BCN 2002/05 - Notice of Filing by CanPX Inc. of Form 21-101F5 Initial Operation Report for Information Processor [BCN - Rescinded]

Background

On August 8, 2001, CanPX Inc. (CanPX) filed Form 21-101F5 to become the information processor for unlisted debt securities under the ATS Rules. The information processor will collect order and trade information for government debt securities and corporate debt securities from marketplaces, inter-dealer bond brokers and dealers executing trades of corporate debt securities and will create a consolidated feed and distribute it to information vendors, news services and other customers. Staff are publishing this notice to seek comments from market participants. A copy of the filing is also available for inspection at the offices of the Ontario Securities Commission, the British Columbia Securities Commission, the Alberta Securities Commission and the Commission des valeurs mobilières du Québec.

Requirements for an Information Processor

Part 8 of National Instrument 21-101 Marketplace Operation (National Instrument 21-101) requires marketplaces, inter-dealer bond brokers and dealers executing trades in unlisted debt securities to provide certain pre-trade and post-trade information to an information processor. An information processor is defined as a company that receives and provides information under National Instrument 21-101 and has filed Form 21-101F5.  Section 1.1 of National Instrument 21-101.

Part 14 of National Instrument 21-101 sets out the requirements applicable to an information processor. The provisions of Part 14 require an information processor to file the information required by Form 21-101F5 (and any amendments thereto), enter into agreements with marketplaces, inter-dealer bond brokers and dealers required to provide information, provide timely and reliable collection and processing of information, and comply with certain system requirements.

Review of Filings

Section 16.2 of Companion Policy 21-101CP states that the CSA will review Form 21-101F5 to determine whether it is contrary to the public interest for the filer to act as an information processor. The CSA is looking at a number of factors when reviewing the form, including,

1. Corporate Ownership and Governance - whether the filer has a corporate ownership and governance structure that will enable it to avoid or properly manage potential conflicts of interest;

2. Performance Capability - whether the filer has the appropriate performance capability, standards and procedures for the collection, processing, distribution, and publication of information of orders for, and trades in, securities and personnel qualifications;

3. Fair Access - whether all marketplaces may obtain access to the information processor on fair and reasonable terms that do not unreasonably discriminate;

4. Financial Resources - whether the filer has sufficient financial resources for the proper performance of its functions; and

5. Alternatives - whether there is another entity that can perform the proposed function for the same type of security.

Summary of the Filing

1. Corporate Ownership and Governance

CanPX, a corporation formed on December 17, 1998, entered into an agreement with investment dealers and inter-dealer bond brokers on March 1, 1999 setting out how CanPX must organize itself and conduct its business (Formation Agreement). Under the Formation Agreement, thirteen investment dealers each hold one Class B Common Share and four inter-dealer bond brokers each hold one Class A Common Share. The Formation Agreement has been amended to allow each Participating ATS (defined in the amended Formation Agreement) to hold one Class C Common Share.

The board of directors of CanPX is composed of eight members. The Class B shareholders have the right to nominate five directors, at least three of whom must be Canadian residents. The Class A shareholders have the right to nominate three directors, at least two of whom must be Canadian residents. If a Participating ATS executes the Formation Agreement, the board will be expanded to 9 members and the Class C shareholders will be given the right to nominate one director.

Although CanPX is a privately owned organization, if it becomes an information processor, it will be subject to various requirements under National Instrument 21-101. The purpose of these requirements is to ensure the availability of prompt and accurate order and trade information on a consolidated basis and to assess its ongoing viability. In light of these policy objectives, we are considering whether CanPX should have independent directors on its board.

On November 16, 2001, CanPX entered into a contract with Moneyline Telerate (Moneyline) under which Moneyline developed the CanPX Transparency System and agreed to act as a technical facilitator and exclusive worldwide sales agent for the CanPX Transparency System. We have been advised that Moneyline owns less than 10% of the non-voting equity common shares of an alternative trading system (ATS) that will be trading fixed income securities. Moneyline is not providing any hardware, software or hosting facilities to the ATS and it has not made arrangements to provide technical support to the ATS. In addition, we note, that the CanPX/Moneyline contract provides, among other things, that Moneyline must treat as confidential all information relating to any CanPX participant Moneyline acquires in any way while performing its responsibilities and obligations under the contract. The contract further provides that the CanPX Transparency System must accept data from the source feeds provided by all CanPX participants in accordance with standard industry protocols and that the system must be designed so as not to create unreasonable barriers of entry to new participants when connecting their source feeds to the system. We will continue to monitor this issue.

2. Performance Capability

As indicated above, MoneyLine has entered into a contract with CanPX to develop the CanPX Transparency System and act as a technical facilitator and the exclusive worldwide sales agent for the CanPX Transparency System. The CanPX Transparency System is a platform and mechanism for providing market transparency for the Canadian fixed income debt market.

a. Information to be Provided to the Information Processor

Under National Instrument 21-101, inter-dealer bond brokers, ATSs and dealers must provide an information processor with information about government debt securities and corporate debt securities. The amended Formation Agreement between CanPX and the inter-dealer bond brokers, ATSs and dealers sets out the transparency requirements and is attached as Appendix “A”. The transparency requirements may be varied by an order issued by the appropriate securities regulatory authority.

Under the Formation Agreement, ATSs that display pre-trade information will provide quotation information about all executable bids and offers of government debt securities and corporate debt securities designated by CanPX, including the amount of securities to which the bids and offers in question pertain. They will also provide transactional information about the prices at which trades of government debt securities and corporate debt securities are executed and the volume of trading for any given transaction, subject to the volume caps contemplated by the CSA (for government debt securities and investment grade corporate debt securities, $2 million+; for non-investment grade corporate debt securities, $200,000+).

