21-310 - Information Processor for Corporate Debt Securities [CSA Staff Notice - Lapsed]

The purpose of this notice is to inform the public that CanPX Inc. (CanPX) will act as an information processor for corporate debt securities under National Instrument 21-101 Marketplace Operation (NI 21-101) for a period of five years from July 1, 2009 to June 30, 2014.

1. Regulatory Requirements

NI 21-101 provides for the operation and regulation of an information processor. An information processor is defined as a person or company that receives and provides information under NI 21-101 and has filed Form 21-101F5 Initial Operation Report for Information Processor (Form 21-101F5).

Part 8 of NI 21-101 requires that marketplaces that display orders of corporate debt securities provide information regarding orders for designated corporate debt securities to an information processor. Marketplaces, inter-dealer bond brokers (IDBs) and dealers are also required to provide trade information for corporate debt securities to an information processor, if one is in place, as required by the information processor.¹

^{1  For government debt securities, the requirements for marketplaces and IDBs to provide order and trade information have been postponed until January 1, 2012.}

The obligations of an information processor are set out in Part 14 of NI 21-101. They include:

• a requirement to provide prompt and accurate order and trade information and not unreasonably restrict fair access to such information;
• a requirement that the information processor provides timely, accurate, reliable and fair collection, processing, distribution and publication of information for orders for, and trades in, securities;
• an obligation to maintain reasonable books and records; and
• certain system requirements, including an annual independent systems review.

In addition, an information processor is required to establish, in a timely manner, an electronic connection to a marketplace, IDB or dealer that is required to provide it with information. It is also required to enter into an agreement with each marketplace, IDB or dealer required to provide it with information. The agreement must set out that the entities will provide the information processor information in accordance with Part 8 of NI 21-101 and that they will comply with any other reasonable requirements set by the information processor.

2. Status of the Information Processor for Corporate Debt Securities and Process to Date

CanPX has been an information processor for corporate debt securities since 2003. Its initial term expired on December 31, 2006. In July 2006, as we considered extending CanPX’s term, we invited other entities interested in being an information processor for corporate debt securities to file Form 21-101F5, and published a separate notice for this purpose.²   Bourse de Montréal Inc. (MX), CDS Inc., TSX Inc. in conjunction with Candeal.ca Inc. (CanDeal), and Gmarkets Inc. (Gmarkets) each filed a Form 21-101F5 to act as an information processor for corporate debt securities.³  We published a summary of the filings received in April 2007.⁴

^{2  CSA Notice 21-304 Request for Filing of Form 21-101F5 Initial Operation Report for Information Processor by Interested Information Processors (CSA Notice 21-304), published in Ontario on July 14, 2006 at (2006) 29 OSCB 5757.
3  CanPX, MX, CDS and TSX Inc. (without CanDeal) also applied to be an information processor for exchange-traded securities.
4  CSA Staff Notice 21-306 Notice of Filing of Forms 21-101F5 Initial Operation Report for Information Processor (CSA Staff Notice 21-306), published in Ontario on April 20, 2007 at (2007) 30 OSCB (Supp-3).}

We have since extended CanPX’s status as an information processor for corporate debt securities to give us time to review the filings and to work through the issues, and have informed the public of the extensions in a number of staff notices.⁵  In CSA Staff Notice 21-308, we notified the public that CanPX informed us that it was discussing the possibility of a partnership with other participants in the fixed income market, and that such partnership could result in a revised application for an information processor for corporate debt securities. We advised existing applicants for the corporate debt information processor that they may also revise and update their applications, and to submit any revised filings by January 31, 2009. A number of applicants, including CanPX, provided updates to their original filings.

