fund, but for the fact that securities of the Pooled Fund are not qualified for distribution under NI 81-101 and the Pooled Fund is not governed by NI 81-102. However, the Pooled Fund will be fully compliant with Parts 2, 4 and 6 of NI 81-102. The Pooled Fund will not use derivatives which, were it governed by NI 81-102, would permit it to determine the series net asset value of its units on a weekly basis.

The Limits on Access to the Chinese Securities Markets

15. Historically, foreign investors interested in investing in China have only been able to invest in a very limited number of Hong Kong Stock Exchange listed securities.

16. By contrast, China's "A-share market" extends to both the Shanghai Stock Exchange and the Shenzhen Stock Exchange, which together offer the opportunity to invest in over 14 times as many listed companies.

17. The ability to invest in the securities ("A-shares") of locally-listed Chinese issuers will provide the Top Funds with much broader and more balanced exposure to the Chinese economy.

Qualified Foreign Institutional Investor Status

18. Foreign fund management institutions, insurance companies, securities companies and other asset management institutions may be permitted to invest in the China A-share market by applying to the China Securities Regulatory Commission ("CSRC") to be licensed as a Qualified Foreign Institutional Investor ("QFII") and applying to the State Administration of Foreign Exchange ("SAFE") for an investment quota ("Investment Quota").

19. Under the QFII regulations, a QFII may invest in shares listed and traded on a stock exchange, bonds listed and traded on a stock exchange, securities, investment funds, warrants listed and traded on a stock exchange and other financial instruments approved by the CSRC.

20. The Manager has obtained a QFII licence from CSRC and has been granted an Investment Quota by SAFE. The majority of the Pooled Fund's assets will be invested through this Investment Quota.

21. By providing indirect access to the A-Share market and other securities that are available only to those able to invest under a QFII licence, an investment in the Pooled Fund provides the Top Funds with an unique investment opportunity in a foreign jurisdiction that imposes significant investment restrictions on other foreign investors, making this situation analogous to the one contemplated in the exemption from paragraphs 2.5(2)(a) and (c) that is set out in paragraph 2.5(3)(b) of NI 81-102.

The QFII Program

22. A QFII is required to remit the entire investment principal for its Investment Quota into an account held in the People's Republic of China ("PRC") with a local Chinese sub-custodian bank within six months of the Investment Quota approval date. Following such remittance, the current practice under the QFII program, for an open-ended fund, imposes a period of three months during which the investment principal may not be repatriated (the "Repatriation Restriction Period") commencing from the day when the full amount equal to the Investment Quota is remitted into the PRC. Thereafter, repatriations are possible subject to the PRC laws and practice affecting a QFII's ability to move the proceeds of its investments outside of the PRC. Throughout the Repatriation Restriction Period, and thereafter, the Pooled Fund may freely trade the A-Shares of any issuer providing the proceeds are reinvested in A-Shares of another issuer.

23. Net realized profits for any fiscal year of a QFII fund can be repatriated at calendar year end provided that an annual audit is undertaken by a Chinese certified public accountant on the QFII's transaction history at the local Chinese sub-custodian bank and subject to payment of all applicable taxes and SAFE approval. The purpose of the audit is solely to determine the amount of the QFII fund's net realized profits that may be repatriated. All repatriations of gains and income on A-shares and other investment products (if any) require the approval of SAFE. The Manager will address this issue through the overall investment strategies of the Pooled Fund.

Investment Restrictions of the QFII Program

24. QFIIs are also subject to the following investment restrictions:

(a) A QFII may not acquire more than 10% of the outstanding shares of the same kind of a single issuer;

(b) The total holdings of the A-shares of a single issuer by all QFIIs under common control may not exceed 20% of such issuer's total issued shares; and

(c) A QFII may not make investments for the purpose of exercising control or management.

The Pooled Fund

25. The Pooled Fund is an Ontario-domiciled mutual fund trust in which the Top Funds would invest to obtain indirect exposure to the China A-share market.

26. The portfolio manager of the Pooled Fund will be Fullgoal Fund Management Co., Ltd. ("Fullgoal"), a company in which Bank of Montreal owns a minority interest. Fullgoal is a limited liability company formed in accordance with the Company Law of the PRC, the Securities Investment Fund Law of the PRC, the Procedures for the Administration of Securities Investment Fund Management Companies, the Guidelines (Trial) for Corporate Governance of Securities Investment Fund Management Companies and other relevant PRC laws and regulations as well as the relevant requirements of the CSRC. Its head office is located in Pudong New Area, Shanghai. Fullgoal is one of the first ten fund companies established in China and has significant experience and expertise managing investments in the PRC. It will be offering its investment advisory services in reliance upon the international adviser exemption set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

27. The Pooled Fund's investment objective is to achieve long-term capital appreciation through investing primarily in the securities of issuers established in, operating in, or that derive the majority of their revenue from with the People's Republic of China.

28. It is expected that the Pooled Fund's portfolio will be broadly diversified. The Pooled Fund will invest primarily in A-shares listed and quoted on the Shanghai and Shenzhen Stock Exchanges and other QFII eligible investments, including Chinese government and corporate debt securities. The Pooled Fund may invest the balance of its net assets in H-shares and Red Chip shares listed and quoted on the Hong Kong Stock Exchange and in cash and cash equivalents.

29. The Manager has entered into an investment advisory agreement with Fullgoal that requires Fullgoal to exercise its professional judgment (i.e., the degree of care, diligence and skill of a reasonable and prudent investment adviser) in carefully selecting investments for the Pooled Fund and the agreement provides for ongoing compliance and oversight of Fullgoal's activities by the Manager. Consistent with its oversight of the portfolio managers of all of the mutual funds it manages, the Manager has robust policies and procedures that it will apply in performing regular due diligence reviews of Fullgoal and monitoring the holdings of the Pooled Fund, to ensure compliance with the NI 81-102 investment restrictions and the QFII investment restrictions.

30. Units of the Pooled Fund will be offered to, among others, institutional and high net worth investors, open-ended retail mutual funds, exempt offered mutual funds and managed accounts managed by the Manager or by an affiliate of the Manager maintained for persons who constitute accredited investors or permitted purchasers as well as various BMO entities.

31. The Pooled Fund's units will be redeemable on each valuation day for the Pooled Fund (which is expected to be daily) in accordance with the provisions of the Pooled Fund's Declaration of Trust and as will be disclosed in the offering memorandum that will be provided to prospective investors in the Pooled Fund.

32. A redemption discount of 5% will be imposed if units are redeemed within the Repatriation Restriction Period. This redemption discount will be disclosed to prospective investors in the offering memorandum.

Rationale for the Exemption Requested

33. The Manager believes that it is in the best interests of the Top Funds to permit them to make investments in units of the Pooled Fund in order to gain indirect exposure to locally-listed Chinese stocks. Through the Pooled Fund's purchase of A-Shares the Top Funds will benefit from investment opportunities that they would not otherwise be able to access.

34. The investment objectives and strategies of the Pooled Fund make it a suitable investment option for the Top Funds.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:

(a) The Pooled Fund will comply with Parts 2, 4 and 6 of NI 81-102 and Part 14 of National Instrument 81-106 Investment Fund Continuous Disclosure;

(b) The Pooled Fund will make available to securityholders of the Top Funds, upon request and without charge, the top twenty-five holdings of the Pooled Fund as at the end of the first and third quarters of the financial year of the Pooled Fund, and the full investment portfolio of the Pooled Fund as at the end of the second quarter and the end of the financial year of the Pooled Fund.