Under the Formation Agreement, inter-dealer bond brokers are required to provide quotation information about all executable bids and offers of government debt securities designated by CanPX, including the amount of securities to which the bids and offers in question pertain. They will also provide transactional information about the prices at which trades of government debt securities and corporate debt securities are executed and the volume of trading for any given transaction.

Under the Formation Agreement, dealers are required to provide transactional information about the prices at which trades of corporate debt securities are executed and the volume of trading for any given transaction, subject to the volume caps described above.

All information about government debt securities and pre-trade information about corporate debt securities will be provided to CanPX in real-time or as close to real-time as possible. All information about corporate debt securities will be provided to CanPX within one-hour of the trade.

CanPX will determine the list of benchmark government debt securities and designated corporate debt securities about which information will be shown on the consolidated feed. The list of designated government debt securities and corporate debt securities is attached as Appendix “B” to this Notice. The list is current as of January 9, 2002. CanPX has developed criteria to determine the designated corporate debt securities to be shown. The criteria are attached to the Formation Agreement as Schedule “F”.

CanPX is a member of the Bond Market Transparency Committee that was set up by the CSA to provide input into various issues relating to the fixed income market, including the list of government debt securities and corporate debt securities that will be shown on CanPX’s consolidated feed. Committee members also represent the dealers, the inter-dealer bond brokers, buy-side participants, alternative trading systems, issuers and regulators.

b. Data to be Displayed by the Information Processor

The CanPX Transparency System will consolidate real-time and traded prices for unlisted debt securities and will make this consolidated data available to financial market participants, institutional firms and retail investors.

3. Fair Access

CanPX will make its consolidated data available through a variety of distribution channels. The information will be available through (i) CanPX’s website (ii) through Moneylines’ website, as an optional subscription on MoneyLine’s basic services, and (iii) through an XML feed directly from Moneyline. The system will operate from 7:00 am to 6:00 pm Eastern Standard Time.

4. Financial Resources

a. Fees to establish a connection

CanPX will charge a connection fee. Inter-dealer bond brokers, ATSs and dealers will need dedicated local Internet Protocol circuits (at a cost approximately $500 per month) plus hardware (at an additional cost of $175 per month) to provide real-time pricing and trade data. For information not provided in real time, they may use file transfer protocols (FTP) through the internet.

b. Fees to obtain the information

A number of different products will be available from CanPX and Moneyline. These products include:

(i) CanPX Private Label Internet Product - $35.00/terminal/month
(ii) CanPX Optional Services Product - $35.00/terminal/month
(iii) CanPX Website Product - CanPX monthly fee - $2000.00/month
(iv) CanPX/US Treasury Premium Product - To be determined
(v) CanPX website - delayed information - free

c. Revenue Sharing

Participants in CanPX will share in the revenues received from selling the consolidated information. CanPX will allocate the total sales revenue generated by CanPX through the sale of information less costs and expenses, between its shareholders based on their relative trading shares in unlisted debt securities displayed on CanPX. CanPX will determine the total dollar trading volume of trades of all government and corporate debt securities shown on the CanPX Transparency System traded by or through each inter-dealer bond broker (the IDB market), dealer (the Corporate market) and Participating ATS (the ATS market). CanPX will then pay:

(i) inter-dealer bond brokers and dealers the percentage that represents their pro rata proportionate share of the total traded volume in the IDB market,

(ii) dealers the percentage that represents their pro rata proportionate share of the total traded volume in the Corporate market, and

(iii) Participating ATS the percentage that represents their pro rata proportionate share of the total traded volume in the ATS market.

5. Alternatives

Currently, no other entities have come forward to act as the information processor.

Comments

You are invited to make written submissions on the information contained in this notice and CanPX’s filing. We will consider the comments we receive by February 18, 2002.

Subject to comments received, we intend to recommend to each Commission that it is not prejudicial to the public interest for CanPX to become the information processor for unlisted debt securities.

You should make your submissions to the following jurisdictions care of the OSC, in duplicate,

British Columbia Securities Commission
Alberta Securities Commission
Ontario Securities Commission
Commission des valeurs mobilières du Québec

c/o John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 1900, Box 55
Toronto, Ontario
M5H 3S8
E-mail:  jstevenson@osc.gov.on.ca

You should also address your submissions to the Commission des valeurs mobilières du Québec as follows:

Denise Brosseau, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 22nd Floor
Montréal, Québec
H4Z 1G3
E-mail: consultation-en-cours@cvmq.com

Please submit a diskette containing your submissions.

You may refer any questions to:

Louyse Gauvin
Special Advisor to the Chair
British Columbia Securities Commission
(604) 899-6538 or (800) 373-6393 (in B.C.)

Glenda Campbell
Vice-Chair
Alberta Securities Commission
(403) 297-4230

Randee Pavalow
Director, Capital Markets
Ontario Securities Commission
(416) 593-8257

Tracey Stern
Legal Counsel, Market Regulation
Ontario Securities Commission
(416) 593-8167

Ann Leduc
Direction de la recherché et du development des marches
Commission des valeurs mobilières du Québec
(514) 940-2199, ext. 4572

Fernand Lavigne
Analyste, Service de l'inscription
Commission des valeurs mobilières du Québec
(514) 940-2199, ext. 4315

David Lemay
Analyste, Service de l'inscription
Commission des valeurs mobilières du Québec
(514) 940-2199, ext. 4237

January 18, 2002

Douglas M. Hyndman
Chair

Ref: National Instrument 21-101 Marketplace Operation

This Notice may refer to other documents. These documents can be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Commission Documents database or the Historical Documents database.