^{5  CSA Staff Notice 21-305 Extension of Approval of Information Processor for Corporate Fixed Income Securities, published in Ontario at (2006) 29 OSCB 8364; CSA Staff Notice 21-307 Extension of Approval of Information Processor for Corporate Fixed Income Securities published in Ontario at (2007) 30 OSCB 9222; and CSA Staff Notice 21-308 Update on Applications to Become an Information Processor (CSA Staff Notice 21-308), published in Ontario at (2008) 31 OSCB 11533.}

3. Factors and Criteria Considered in the Review of Form 21-101F5

Section 16.2 of Companion Policy 21-101 to National Instrument 21-101 Marketplace Operation (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, and also describes the factors used when evaluating the filings received. These factors, which we also communicated in CSA Notice 21-304, include: the performance capabilities, standards and procedures for the collection, processing, distribution and publication of order and trade information; whether all marketplaces may obtain access to the information processor on fair and reasonable terms; whether the entity applying for the role of an information processor has sufficient financial resources for the role; the qualification of its personnel; the existence of another entity performing the role of an information processor; and the independent systems review prepared as required by subsection 14.5(b) of NI 21-101.

In CSA Staff Notice 21-306, we identified the criteria we would use to evaluate applications to be an information processor as follows: financial viability; governance requirements; the existence of processes to manage inherent conflicts of interest; system requirements; a commitment to receiving and disseminating data in order to meet the transparency requirements set out in NI 21-101; a competitive fee structure; and, where revenue is shared with contributors of data, a fair method of revenue allocation.

4. Review of CanPX Revised Form 21-101F5

As indicated above, since the filing of Form 21-101F5 by CanPX published in summary on April 2007, CanPX revised its proposal. The changes were in the following areas:

• CanPX will establish an Advisory Committee with representation from fixed income industry participants whose mandate will include providing CanPX with views and recommendations on issues of concern to data contributors and data purchasers; this Committee will also be included as part of the process for designating corporate debt securities⁶; and
• CanPX will replace its existing technical facilitator, Reuters Canada Limited with CanDeal.

^{6  For a description of the current list of designated corporate bonds, the selection criteria and the process for their selection, see http://www.canpx.ca/selectioncriteria.jsp.}

A summary of the revised proposal, prepared based on information provided by CanPX, is included at Appendix A of this notice.

5. CSA Conclusion
 
a. CanPX as an information processor for corporate debt securities

We believe that CanPX’s revised proposal meets our criteria for evaluation of a potential information processor. The implementation of an Advisory Committee, with representation from contributors and purchasers of data, would help ensure that all stakeholders have the opportunity to provide their views. In addition, it ensures that issues of concern will be raised through the Advisory Committee and properly considered by CanPX. As well, CanPX has a model for sharing revenue with its shareholders that are also contributors of data and has agreed in its undertakings to review this model to compensate all contributors of corporate bond data, regardless of whether they are shareholders.⁷

^{7  Currently, no marketplaces meet the existing threshold to contribute data to CanPX.}

In addition, we are of the view that the participation of industry participants such as dealers and IDBs in the governance of CanPX helps promote industry input in decisions regarding transparency in the fixed income markets. We acknowledge, however, that there are inherent conflicts of interest associated with the industry participants’ involvement in transparency decisions that may potentially impact their business. We believe that such conflicts, real or perceived, should be properly managed and note the undertakings that have been provided by CanPX to establish proper policies and procedures in this regard. In addition, we note that in the course of conducting our regulatory oversight of CanPX, the effectiveness of these policies and procedures will be examined.

Consequently, based on our review of the updated Form 21-101F5 filed by CanPX and the undertakings provided by CanPX (attached at Appendix B), we believe that it is not contrary to the public interest for CanPX to continue to be an information processor for corporate debt securities, for a period of five years beginning July 1, 2009 and ending June 30, 2014.

As an information processor, CanPX is designated as a market participant under the Securities Act (Ontario) and it was recognized as an information processor under the Securities Act (Québec).

b. Obligations of the marketplaces, IDBs and dealers

We remind the marketplaces, IDBs and dealers of the requirements in Part 8 of NI 21-101 to provide their data to CanPX, as an information processor, as required by CanPX and in accordance with the requirements set out in Part 10 of 21-101CP. In order to comply with this requirement, the marketplaces, IDBs and dealers required to report the corporate debt information must work with CanPX and CanDeal, as its technical facilitator, to establish the necessary connections in a timely manner.

6. Questions

Questions may be referred to: