Exemption Orders (Discretionary)
ARCHIPELAGO L.L.C.
2001 BCSECCOM 1154
Headnote:
Mutual Reliance Review System for Exemptive Relief Applications - Temporary relief from the requirements of the ATS Rules granted during period when ATS converting into an exchange.
Applicable British Columbia Provisions
National Instrument 21-101
National Instrument 23-101
IN THE MATTER OF NATIONAL INSTRUMENT 21-101 MARKETPLACE OPERATION AND NATIONAL INSTRUMENT 23-101 TRADING RULES
AND
IN THE MATTER OF THE MUTUAL RELIANCE REVIEW SYSTEM FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF ARCHIPELAGO L.L.C.
MRRS DECISION DOCUMENT
WHEREAS the securities regulatory authority or regulator in each of the Provinces of Ontario and British Columbia (the “Decision Maker”) has received an application (the “Application”) from Archipelago L.L.C. (“Archipelago”) for a decision under section 15.1 of National Instrument 21-101 Marketplace Operation and section 12.1 of National Instrument 23-101 Trading Rules that the requirement to comply with National Instrument 21-101 Marketplace Operation and National Instrument 23-101 Trading Rules (together, the “ATS Rules”) does not apply to Archipelago until April 1, 2002;
AND WHEREAS pursuant to the Mutual Reliance Review System for Exemptive Relief Applications (the “System”), the Ontario Securities Commission is the principal jurisdiction for this Application;
AND WHEREAS Archipelago has represented to the Decision Makers that:
1. Archipelago is a limited liability company organized under the laws of the State of Delaware with its registered office in Chicago.
2. Archipelago is a registered broker-dealer under the United States Securities Exchange Act of 1934, and is also registered as an “alternative trading system” pursuant to Regulation ATS in the United States.
3. Archipelago is a member in good standing of the National Association of Securities Dealers in the United States and a participant in the Securities Investor Protection Corporation.
4. Archipelago owns and operates an alternative trading system (“ATS”) that matches electronic bids and offers for publicly traded equity securities of U.S. registered companies (the “ARCA System”). Archipelago has effectively created a national limit order book for national markets, including the Nasdaq Stock market and securities listed on the New York Stock Exchange and the American Stock Exchange. Subscribers to the ARCA System are broker-dealers and institutional investors. Subscribers are provided with a choice of three methods to connect to the ARCA System. The choices are a dedicated line connection, a virtual private network connection, and a third party private network connection.
5. On July 19, 2000, Archipelago became registered with the Ontario Securities Commission as an International Dealer and has been providing access to the ARCA System to Ontario residents pursuant to the terms of such registration.
6. In connection with its International Dealer registration, Archipelago is required to comply with certain terms and condition of registration (the “Terms and Conditions”), which are attached hereto as Schedule A.
7. Outside of Ontario, Archipelago currently provides access to its ATS solely to registered investment dealers in British Columbia in reliance on the exemption set out in subsection 45(2)(7) of the Securities Act (British Columbia).
8. In March 2000, Archipelago signed an agreement with the Pacific Exchange, Inc. (“PCX”) pursuant to which Archipelago’s ATS will be transformed into a new market, which will be called the Archipelago Exchange (“ArcaEx”). ArcaEx, which will be operated by Archipelago Exchange L.L.C., a wholly-owned subsidiary of Archipelago Holdings, L.L.C. (the parent entity of Archipelago), will become a trading ‘facility’ (as such term is defined in Section 3(a)(2) of the United States Securities Exchange Act of 1934) of PCX Equities Inc. (“PCXE”), a wholly owned subsidiary of PCX, and will replace the equity marketplace currently offered by PCX (options trading will continue on the PCX). ArcaEx will provide automatic order execution capabilities for NYSE, Amex, Nasdaq and PCX-traded equity securities.
9. PCX and PCXE will be responsible for regulating the trading activity on the facility, and Archipelago Exchange, L.L.C. will be responsible for the business of the facility.
10. In connection with these plans, new exchange rules were filed with the SEC in June 2000 and SEC approval was granted on October 25, 2001.
11. The transformation of Archipelago’s ATS into ArcaEx is currently scheduled for the first quarter of 2002.
12. Archipelago undertakes to comply with the Terms and Conditions until April 1, 2002;
AND WHEREAS pursuant to the System, this MRRS Decision Document evidences the decision of each Decision Maker (collectively, the “Decision”);
AND WHEREAS each of the Decision Makers is satisfied that the test contained in the ATS Rules that provides the Decision Maker with the jurisdiction to make the Decision has been met;
THE DECISION of the Decision Makers is that Archipelago is exempt from the requirements of the ATS Rules until April 1, 2002.
This Decision is effective December 1, 2001.
DATED November 29, 2001
Randee B. Pavalow
SCHEDULE A
Registration of Archipelago L.L.C. as an International Dealer
Terms and Conditions of Registration
Archipelago L.L.C. has been granted registration as an International Dealer which permits it to provide Ontario resident Designated Institutions (as defined in s. 204 of the Regulation to the Securities Act) terminals to trade foreign non-interlisted securities, provided it complies with certain Terms and Conditions set out below.
Part A: Trading Restrictions
In this Part A:
“Canadian issuer” means an issuer incorporated, formed or created under the laws of Canada or any province or territory of Canada.
“foreign security” means a security issued by an issuer that is not a Canadian issuer.
The registrant shall be permitted to execute orders on behalf of customers resident in Ontario but only in foreign securities that are not listed and posted on the Toronto Stock Exchange, The Montreal Exchange or the Canadian Venture Exchange (“CDNX”).
Part B: Information to be Supplied by the Registrant on a Confidential Basis
The registrant agrees to:
(a) advise the Ontario Securities Commission (the “Commission”) of any substantial or material changes to its electronic trading system and business including, but not limited to, substantial or material changes in the criteria used to screen potential customers, changes in the algorithm regarding matching orders and complying with trading rules (but without prejudice to the registrant’s discretion to exercise its business judgement in accepting and evaluating customers), and whether securities listed only on any of The Toronto Stock Exchange, The Montreal Exchange or CDNX are proposed to be traded through the registrant’s electronic trading system;
(b) furnish, upon the request of the Commission, access on a confidential basis to filings and/or copies of filings effected by the registrant with the Securities and Exchange Commission of the United States (“SEC”); the most recent No-Action Letter dated January 12, 2001, its Form BD and its Focus Report and notify the Commission if it discontinues the filing of any of these documents;
(c) furnish on a quarterly basis a report identifying Ontario resident customers by code and listing stocks traded on behalf of Ontario resident customers so that compliance with the trading restrictions set forth in Part A can be monitored. (Ontario resident customers may be identified on such quarterly reports by identification codes only);
(d) make available on a quarterly basis a list of foreign securities and securities of Canadian issuers traded through the registrant’s electronic trading system which cannot be traded on behalf of the registrant’s customers resident in Ontario by virtue of the trading restrictions set forth in Part A;
(e) furnish promptly upon a request of the Commission any of the following information:
(i) a complete list of names and addresses of Ontario-resident customers on the system and their identification codes (“IDs”);
(ii) a complete list of customer IDs for Ontario resident customers whose access to certain securities traded through the registrant’s electronic trading system has been blocked by a mechanism (the “Blocking Mechanism”) implemented by virtue of the trading restrictions set forth in Part A;
(iii) a list of identification acronyms used for Ontario resident customers with Canadian addresses;
(iv) an exception report showing Ontario addresses with IDs out of range or with the Blocking Mechanism switched off;
(v) a complete description of the controls over and procedures for identifying Ontario resident customers on the system and implementing the Blocking Mechanism to prevent trading through the registrant’s terminals in both interlisted and Canadian non-interlisted securities including specifically, who initially activates the switch, who has access to or the ability to change the setting, and how changes are authorized and logged;
(vi) records of all trades by Ontario-resident customers including a description of the securities traded;
(vii) identification from the trading records of those trades made directly through a terminal of the registrant and those trades which were made by other means;
(viii) the process and criteria used by the registrant to screen potential customers, the identification of parties that have not been accepted as customers and documentation of procedures and reasons for accepting or rejecting a specific customer application;
(ix) information regarding the system’s algorithm for matching orders and compliance with trading rules; and
(x) confirmation of trades and settlement process including procedures for dealing with failed trades.
(f) maintain books and records necessary to record properly the registrant’s business transactions and financial affairs and make these available upon request to staff of the Commission for any valid regulatory purpose.
(g) report all information to the Securities and Exchange Commission which shall include transactions involving Ontario resident customer investors and which can be segregated from other information and made available on that basis.
Part C: Expiration of Terms and Conditions
The Terms and Conditions set forth in Parts A and B shall cease to apply to the registrant upon the expiry of the sixty day period following the date that Proposed National Instrument 21-101 Marketplace Operation becomes effective.