Alberta Securities Commission (ASC)
Ontario Securities Commission (OSC)
Manitoba Securities Commission
Quebec – Autorité des Marchés Financiers (AMF)
Saskatchewan – Financial and Consumer Affairs Authority
British Columbia Securities Commission (BCSC)
TMX Group Limited Regulation By the Ontario Securities Commission
NGX is a recognized exchange and clearing agency in Alberta. It has received exemption orders in the following additional Canadian jurisdictions: Ontario, Manitoba, Saskatchewan, British Columbia and Quebec.
Alberta Securities Commission (“ASC”)
The ASC is NGX’s primary regulator in Canada. NGX is recognized by the ASC under the Securities Act (Alberta) (“ASA”) as an exchange and as a clearing agency for natural gas, electricity, crude oil and related contracts (the Contracts) by orders that became effective on March 31, 2017. The current orders replaced NGX’s previous orders.
On July 28, 2014, through a Canadian Securities Administrators notice issued jointly by the ASC, the Bank of Canada and certain other provincial securities regulators, it was declared that NGX can be considered a qualifying central counterparty (“QCCP”) under the standard on the capital treatment of certain bank exposures to central counterparties developed by the Basel Committee on Banking Supervision.
- Under the exchange recognition order, the ASC has
- recognized NGX as an exchange pursuant to section 62 of the ASA with respect to the Contracts;
- granted a registration exemption to contracting parties that enter into NGX’s standard form trading agreement;
- exempted NGX from the requirements of National Instrument 21-101;
- granted an exemption from the requirement in section 62 of the ASA to be recognized as an exchange in relation to the trading of NGX products identified as “Forwards” in NGX’s Contracting Party’s Agreement.
- Under the clearing agency recognition order, NGX has been recognized by the ASC as a clearing agency pursuant to section 67 of the ASA (subject to certain conditions).
Pursuant to the orders, NGX must fulfill certain undertakings including complying with certain Clearing Principles, Exchange Principles and Reporting Requirements.
NGX must comply with the following Clearing Principles:
- Financial Resources – must have ongoing adequate resources
- Participant and Product Eligibility – must maintain appropriate admission standards and product eligibility standards
- Risk Management – must manage risk with appropriate tools and procedures
- Settlement Procedure – must settle on a timely basis, maintain adequate flow records and comply with netting or offset arrangements of other clearing organizations
- Treatment of Funds – must maintain standards and procedures to protect funds
- Default Rules and Procedures – must maintain rules to allow for efficient and fair event management
- Rule Enforcement – must: (i) maintain adequate arrangements and resources to monitor and enforce rule compliance and dispute resolution and (ii) maintain the authority and ability to limit or discipline members for rule violation
- System Safeguards – must maintain oversight and risk analysis, maintain emergency procedures and a disaster recovery plan, ensure annual testing of its systems by professionals
- Reporting – must provide to the ASC all information necessary for it to conduct its oversight
- Recordkeeping – must maintain records of all activities related to its business in a form and manner acceptable to the ASC
- Public Information – must make information regarding rules and operating procedures governing clearing and settlement available to market participants
- Information Sharing – must enter into and abide by all applicable information-sharing agreements and use relevant information obtained from the agreements in its risk management program
- Restraint of Trade – must avoid unreasonably restraining trade or imposing a material anti-competitive burden on trading in regulated markets
NGX must comply with the following Exchange Operating Requirements:
- Access – (i) must not unreasonably inhibit, condition or limit access or permit unreasonable discrimination amongst contracting parties; (ii) will only provide access to entities authorized by NGX and will take reasonable steps to prevent unauthorized access; (iii) must take reasonable steps to ensure that each officer and director, or other individual performing a similar function, of each entity applying to become a contracting party, is a fit and proper person for that role; (iv) where a decision has been made to deny or suspend access, must ensure that the party has been given an opportunity to have that decision reviewed; and (v) must not impose any restriction on competition among contracting parties that is not reasonably necessary or appropriate
- Fees – process for setting fees must be fair and appropriate and the fee model must be readily accessible
- Financial Integrity of Transactions – must take steps to ensure the financial integrity of transactions, including (i) requiring transactions, other than forwards, to be cleared and (ii) periodically confirming that each contracting party continues to satisfy qualification requirements
- Trade Monitoring and Market Integrity – (i) must have an effective program for monitoring trading activity; (ii) contracts must not be readily susceptible to manipulation; (iii) must establish risk-control mechanisms including powers to address trading errors and system malfunctions, impose trading halts or suspensions and apply position-management mechanisms; (iv) trade cancellations must be conducted in a transparent manner
- Recordkeeping – must maintain records of all activities relating to the exchange trading platform in a form and manner acceptable to the ASC, and make such records available to the ASC upon request
- Post-trade reporting – within one business day, must report to the public daily information on settlement prices, volume, open interest and opening and closing ranges
- Conflicts of Interest – must establish a process for identifying and managing conflicts of interest
- Inquiries and Investigations – must be empowered to may make inquiries or conduct investigations relating to the trading activities of contracting parties
- Governance – (i) arrangements must be designed to ensure effective oversight; (ii) must take reasonable steps to ensure that each officer and director is a fit and proper person for that role
- System Safeguards – (i) must maintain a program of risk analysis and oversight designed to identify and manage sources of operational risk; (ii) must have adequate business continuity and disaster recovery plans and regularly test and review such plans, and if practicable, coordinate such plans with essential service providers and contracting parties
- Resources and Outsourcing – must (i) have access to sufficient financial, operational, managerial and regulatory compliance and oversight resources, and (ii) ensure that any outsourcing arrangements will not impair the ability to comply with exchange recognition requirements
The reporting requirements require NGX to report certain information to the ASC quarterly, annually, and upon the occurrence of certain key events
The ASC also conducts periodic oversight assessments of NGX’s operations to confirm compliance with its orders.