(c) The Top Funds will comply with the conditions set out in section 2.5 of NI 81-102 in investing in the Pooled Fund, except for paragraphs 2.5(2)(a) and (c) and will include the disclosure mandated for mutual funds investing in other mutual funds in their respective prospectuses;

(d) A Top Fund will not invest in the Pooled Fund if, immediately after the investment, more than 10% of its net assets, taken at market value at the time of investment, would be invested in the Pooled Fund; and

(e) During the Repatriation Restriction Period, the Top Funds will treat the investment in the Pooled Fund as being an "illiquid asset" for the purposes for determining compliance with section 2.4 of NI 81-102.

First Asset Investment Management Inc. and First Asset Morningstar Emerging Markets Composite Bond Index ETF

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from subsection 2.1(1) and paragraphs 2.5(2)(a) and (c) of NI 81-102 to permit an exchange traded mutual fund to enter into forward agreements providing exposure to the portfolio of a reference fund -- Reference fund is not subject to NI 81-101 and NI 81-102, nor qualified for distribution in the same jurisdictions as the exchange traded mutual fund, contrary to paragraphs 2.5(2)(a) and (c) of NI 81-102 -- Exchange traded mutual fund prohibited by subsection 2.1(1) from being 100% exposed to the portfolio of the reference fund through the forward agreement -- Units of the reference fund sold only to the counterparty under the forward agreement on an exempt basis -- National Instrument 81-102 Mutual Funds.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.1(1), 2.5(2)(a) and (c), 19.1.

June 18, 2012

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(The Jurisdiction)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

FIRST ASSET INVESTMENT MANAGEMENT INC.

(the Filer)

AND

IN THE MATTER OF

FIRST ASSET MORNINGSTAR EMERGING MARKETS

COMPOSITE BOND INDEX ETF

(the Fund)

DECISION

Background

The securities regulatory authority or regulator in the Jurisdiction (Decision Maker) has received an application from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction (the Legislation) for an exemption under section 19.1 of the National Instrument 81-102 -- Mutual Funds (NI 81-102) from sections 2.1(1), 2.5(2)(a) and 2.5(2)(c) of NI 81-102 in respect of one or more forward purchase and sale agreements to be entered into for the purpose of providing the Fund with exposure to the portfolio of First Asset Morningstar Emerging Markets Bond Fund (the Reference Fund) (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission (OSC) is the principal regulator for the application herein; and

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Nunavut and Yukon (the Passport Jurisdictions).

Interpretation

Terms defined in National Instrument 14-101 -- Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer:

1. The Filer is a corporation governed by the laws of Ontario and is the investment fund manager, trustee and portfolio manager of the Fund and is the investment fund manager, trustee and portfolio manager of the Reference Fund. The head office of the Filer is located in Toronto, Ontario. The Filer is registered as an investment fund manager, a portfolio manager and an exempt market dealer under the Securities Act (Ontario).

The Fund

2. The Fund is organized as a trust and is a mutual fund within the meaning of the Legislation and similar legislation in each Passport Jurisdiction. The Fund is subject to NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities.

3. The Fund is qualified by a long form prospectus dated January 19, 2012. Upon the issuance of a receipt on January 20, 2012 for its final long form prospectus, the Fund became a reporting issuer in the Province of Ontario and each Passport Jurisdiction.

4. Pursuant to an amended and restated declaration of trust dated June 4, ,2012 and an amendment to the prospectus of the Fund dated June 5, 2012, the Fund changed its name from "XTF Morningstar Emerging Markets Composite Bond Index ETF" to "First Asset Morningstar Emerging Markets Composite Bond Index ETF".

5. The Fund is, and is generally described as, an exchange-traded fund. The units of the Fund are listed on the Toronto Stock Exchange.

6. Neither the Filer nor the Fund is in default of any of its obligations under the Legislation or similar legislation in any Passport Jurisdiction.

7. The Fund's investment objective is to provide investors with economic exposure, to the extent possible, to the performance of the Morningstar Emerging Market Composite Bond Index, net of expenses.

8. The Fund will seek to achieve its investment objective by investing the net proceeds of its continuous offering in a portfolio of common shares of Canadian public companies listed on the TSX that qualify as "Canadian securities" for purposes of the Tax Act (the "Common Share Basket"). The Fund will gain exposure to the portfolio of the Reference Fund by selling the Common Share Basket forward pursuant to one or more forward purchase and sale agreements (collectively, the Forward Agreement) with a Canadian chartered bank or an affiliate thereof (the Counterparty) with an approved credit rating, as defined in NI 81-102. Generally, the Forward Agreement will provide 100% exposure to the portfolio of the Reference Fund such that the return to the Fund and its unitholders is based on the return of the portfolio of the Reference Fund.

The Reference Fund

9. The Reference Fund is organized as a trust and is qualified by a non-offering long form prospectus dated May 4, 2012 filed with the OSC and Autorité des marchés financiers. Upon the issuance of a receipt on May 9, 2012 for its final non-offering prospectus, the Reference Fund became a reporting issuer in the Province of Ontario and Québec.

10. The Reference Fund does not intend to list its units on a stock exchange. Units of the Reference Fund will only be offered in reliance on exemptions from the applicable prospectus requirements. The only holder of units of the Reference Fund will be the Counterparty to the Forward Agreement with the Fund.

11. The Reference Fund is a mutual fund within the meaning of the Legislation and similar legislation in each Passport Jurisdiction because the holder of its units is entitled to receive, on demand, an amount computed by reference to the net asset value of the Reference Fund.

12. The Reference Fund is not in default of any of its obligations under the Legislation or similar legislation in any Passport Jurisdiction.

13. The Reference Fund does not and will not distribute any units under its final non-offering prospectus. Accordingly, the Reference Fund is a mutual fund to which National Instrument 81-106 -- Investment Fund Continuous Disclosure (NI 81-106) applies, but will not be subject to the requirements of either National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101). or NI 81-102.

14. The Reference Fund's investment objective is to replicate, to the extent possible, the Morningstar Emerging Markets Composite Bond Index, net of expenses. Accordingly, the investment objective and strategy of the Reference Fund is consistent with the Fund's investment objective.

15. Although the Reference Fund is a mutual fund for the purposes of Ontario and Québec securities law, it is not subject to NI 81-102 but will make investments as if it were subject to NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the securities regulatory authorities to the Fund.

16. In the absence of the Exemption Sought, the Fund would not be permitted to invest through the Forward Agreement in the Reference Fund because:

a. the indirect investment by the Fund of more than 10% of its net assets in securities of the Reference Fund would be contrary to the requirement in s. 2.1(1) of NI 81-102;

b. the Reference Fund is not subject to NI 81-101 or NI 81-102, contrary to the requirement of 2.5(2)(a) of NI 81-102; and,

c. the securities of the Reference Fund are not listed on any stock exchange and are not qualified for distribution in the Jurisdiction and the Passport Jurisdictions, contrary to the requirement in s. 2.5(2)(c) of NI 81-102.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted, provided that:

(a) the exposure of the Fund to the portfolio of the Reference Fund is in accordance with the fundamental investment objective of the Fund;

(b) the indirect investment by the Fund in securities of the Reference Fund is made in compliance with the requirements of NI 81-102 other than the requirements of sections 2.1(1), 2.5(2)(a) and 2.5(2)(c) of NI 81-102;

(c) the Reference Fund is a reporting issuer in the Jurisdiction and in Quebec subject to the requirements of NI 81-106;

(d) the Fund is subject to NI 81-102 and the Reference Fund operates in accordance with NI 81-102;

(e) the prospectus of the Fund discloses that the Fund will obtain exposure to securities of the Reference Fund and, to the extent applicable, the risks associated with such an investment; and

(f) no securities of the Reference Fund are distributed in Canada other than to the Counterparty under the Forward Agreement.

Franklin Templeton Investments Corp. and Wellington West Franklin Templeton Balanced Retirement Income Fund

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- approval for fund merger under 5.5 of NI 81-102 -- relief needed because merger will not meet pre-approval criteria -- the merger will not be tax deferred -- securityholders of terminating fund provided with timely and adequate disclosure regarding the merger

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6. 5.7(1)(b), 19.1.

June 21, 2012

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the "Jurisdiction")

AND

IN THE MATTER OF THE

PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

FRANKLIN TEMPLETON INVESTMENTS CORP.

(the "Manager") AND WELLINGTON WEST

FRANKLIN TEMPLETON BALANCED RETIREMENT

INCOME FUND (the "Terminating Fund" and with the

Manager, the "Filers")

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for approval of the merger (the "Merger") of the Terminating Fund into the Continuing Fund (as defined below) under section 5.5(1)(b) of National Instrument 81-102 Mutual Funds ("NI 81-102") (the "Exemption Sought").

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission ("OSC") is the principal regulator for this application, and

(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System ("MI 11-102") is intended to be relied upon in British Columbia, Alberta, Saskatchewan and Manitoba (the "Non-Principal Jurisdictions").

Interpretation

Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. The following additional terms shall have the following meanings:

"Continuing Fund" means Quotential Balanced Growth Portfolio;

"Effective Date" means the close of business on June 22, 2012 or as soon as practicable thereafter;

"Fund" or "Funds" means, individually or collectively, the Terminating Fund and the Continuing Fund;

"Tax Act" means theIncome Tax Act (Canada);

Representations

This decision is based on the following facts represented by the Filers:

1. The Manager is a corporation existing under the laws of Ontario having its registered head office in Toronto, Ontario.

2. The Manager is the manager of each of the Funds.

3. Each of the Funds is an open-ended mutual fund trust established under the laws of Ontario by a declaration of trust.

4. Units of the Terminating Fund are currently qualified for sale by a simplified prospectus, annual information form and fund facts document dated June 29, 2011, which have been filed and receipted in the Jurisdiction and each of the Non-Principal Jurisdictions.

5. Units of the Continuing Fund are currently qualified for sale by a simplified prospectus, annual information form and fund facts document dated June 20, 2011, as amended on December 7, 2011, which have been filed and receipted in Ontario and each of the Non-Principal Jurisdictions, as well as Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut.

6. The Continuing Fund and Terminating Fund are reporting issuers in Ontario and each of the Non-Principal Jurisdictions and are not in default under the securities legislation in force in such Jurisdictions.

7. Other than circumstances in which the principal regulator or the securities regulatory authority of a Non-Principal Jurisdiction has expressly exempted a Fund therefrom, each of the Funds follows the standard investment restrictions and practices set out in NI 81-102.

8. The net asset value for each series of the Funds is calculated on a daily basis on each day that the Toronto Stock Exchange is open for trading.

9. Provided the necessary unitholder and regulatory approvals are obtained, the Terminating Fund will merge into the Continuing Fund at the close of business on the Effective Date.

10. Pursuant to the Merger, unitholders of the Terminating Fund will receive units with the same value and in the same series of the Continuing Fund as they currently own in the Terminating Fund.

11. No sales charges will be payable in connection with the exchange of units of the Terminating Fund into units of the Continuing Fund.

12. The Merger cannot be carried out as a "qualifying exchange" within the meaning of section 132.2 of the Tax Act or a tax-deferred transaction under subsection 85(1), 85.1(1) or 97(1) of the Tax Act because the Terminating Fund does not currently qualify as a "mutual fund trust" under the Tax Act.

13. Unitholders of the Terminating Fund approved the Merger at a meeting held on June 15, 2012.

14. The independent review committee ("IRC") of the Funds has reviewed and made a positive recommendation with respect to the Merger, having determined that the Merger, if implemented, achieves a fair and reasonable result for the Funds. The recommendation of the IRC has been included in the notice of meeting as required by section 5.1(2) of National Instrument 81-107.

15. If the approval of the unitholders of the Terminating Fund is not received at the special meeting in respect of the Merger, the Merger will not proceed. However, in the view of the Manager, because continued operation of the Terminating Fund is no longer viable, if the Merger is not approved by the unitholders, the Terminating Fund will be wound up and terminated on or about July 27, 2012.

16. All costs attributable to the Merger (consisting primarily of legal, proxy solicitation, printing and mailing costs) will be borne by the Manager and will not be borne by the Terminating Fund or the Continuing Fund.

17. Unitholders of the Terminating Fund will continue to have the right to redeem units of the Terminating Fund for cash at any time up to the close of business on June 21, 2012. The management information circular mailed to unitholders of the Terminating Fund discloses that a unitholder's deferred sales charge schedule is not changed or eliminated as a result of the Merger, and that investors who redeem their units of the Terminating Fund may be subject to redemption charges as outlined in the simplified prospectus.

18. Effective as of the close of business on April 2, 2012, the Terminating Fund ceased distribution of units. Following the Merger, all systematic withdrawal programs that were established with respect to the Terminating Fund, will be re-established in the Continuing Fund, unless a unitholder advises the Manager otherwise. Unitholders may change or cancel any systematic program at any time and unitholders of the Terminating Fund who wish to establish one or more systematic programs in respect of their holdings in the Continuing Fund may do so following the Merger.

19. A material change report and press release, which gave notice of the proposed Merger, were filed via SEDAR on April 3, 2012.

20. A notice of meeting, management information circular (the "Circular") and a proxy in connection with meetings of unitholders were mailed to unitholders of the Terminating Fund on or about May 22, 2012 and were filed via SEDAR.

21. The Circular that was mailed to unitholders of the Terminating Fund sets out:

a) information about the differences between the units of the Terminating Fund and the units of the Continuing Fund including investment objectives, net asset values, management fees and management expense ratios;

b) information about the investment objectives and strategies of the Continuing Fund sufficient to consider the Merger;

c) information about the tax consequences of the Merger;

d) the various ways in which unitholders of the Terminating Fund can obtain, at no cost, the most recent simplified prospectus, the annual information form, the audited financial statements for the period ended December 31, 2011 and the unaudited semi-annual financial statements for the period ended June 30, 2011 of the Continuing Fund; and

e) the opinion of the IRC of the Funds that the Merger achieves a fair and reasonable result for the Terminating Fund and the Continuing Fund.

22. The current Fund Facts for Series A of the Continuing Fund were also mailed to unitholders of the Terminating Fund.

23. Following the Merger, the Continuing Fund will continue as a publicly offered open- end mutual fund governed by the laws of Ontario.

24. The proposed Merger will be implemented pursuant to the following steps:

Step 1: Prior to the Effective Date, all securities in the portfolio of the Terminating Fund will be liquidated. As a result, the Terminating Fund will temporarily hold cash or money market instruments and will not be invested in accordance with its investment objectives for a brief period of time prior to the Merger.

Step 2: One day prior to the Effective Date, the terminating Fund will distribute to its unitholders sufficient net income and net realized capital gains so that it will not be subject to tax under Part 1 of the Tax Act for its current taxation year.

Step 3: On the Effective Date, the Terminating Fund will transfer all of its assets, which will consist of cash or money market instruments (less an amount required to satisfy the liabilities of the Terminating Fund), to the Continuing Fund, in exchange for Series A units of the Continuing Fund. The Series A units of the Continuing Fund received by the Terminating Fund will have an aggregate net asset value equal to the value of the Terminating Fund's net assets, which units will be issued by the Continuing Fund at the Series A net asset value per unit as of the close of business on the Effective Date.

Step 4: Immediately following the above-noted transfer, the Terminating Fund will distribute Series A units of the Continuing Fund held in its portfolio to its unitholders in exchange for their Series A units of the Terminating Fund on a dollar-for-dollar basis, so that following the distribution, the unitholders of the Terminating Fund will become direct unitholders of the Continuing Fund.

Step 5: As soon as reasonably possible following the Merger, the Terminating Fund will be wound up.

25. Approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102, as the Merger will not be effected a "qualifying exchange" or a tax-deferred transaction under the Tax Act.

26. Except as noted herein, the Merger will otherwise comply with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

27. The Filers submit that the Merger will result in the following benefits to unitholders of the Funds:

a) The Continuing Fund qualifies as a "mutual fund trust" for tax purposes while the Terminating Fund does not qualify. Once a mutual fund qualifies as a mutual fund trust for tax purposes it is no longer subject to alternative minimum tax, Part X.2 tax and Part XII.2 tax. In addition, it becomes entitled to a capital gains refund, which in certain situations has the effect of mitigating double taxation on capital gains realized by the fund;

b) The Merger will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual fund; and

c) The Continuing Fund will have a portfolio of greater value, potentially allowing for increased portfolio diversification opportunities.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted.

Sara Lee Corporation

Headnote

NP 11-203 -- relief from prospectus requirements to allow U.S. parent company to spin off shares of its subsidiary to investors by way of distribution in kind -- distribution not covered by legislative exemptions -- U.S. parent company is a public company in the U.S. but is not a reporting issuer in Canada -- U.S. parent company has a de minimis presence in Canada. Following the spin off, subsidiary will become independent public company based in the Netherlands and will not be a reporting issuer in Canada -- no investment decision required from Canadian shareholders in order to receive shares from distribution.

Applicable Legislative Provisions

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1).

June 22, 2012

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(THE "JURISDICTION")

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

SARA LEE CORPORATION

(THE "FILER")

DECISION$

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") for an exemption from the prospectus requirements of section 53 of the Securities Act (Ontario) (the "Act") in connection with the distribution by the Filer of all of the outstanding shares of common stock of DE US, Inc. ("DE US"), a wholly-owned subsidiary of the Filer, on a pro rata basis and by way of a dividend in specie, to the Filer's shareholders (the "Exemption Sought").

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) the Filer has provided notice that Section 4.7(1) of MI 11-102 is intended to be relied upon in each of the other provinces and territories of Canada.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filer.

1. The Filer is a Maryland corporation engaged in the business of manufacturing and marketing brand-name products for consumers throughout the world, focussed primarily in the meats, bakery and beverage categories. The Filer's principal executive offices are located at 3500 Lacey Road, Downers Grove, Illinois.

2. The Filer is not a reporting issuer under the securities laws of any province or territory of Canada. The Filer has no intention of becoming a reporting issuer under the securities laws of any province or territory of Canada.

3. The Filer's common shares (the "Filer Shares") are widely held and trade on the New York Stock Exchange, the Chicago Stock Exchange and the London Stock Exchange (collectively, the "Exchanges"). Filer Shares are not listed on any Canadian stock exchange.

4. As of May 1, 2012, there were 615 registered holders of Filer Shares resident in Canada (the "Canadian Shareholders") holding approximately 312,931 Filer Shares, representing approximately 1.1% of the registered shareholders of the Filer worldwide and approximately 0.05% of the outstanding Filer Shares as of such date. As such, the proportion of Filer Shares held by residents in Canada is de minimis.

5. Based on information obtained as of October 6, 2011 in connection with the transactions proposed herein, there were 1,313 beneficial holders of Filer Shares resident in Canada, representing approximately 1.1% of all beneficial holders of Filer Shares. The Filer does not expect the percentage of beneficial shareholders resident in Canada to have materially changed since that date. As such, the number of beneficial holders of Filer Shares resident in Canada is de minimis.

6. The Filer is proposing to spin-out (the "Spin-off Transaction") its international coffee and tea businesses into an independent public company (DutchCo) through a series of transactions. These transactions are expected, in addition to certain related transactions, to result in (1) the distribution (the "Stock Dividend") by the Filer, pro rata to its shareholders of all of the shares of common stock (the "DE Shares") of DE US, which will be 100% of the DE Shares outstanding immediately prior to such distribution, (2) the subsequent merger (the "Merger") of DE US with a wholly owned subsidiary of D.E Master Blenders 1753 N.V ("DutchCo"), with DE US surviving the merger as a subsidiary of DutchCo, and (3) the exchange of DutchCo ordinary shares (the "DutchCo Shares") for the previously distributed DE Shares.

7. DE US is a Delaware corporation and a wholly owned subsidiary of the Filer that at the time of the Stock Dividend will hold, through its subsidiaries, the assets and liabilities associated with the Filer's international coffee and tea businesses.

8. DutchCo is a private company with limited liability incorporated under the laws of the Netherlands and will convert to a public company with limited liability prior to completion of the separation. All of the currently outstanding ordinary shares of DutchCo are owned by a wholly owned subsidiary of the Filer. The Filer intends to cause its subsidiary to transfer the Filer's interest in DutchCo to DE US prior to the effective time of the Merger, at which time DutchCo will be an independent public company based in the Netherlands.

9. In connection with the Spin-off Transaction, DutchCo filed with the SEC on June 1, 2012 amendment no. 7 to a registration statement on Form F-1 under the U.S. Securities Act of 1933 (as subsequently amended, restated and supplemented, the "Registration Statement"). The final prospectus filed as part of the Registration Statement will contain audited consolidated financial statements of DutchCo, and it will be made available to shareholders of the Filer for information purposes. The SEC declared the Registration Statement effective on June 1, 2012.

10. Fractional shares of DutchCo Shares will not be distributed. An exchange agent will aggregate the amount of fractional shares that would otherwise have been distributed into whole shares of DutchCo and will sell such shares into the open market within ten business days after the distribution date at prevailing share prices and distribute the cash proceeds in U.S. dollars, net of brokerage fees and other costs, from the sale to the exchange agent. The exchange agent will distribute such net proceeds pro rata to each Filer Shareholder who would otherwise have been entitled to receive a fractional share of DutchCo.

11. Shareholders of the Filer will not be required to pay for the DE Shares or DutchCo Shares received pursuant to the Stock Dividend, or to surrender or exchange Filer Shares or take any other action to be entitled to receive their DE Shares, or the DutchCo Shares that they will receive in exchange for their DE Shares. The Stock Dividend and the Merger will occur automatically and without any investment decision on the part of the Filer Shareholders.

12. After the completion of the Spin-off Transaction, the Filer will continue to be listed and traded on the Exchanges.

13. DutchCo will apply to have the DutchCo Shares listed on the NYSE Euronext in Amsterdam. DutchCo will also be registered with the SEC as a foreign private issuer.

14. Sara Lee's coffee and tea business is being spun out into a Netherlands corporation because the coffee and tea business in headquartered in the Netherlands and is principally administered there.

15. Prior to the completion of the Spin-off Transaction, neither DE US nor DutchCo are or intend to become reporting issuers in any province or territory in Canada or list their securities on any stock exchange in Canada. To the knowledge of the Filer, DutchCo has no intention of becoming a reporting issuer in any province or territory in Canada or listing its securities on any stock exchange in Canada after the completion of the Spin-off Transaction.

16. The Spin-off Transaction will be effected under the laws of the United States, Delaware, Maryland and the Netherlands.

17. Because the Stock Dividend will be by way of a dividend of DE Shares to the Filer Shareholders, no shareholder approval of the proposed transaction is required (or being sought) under Maryland law.

18. All materials relating to the Spin-off Transaction sent by or on behalf of the Filer and DutchCo to registered shareholders of the Filer in the United States will be sent concurrently to the registered shareholders resident in Canada. The prospectus that forms part of the Registration Statement will be sent to registered shareholders resident in Canada after the SEC declares the Registration Statement effective.

19. Following the completion of the Spin-off Transaction and Stock Dividend, the Filer and DutchCo, respectively, will send concurrently to the registered holders of Filer Shares and DutchCo Shares, respectively, resident in Canada the same disclosure materials required to be sent under applicable U.S. or Netherlands laws, as the case may be, that each sends to registered holders of Filer Shares and DutchCo Shares with addresses, as shown on their respective books to be, in the United States or the Netherlands, as applicable.

20. The Canadian Shareholders who receive DE Shares (and ultimately DutchCo Shares) as a dividend pursuant to the Spin-off Transaction will have the benefit of the same rights and remedies in respect of the disclosure documentation received in connection with the Spin-off Transaction and the Stock Dividend that are available to Filer Shareholders in the United States.

21. The Canadian Shareholders who receive DE Shares (and ultimately DutchCo Shares) following completion of the Spin-off Transaction will have the same rights and remedies under Netherlands law as securityholders resident in the Netherlands in the event of a misrepresentation in the continuous disclosure documents of DutchCo.

22. The Stock Dividend to Canadian Shareholders would be exempt from the Prospectus Requirements pursuant to subsection 2.31(2) of National Instrument 45-106 -- Prospectus and Registration Exemptions ("NI 45-106") but for the fact that DE US is not a reporting issuer under the Act.

23. The distribution of DutchCo Shares in exchange for DE Shares in connection with the Merger is exempt from the Prospectus Requirements under section 2.11 of NI 45-106 because it will be effected pursuant to a statutory procedure under Delaware law.

24. The Filer, DE US and DutchCo are not in default of any securities legislation in any of the provinces or territories of Canada.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that the first trade in DutchCo Shares issued in connection with the Merger subsequent to the issuance of the Stock Dividend will be deemed to be a distribution unless the conditions in section 2.6 or subsection 2.14(1) of National Instrument 45-102 Resale of Securities are satisfied.

Clairvest Group Inc.

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Reporting issuer seeking relief so that it can continue to file financial statements in accordance with old Canadian GAAP (rather than IFRS) for periods relating to the Applicant's financial year beginning on April 1, 2011 and ending on March 31, 2012 and the Applicant's financial year beginning on April 1, 2012 and ending on March 31, 2013 and the Applicant's financial year beginning on April 1, 2013 and ending on March 31, 2014 (collectively, the "Applicant's Deferred Financial Years"). -- In particular, the issuer is seeking relief from the requirements in Part 3 of National Instrument 52-107 that would apply to financial statements for periods relating to the issuer's deferred financial years -- The issuer is also seeking relief from the IFRS-related amendments to the continuous disclosure, prospectus, certification and audit committee rules (collectively, the rules) that came into force on January 1, 2011 and that would apply to periods relating to the issuer's deferred financial years -- The issuer is an "investment company" as defined in Accounting Guideline 18 Investment Companies (AcG-18) in the Handbook of the Canadian Institute of Chartered Accountants -- At its meeting on February 29, 2012, the Canadian Accounting Standards Board decided that investment companies, as defined in and applying AcG-18, will only be required to adopt IFRS for annual periods beginning on or after January 1, 2014 -- Since Part 3 of National Instrument 52-107 and the IFRS-related amendments to the rules do not have a provision providing for a three-year deferral of the transition to IFRS for investment companies subject to NI 52-107 and the rules, the issuer has applied for the relief -- Relief granted, subject to a number of conditions.

Applicable Legislative Provisions

National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, Parts 3 and 4 (NI 52-107).

National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102).

National Instrument 41-101 General Prospectus Requirements (NI 41-101).

National Instrument 44-101 Short Form Prospectus Distributions (NI 44-101).

National Instrument 44-102 Shelf Distributions (NI 44-102).

National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (NI 52-109).

National Instrument 52-110 Audit Committees (NI 51-110).

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, CHAPTER S.5, AS AMENDED

AND

IN THE MATTER OF

CLAIRVEST GROUP INC.

DECISION

Background

The Ontario Securities Commission has received an application from Clairvest Group Inc. (the "Applicant") for a decision under Ontario securities legislation (the "Legislation")for an exemption (the "Exemption Sought") from:

1. the requirements of Part 3 of National Instrument 52-107 -- Acceptable Accounting Principles and Auditing Standards ("NI 52-107") that apply to financial statements, financial information, operating statements and pro forma financial statements for periods relating to the Applicant's financial year beginning on April 1, 2011 and ending on March 31, 2012, the Applicant's financial year beginning on April 1, 2012 and ending on March 31, 2013 and the Applicant's financial year beginning on April 1, 2013 and ending on March 31, 2014 (collectively, the "Applicant's Deferred Financial Years");

2. the amendments to National Instrument 51-102 -- Continuous Disclosure Obligations ("NI 51-102") related to International Financial Reporting Standards ("IFRS") that came into force on January 1, 2011 and that apply to documents required to be prepared, filed, delivered or sent under NI 51-102 for periods relating to the Applicant's Deferred Financial Years;

3. the IFRS-related amendments to National Instrument 41-101 -- General Prospectus Requirements ("NI 41-101") that came into force on January 1, 2011 and that apply to a preliminary prospectus, an amendment to a preliminary prospectus, a final prospectus or an amendment to a final prospectus of the Applicant which includes or incorporates by reference financial statements of the Applicant in respect of periods relating to the Applicant's Deferred Financial Years;