Links to the ASC orders have been provided below.
Ontario Securities Commission (“OSC”)
NGX was exempted from the requirements of an exchange by the OSC under the Securities Act (Ontario) (“OSA”) and the Commodities Futures Act (“CFA”) by an order dated March 31, 2009.
The order was subsequently varied on February 11, 2011 and again on July 27, 2012, following the acquisition of TMX by Maple to expand NGX corporate governance obligations. The OSC ordered that:
- NGX be exempt from registration as a commodity futures exchange under section 15 of the CFA;
- Trades in contracts on NGX (“Contracts”) by NGX participants in Ontario (“Ontario Participants”) be exempt from the registration requirement under section 22 of the CFA;
- Trades in Contracts by Ontario Participants be exempt from the requirements under section 33 of the CFA; and
- NGX be exempt from recognition as an exchange under section 21 of the OSA.
Because the definition of a clearing agency under the OSA does not include an exchange, the OSC found NGX to be an exchange with clearing agency functions (not an exchange and a clearing agency) and therefore found it unnecessary to address exemption as a clearing agency.
Manitoba Securities Commission
Pursuant to an order dated April 22, 2009, NGX has received the following relief:
- An exemption from the need for recognition as an extra-provincial commodity futures exchange under Section 36(1) of the Commodity Futures Act (Manitoba) (the “Manitoba CFA”) for the purpose of the trading restrictions contained in Section 40 of the Manitoba CFA;
- An exemption from the need for approval of the form of contract under Section 38(1) of the Manitoba CFA for the purpose of the trading restrictions contained in Section 40; and
- An exemption for current and future contracting parties from the registration requirement contained in Section 24(1) of the Manitoba CFA.
NGX is required to comply with the ASC recognition order, including any variations or amendments.
Quebec – Autorité des Marchés Financiers (“AMF”)
NGX has received orders from the AMF dated November 29, 2002, July 27, 2004 and April 29, 2009 authorizing it to carry on exchange and clearing house activities and exempting it from:
- The obligation to register as a dealer for its contracting parties;
- The obligation to register for any natural person who acts on behalf of its contracting parties; and
- The obligation to qualify for the creation or marketing of derivatives offered to the public.
NGX must advise the AMF of all important changes with respect to the situation described in its request and must annually provide the AMF with a list of its contracting parties.
Saskatchewan – Financial and Consumer Affairs Authority
Pursuant to a decision dated May 16, 2014, the Financial and Consumer Affairs Authority of Saskatchewan:
- current and future NGX participants in Saskatchewan (“Saskatchewan Participants”) trading in contracts on NGX are exempt from registration;
- current and future Saskatchewan Participants are exempt from the trading restrictions contained in subsection 40(1) of The Securities Act, 1988 (Saskatchewan); and
- NGX is exempt from the requirement to be recognized as an exchange and from the requirement to be recognized as a clearing agency.
Prior to the current order, NGX operated in Saskatchewan pursuant to exemptive relief provided through a Mutual Reliance Relief System order dated December 1, 2004.
British Columbia Securities Commission (“BCSC”)
Pursuant to an order dated September 18, 2001, the BCSC ordered that:
- Trades in exchange contracts and swap contracts by contracting parties through the system operated by NGX are exempt from the registration requirement in section 34(1) of the Securities Act (British Columbia) (“BCSA”); and
- NGX is exempt from the prohibition in section 59(1) of the BCSA against trading exchange contracts on unrecognized exchanges outside British Columbia.
TMX Group Limited Regulation by the Ontario Securities Commission
Following the acquisition of NGX’s parent company, TMX by Maple and to ensure ongoing strong regulatory oversight and investor protection, securities regulators imposed certain restrictions and reporting requirements upon TMX Group Limited, TMX, TSX, Alpha LP and Alpha Exchange (each, a “Recognized Exchange”) regarding matters relating to affiliates (including NGX) including requiring that a Recognized Exchange:
- Receive prior approval before implementing any significant integration, combination or reorganization of any businesses, operations or corporate functions related to trading, clearing and settlement between itself and NGX;
- Cannot provide discounts on products or services offered that are conditional upon the purchase of any other product or service offered by NGX;
- Cannot require a person or company to purchase products or services from a TMX Group Limited clearing agency as a condition of supplying a product or service;
- Report on the entering into of a new businesses or ceasing of an existing business by NGX;
- Report on any strategic plan for the Recognized Exchange and NGX, including any relating to the derivatives business, following Recognize Exchange board approval; and
- Provide a quarterly list of any integration, combination or reorganization of any businesses, operations or corporate functions relating to trading, clearing and settlement, including marketplace and clearing agency operations between any Recognized Exchanges and NGX in the previous quarter that are not subject to prior approval.
NGX is regulated by the Commodity Futures Trading Commission (“CFTC”) in the United States and is registered to operate as a clearinghouse through its Derivatives Clearing Organization (“DCO”) order and as an exchange through its Foreign Board of Trade (“FBOT”) order.
NGX is also regulated by the Federal Energy Regulatory Commission (“FERC”) in the United States and is designated as a Category 1 seller.
Foreign Board of Trade (“FBOT”) Order
NGX was the first entity to be granted FBOT status and received the order on May 2, 2013. The order permits identified members and other participants located in the United States to enter trades directly into NGX’s order entry and trade matching system subject to the following:
- NGX must comply with the Commodity Exchange Act (“CEA”) and the regulations thereunder applicable to NGX as a FBOT;
- NGX must comply with the applicable conditions of registration specified in CFTC regulation 48.8 and any additional conditions that the CFTC may impose; and
- NGX must fulfill the representations made in support of its application for registration.
Derivatives Clearing Organization (“DCO”) Order
The CFTC granted NGX a DCO order on December 12, 2008, which was amended on March 20, 2013, for the clearing of: (i) physically delivered or financially settled contracts (futures or swaps) based on energy products that could qualify as exempt commodities as defined in the CEA, traded on or subject to the rules of a registered FBOT; and (ii) physically delivered or financially settled swaps as defined in the CEA, based on energy products that could qualify as exempt commodities as defined in the CEA, and which are traded bilaterally or on or subject to the rules of a Designated Contract Market or registered Swap Execution Facility. Clearing spot and forward contracts is not subject to the CEA and therefore not prohibited by the order.
The order generally requires NGX’s compliance with the CEA and regulations and also sets out (i) the accounting methodology required for daily settlement procedures, (ii) the self-regulatory functions required of NGX; (iii) certain reporting requirements upon changes to applicable law; and (iv) a requirement to maintain an agent for service in the United States.
Federal Energy Regulatory Commission (“FERC”) Order
The FERC designated NGX as a Category 1 seller effective May 4, 2014, granting NGX market-based rate authority. This designation was required in connection with NGX providing clearing for FERC-regulated physical electricity futures products, which commenced in June 2014. Effective September 17, 2016 NGX does not offer clearing for any FERC-regulated physical electricity futures products, however NGX’s market-based rate authority remains in effect.
NGX also provides clearing for Electric Reliability Council of Texas (“ERCOT”) physical electricity futures products, which commenced in August 2013. NGX is registered as a power marketer by the Public Utility Commission of Texas and its function as a registered power marketer is not subject to FERC jurisdiction.
Effective January 28, 2016, NGX received third country central clearing counterparty (“CCP”) recognition from the European Securities and Markets Authorities (“ESMA”). Recognition as a third country CCP under European Market Infrastructure (“EMIR”) allows CCPs from outside the European Union (“EU”) to provide central clearing services to clearing members or trading venues established in the EU. Pursuant to EU capital requirements regulations, recognition under EMIR also provides for QCCP status in the EU.