4. the IFRS-related amendments to National Instrument 44-101 -- Short Form Prospectus Distributions ("NI 44-101") that came into force on January 1, 2011 and that apply to a preliminary short form prospectus, an amendment to a preliminary short form prospectus, a final short form prospectus or an amendment to a final short form prospectus of the Applicant which includes or incorporates by reference financial statements of the Applicant in respect of periods relating to the Applicant's Deferred Financial Years;

5. the IFRS-related amendments to National Instrument 44-102 -- Shelf Distributions ("NI 44-102") that came into force on January 1, 2011 and that apply to a preliminary base shelf prospectus, an amendment to a preliminary base shelf prospectus, a base shelf prospectus, an amendment to a base shelf prospectus or a shelf prospectus supplement of the Applicant which includes or incorporates by reference financial statements of the Applicant in respect of periods relating to the Applicant's Deferred Financial Years;

6. the IFRS-related amendments to National Instrument 52-109 -- Certification of Disclosure in Issuers' Annual and Interim Filings ("NI 52-109") that came into force on January 1, 2011 and that apply to annual filings and interim filings for periods relating to the Applicant's Deferred Financial Years; and

7. the IFRS-related amendments to National Instrument 52-110 -- Audit Committees ("NI 52-110") that came into force on January 1, 2011 and that apply to periods relating to the Applicant's Deferred Financial Years.

Representations

The Applicant has represented to the Commission that:

1. The Applicant is a corporation governed by the Business Corporations Act (Ontario), with its registered and principal office address located at 22 St. Clair Avenue East, Suite 1700, Toronto, Ontario M4T 2S3.

2. The Applicant is a reporting issuer in Ontario.

3. The Applicant is a private equity investor whose common shares trade on the Toronto Stock Exchange under the symbol "CVG".

4. The Applicant's financial year end is March 31.

5. The Applicant is an "investment company" as defined in Accounting Guideline 18 -- Investment Companies ("AcG-18") in the Handbook of the Canadian Institute of Chartered Accountants (the "Handbook"). The Applicant applies AcG-18 in the preparation of its financial statements in accordance with Part V of the Handbook -- Canadian GAAP for public enterprises that is the pre-changeover accounting standards ("pre-changeover Canadian GAAP").

6. The Applicant is not an investment fund as that term is defined in theSecurities Act (Ontario).

7. As part of the changeover to IFRS in Canada, the Canadian Accounting Standards Board ("AcSB") has incorporated IFRS into the Handbook as Canadian GAAP for publicly accountable enterprises. As a result, the Handbook contains two sets of standards for public companies:

(a) Part I of the Handbook -- Canadian GAAP applicable to publicly accountable enterprises that applies for financial years beginning on or after January 1, 2011, and

(b) pre-changeover Canadian GAAP.

8. On October 1, 2010, the AcSB published amendments to Part 1 of the Handbook that provided a one-year deferral of the transition to IFRS for investment companies. The amendments required investment companies, as defined in and applying AcG-18, to adopt IFRS for annual periods beginning on or after January 1, 2012. Subsequently, at its meeting on January 12, 2011, the AcSB decided to extend the deferral for an additional year and in March 2011, issued amendments to Part 1 of the Handbook so that investment companies, as defined in and applying AcG-18, would only be required to adopt IFRS for annual periods beginning on or after January 1, 2013. On February 29, 2012, the deferral was extended for a third time by amendments to Part 1 of the Handbook issued by the AcSB requiring investment companies, as defined in and applying AcG-18, to adopt IFRS for annual periods beginning on or after January 1, 2014.

9. As part of the changeover to IFRS, NI 52-107 was repealed and replaced effective January 1, 2011. In the new version of NI 52-107,

(a) Part 3 contains requirements based on IFRS and applies to financial statements, financial information, operating statements and pro forma financial statements for periods relating to financial years beginning on or after January 1, 2011, and

(b) Part 4 contains requirements based on pre-changeover Canadian GAAP and applies to financial statements, financial information, operating statements and pro forma financial statements for periods relating to financial years beginning before January 1, 2011.

10. As part of the changeover to IFRS, IFRS-related amendments were made to NI 51-102, NI 41-101, NI 44-101, NI 44-102, NI 52-109 and NI 52-110 (collectively, the "Rules") and these amendments came into force on January 1, 2011. Among other things, the amendments replace Canadian GAAP terms and phrases with IFRS terms and phrases and contain IFRS-specific requirements. The amendment instruments for the Rules contain transition provisions that provide that the IFRS-related amendments only apply to documents required to be filed under the Rules for periods relating to financial years beginning on or after January 1, 2011. Therefore, during the IFRS transition period,

(a) issuers filing financial statements prepared in accordance with pre-changeover Canadian GAAP will be required to comply with the versions of the Rules that contain Canadian GAAP terms and phrases, and

(b) issuers filing financial statements that comply with IFRS will be required to comply with the versions of the Rules that contain IFRS terms and phrases and IFRS-specific requirements.

11. On October 8, 2010, the Canadian Securities Administrators ("CSA") published CSA Staff Notice 81-320 -- Update on International Financial Reporting Standards for Investment Funds, as revised on March 23, 2011 and March 30, 2012, which indicated that, given the October 1, 2010, March 2011 and February 29, 2012 amendments to the Handbook providing for a deferral of the transition to IFRS for investment companies, the CSA would defer finalizing IFRS-related amendments to the rules related to investment funds, with the stated goal of having the necessary IFRS-related amendments for investment funds in force by January 1, 2014.

12. NI 52-107 and the Rules apply to the Applicant. Since Part 3 of NI 52-107 and the IFRS-related amendments to the Rules do not have a provision providing for a three-year deferral of the transition to IFRS for investment companies subject to NI 52-107 and the Rules, the Applicant has applied for the Exemption Sought.

13. During the Applicant's Deferred Financial Years, the Applicant will comply with section 1.13 of Form 51-102F1 -- Management's Discussion & Analysis ("MD&A") by providing an updated discussion of the Applicant's preparations for changeover to IFRS in its annual and interim MD&A. In particular, the Applicant will discuss the expected effect on the financial statements, or state that the effect cannot be reasonably estimated.

14. The Applicant's interim financial statements for the interim periods ended June 30, 2011, September 30, 2011 and December 31, 2011 ( the "Interim Financial Statements") were not prepared in accordance with IFRS pursuant to Part 3 of NI 52-107.

15. At the time the Applicant filed the Interim Financial Statements, it believed that the CICA's deferral of IFRS for companies qualifying to apply AcG-18 was accepted by the CSA for documents filed under the Rules. Upon further review of the Rules, the Applicant acknowledges that it should have filed for the Exemption Sought prior to the filing of the Interim Financial Statements.

16. The Applicant acknowledges that if the Exemption Sought is granted, the Applicant:

(a) will be subject to Part 3 of NI 52-107 and the IFRS-related amendments to the Rules for periods relating to financial years beginning on or after January 1, 2014, and

(b) will not have the benefit of the 30 day extension to the deadline of filing the first interim financial report in the year of adopting IFRS in respect of an interim period beginning on or after January 1, 2011, as set out in the IFRS-related amendments to NI 51-102, since that extension does not apply if the first interim financial report is in respect of an interim period ending after March 30, 2012.

Decision

The Ontario Securities Commission is satisfied that the decision meets the test set out in the Legislation.

The Exemption Sought is granted provided that:

1. the Applicant continues to be an investment company, as defined in and applying AcG-18;

2. the Applicant provides the communication as described and in the manner set out in paragraph 13 above;

3. the Applicant complies with the requirements in Part 4 of NI 52-107 for all financial statements (including interim financial statements), financial information, operating statements and pro forma financial statements for periods relating to the Applicant's Deferred Financial Years, as if the expression "January 1, 2011" in subsection 4.1(2) were read as "January 1, 2014";

4. the Applicant complies with the version of NI 51-102 that was in effect on December 31, 2010 (together with any amendments to NI 51-102 that are not related to IFRS and that come into force after January 1, 2011) for all documents required to be prepared, filed, delivered, or sent under NI 51-102 for periods relating to the Applicant's Deferred Financial Years;

5. the Applicant complies with the version of NI 41-101 that was in effect on December 31, 2010 (together with any amendments to NI 41-101 that are not related to IFRS and that come into effect after January 1, 2011) for any preliminary prospectus, amendment to a preliminary prospectus, final prospectus or amendment to a final prospectus of the Applicant which includes or incorporates by reference financial statements of the Applicant in respect of periods relating to the Applicant's Deferred Financial Years;

6. the Applicant complies with the version of NI 44-101 that was in effect on December 31, 2010 (together with any amendments to NI 44-101 that are not related to IFRS and that come into effect after January 1, 2011) for any preliminary short form prospectus, amendment to a preliminary short form prospectus, final short form prospectus or amendment to a final short form prospectus of the Applicant which includes or incorporates by reference financial statements of the Applicant in respect of periods relating to the Applicant's Deferred Financial Years;

7. the Applicant complies with the version of NI 44-102 that was in effect on December 31, 2010 (together with any amendments to NI 44-102 that are not related to IFRS and that come into effect after January 1, 2011) for any preliminary base shelf prospectus, amendment to a preliminary base shelf prospectus, base shelf prospectus, amendment to a base shelf prospectus or shelf prospectus supplement of the Applicant which includes or incorporates by reference financial statements of the Applicant in respect of periods relating to the Applicant's Deferred Financial Years;

8. the Applicant complies with the version of NI 52-109 that was in effect on December 31, 2010 (together with any amendments to NI 52-109 that are not related to IFRS and that come into effect after January 1, 2011) for all annual filings and interim filings for periods relating to the Applicant's Deferred Financial Years;

9. the Applicant complies with the version of NI 52-110 that was in effect on December 31, 2010 (together with any amendments to NI 52-110 that are not related to IFRS and that come into effect after January 1, 2011) for periods relating to the Applicant's Deferred Financial Years;

10. if, notwithstanding this order, the Applicant decides not to rely on the Exemption Sought and files an interim financial report prepared in accordance with IFRS for an interim period in a deferred financial year, the Applicant must, at the same time:

a) restate, in accordance with IFRS, any interim financial statements for any previous interim period in the same deferred financial year (each, a "Previous Interim Period") that were originally prepared in accordance with pre-changeover Canadian GAAP and filed pursuant to this order, and

b) file a restated interim financial report prepared in accordance with IFRS for each Previous Interim Period, together with corresponding restated interim MD&A and certificates required by NI 52-109. For greater certainty, any restated interim financial report for a Previous Interim Period must comply with applicable securities legislation (including Part 3 of NI 52-107 and the amendments to Part 4 of NI 51-102 that came into force on January 1, 2011) and any restated interim financial report for the first interim period in the deferred financial year must include the opening IFRS statement of financial position at the date of transition to IFRS; and

11. if, notwithstanding this order, the Applicant decides not to rely on the Exemption Sought and files annual financial statements prepared in accordance with IFRS for a deferred financial year, the Applicant must, at the same time (unless previously done pursuant to paragraph 10 immediately above):

a) restate, in accordance with IFRS, any interim financial statements for any Previous Interim Period that were originally prepared in accordance with pre-changeover Canadian GAAP and filed pursuant to this order, and

b) file a restated interim financial report prepared in accordance with IFRS for each Previous Interim Period, together with corresponding restated interim MD&A and certificates required by NI 52-109. For greater certainty, any restated interim financial report for a Previous Interim Period must comply with applicable securities legislation (including Part 3 of NI 52-107 and the amendments to Part 4 of NI 51-102 that came into force on January 1, 2011) and any restated interim financial report for the first interim period in the deferred financial year must include the opening IFRS statement of financial position at the date of transition to IFRS.

DATED this 13th day of June, 2012

AlphaPro Management Inc.

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from subsection 2.1(1) and paragraphs 2.5(2)(a), (b) and (c) of NI 81-102, the fund on funds restrictions, to permit commodity pools to enter into a forward agreement providing exposure to commodity pools investing in, or gaining exposure to exchange traded mutual funds tracking the performance of, physical commodities. Also relief granted allowing payment of brokerage commission in relation to the sales and purchases of securities of the related underlying fund(s), provided that the requirements of section 2.5 of NI 81-102, except for paragraph 2.5(2)(e) -- National Instrument 81-102 Mutual Funds are complied with.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 2.5(2)(a) and (e), 19.1.

National Instrument 81-104 Commodity Pools.

June 25, 2012

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(the Jurisdiction)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

ALPHAPRO MANAGEMENT INC.

(the Filer)

AND

THE TOP FUNDS

(as defined below)

DECISION

BACKGROUND

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption (the Exemption Sought) relieving the existing mutual funds listed at Schedule "A" (the Existing Top Funds) and such mutual funds that may be managed by the Filer or its affiliates in the future (the Future Top Funds, and together with the Existing Top Funds, the Top Funds and individually, a Top Fund) that are subject to National Instrument 81-102 -- Mutual Funds (NI 81-102), from the prohibitions in:

(a) paragraph 2.5(2)(a) of NI 81-102 to permit each Top Fund to invest in exchange traded mutual funds that are not subject to National Instrument 81-101 -- Mutual Fund Prospectus Disclosure (NI 81-101); and

(b) paragraph 2.5(2)(e) of NI 81-102 to permit each Top Fund to pay brokerage commissions in relation to its purchase and sale on a recognized exchange of securities of exchange traded mutual funds that are managed by the Filer, or an affiliate or associate of the Filer

(collectively, the Exemption Sought)

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission (OSC) is the principal regulator for this application; and

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada.

INTERPRETATION

Terms defined in National Instrument 14-101 -- Definitions and MI 11-102 have the same meaning if used in this decision unless otherwise defined.

REPRESENTATIONS

This decision is based on the following facts represented by the Filer:

About the Filer

1. The Filer is a corporation incorporated pursuant to the laws of Canada.

2. The Filer, or an affiliate of the Filer, acts as, or will act as, the investment fund manager of the Top Funds.

3. The Filer is not in default of the securities legislation of any of the provinces or territories of Canada.

About the Top Funds

4. The Top Funds are, or will be, open end mutual funds established as trusts under the laws of the Province of Ontario.

5. The Top Funds are, or will be, governed by the provisions of NI 81-102; or NI 81-102 and National Instrument 81-104 -- Commodity Pools (NI 81-104).

6. Each Top Fund distributes, or will distribute, securities pursuant to a simplified prospectus and annual information form prepared under NI 81-101 or to a long form prospectus prepared under Form 41-101F2 -- Information Required in an Investment Fund Prospectus (Form 41-101F2).

7. The Top Funds are, or will be, reporting issuers in some or all of the provinces and territories of Canada.

8. The Existing Top Funds are not in default of any requirements of the securities legislation of any province or territory of Canada.

9. The Filer would like to be able to invest the assets of the Top Funds in the exchange traded funds set out in Schedule "B" (the Existing Underlying ETFs) and such other exchange traded mutual funds that may be established by the Filer or its affiliates or associates in the future (the Future Underlying ETFs, and together with the Existing Underlying ETFs, the Underlying ETFs or individually an Underlying ETF).

10. The investment by a Top Fund in securities of an Underlying ETF will be made in accordance with the fundamental investment objective of the Top Fund and will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Top Funds.

About the Underlying ETFs

11. The Filer or an affiliate is or will be the investment fund manager of the Underlying ETFs.

12. Each Underlying ETF is, or will be:

(a) an open end mutual fund subject to NI 81-102 and National Instrument 41-101 -- General Prospectus Requirements (NI 41-101);

(b) a reporting issuer in each of the provinces and territories of Canada; and

(c) listed on the Toronto Stock Exchange (the TSX) or another "recognized exchange" in Canada as that term is defined in securities legislation.

13. The Existing Underlying ETFs are not in default of any requirements of the securities legislation of any province or territory of Canada.

14. Each Underlying ETF distributes, or will distribute, its securities pursuant to a long form prospectus prepared under Form 41-101F2.

15. Each Underlying ETF does not or will not, at the time of purchase by a Top Fund, hold more than 10% of the market value of its net assets in securities of any other mutual fund other than the securities of a money market fund or a mutual fund that issues index participation units.

16. Each Underlying ETF issues, or will issue, units which are qualified for distribution in each of the provinces and territories of Canada.

17. Each Underlying ETF is not, or will not be, a commodity pool governed by NI 81-104.

18. The Underlying ETFs do not or will not issue "index participation units" as defined in NI 81-102.

19. No Underlying ETF has, or will have, a net market exposure greater than 100% of its net asset value.

20. Each Underlying ETF does not or will not pay management or incentive fees which to a reasonable person would duplicate a fee payable by the Top Funds for the same service.

21. Where the investment fund manager of a Top Fund (the Top Fund Manager) determines that the management fees and incentive fees (the Fees) payable by an Underlying ETF to its investment fund manager (the Underlying ETF Manager) would duplicate a fee payable by the Top Fund for the same service, either

(a) The Underlying ETF Manager will pay a management fee rebate to the Top Fund that is equal to the Fees paid to it by that Underlying ETF and the Top Fund Manager will pay an amount equal to those Fees to the Underlying ETF Manager; or

(b) The Top Fund Manager will pay to the Top Fund an amount equal to the Fees payable to the Underlying ETF Manager in respect of the Top Fund's investment in the Underlying ETF.

22. Holders of units of an Underlying ETF may:

(a) sell units of an Underlying ETF on the TSX or another recognized exchange in Canada on which units of an Underlying ETF are listed for trading;

(b) redeem units of that Underlying ETF in any number for cash at a redemption price of 95% of the closing price for the unit on the applicable exchange on the effective day of redemption; or

(c) redeem or exchange a prescribed number of units (a PNU) of the Underlying ETF for cash or securities equal to the net asset value of each PNU tendered for redemption or exchange, respectively.

23. Each Underlying ETF may, from time to time, retain:

(a) National Bank Financial Inc., an associate of the Filer, to act as its designated broker, distributor and securities lending agent;

(b) Natcan Investment Management Inc., an associate of the Filer, to act as portfolio sub-adviser; and

(c) Horizons Investment Management Inc., an affiliate of the Filer, to act as its manager, trustee, or portfolio manager.

24. The Existing Underlying ETFs primarily achieve, and Future Underlying ETFs will primarily achieve, their investment objectives through direct holdings of cash and securities and, in some circumstances, through investment in specified derivatives for hedging and non-hedging purposes, in accordance with their investment objectives and strategies and with NI 81-102.

25. All brokerage costs related to trades in securities of the Underlying ETFs will be borne by the Top Funds in the same manner as any other portfolio transaction made on an exchange.

26. If a Top Fund makes a trade in securities of an Underlying ETF with or through an affiliate or associate of the Filer acting as dealer, the Filer will comply with its obligations under National Instrument 81-107 Independent Review Committee for Investment Funds in respect of any proposed related party transactions. Lastly, all such related party transactions will be disclosed to securityholders of the relevant Top Fund in its management report of fund performance.

Reasons for the Exemption Sought

27. An investment in an Underlying ETF by a Top Fund is an efficient and cost effective alternative to administering one or more investment strategies directly or engaging a sub-adviser to implement an investment strategy for a Top Fund.

28. Absent the Exemption Sought, an investment by a Top Fund in an Underlying ETF would be prohibited by paragraph 2.5(2)(a) of NI 81-102 solely because the Underlying ETF is not governed by NI 81-101.

29. An investment by a Top Fund in an Underlying ETF would not qualify for the exemption in paragraph 2.5(3) of NI 81-102 from paragraph 2.5(2)(a) of NI 81-102 because the Underlying ETF does not issue index participation units.

30. The only material difference between the Underlying ETFs and any other mutual fund governed by NI 81-102 is the method of distribution. If the Exemption Sought is granted the Top Funds will be permitted to purchase units of a mutual fund that is listed on the TSX (or other recognized exchange) in the same manner that they are permitted to invest in a mutual fund that is not listed on the applicable exchange.

31. It is anticipated that many of the trades conducted by the Top Funds would not be of the size necessary for the Top Fund to be eligible to purchase or redeem a PNU directly from the Underlying ETF. As a result, it is anticipated that the majority of trading in respect of units of the Underlying ETFs will be conducted in the secondary market using the facilities of a recognized exchange.

32. Absent the Exemption Sought, when the Top Funds trade securities of an Underlying ETF on a recognized exchange, paragraph 2.5(2)(e) would not permit the Top Fund to pay any brokerage fees incurred in connection with the trade.

DECISION

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted, provided that

(a) A Top Fund does not short sell securities of an Underlying ETF; and

(b) the Underlying ETFs do not rely on exemptive relief from

(i) the requirements of section 2.3 of NI 81-102 regarding the purchase of physical commodities;

(ii) the requirements of sections 2.7 and 2.8 of NI 81-102 regarding the purchase, sale or use of specified derivatives, with the exception of the relief from paragraphs 2.7(1)(a) and 2.8(1) of NI 81-102 granted to certain Underlying ETFs pursuant to the In the Matter of AlphaPro Management Inc. decision dated November 18, 2010; and

(iii) paragraphs 2.6(a) and (b) of NI 81-102 with respect to the use of leverage.

SCHEDULE "A"

EXISTING TOP FUNDS

{1} Affiliate of the Manager

{2} Affiliate of a minority shareholder of the Manager

SCHEDULE "B"

EXISTING UNDERLING ETFs