NZX Regulation Decision

Transcription

1 NZX Regulation Decision Top Capital Partners Limited (TCPA) Waiver from NZX Participant Rules and Ruling on NZX Participant Rule February 2018

2 Application Waiver from NZX Participant Rules and , and Ruling on NZX Participant Rule Decision 1. On the basis that the information provided to NZX Regulation (NZXR) is full and accurate in all material aspects, and subject to the conditions in paragraph two below, NZXR grants Top Capital Partners Limited (TCPA): a. A waiver from NZX Participant Rules (Rules) and to allow Client Funds received by TCPA and transferred to Interactive Brokers LLC (IB) to be included in TCPA s calculation of Client Assets; and b. A ruling on Rule for Client Funds received by TCPA and transferred to IB to be considered held on trust for TCPA s clients. 2. The waiver and ruling in paragraph one above is provided on the conditions that: a. TCPA performs the reconciliation required under Rule (h) to ensure that total Client Assets held in TCPA s Client Funds Account and funds held in IB s segregated customer accounts on TCPA s clients behalf, taken together but excluding any Buffer, at the end of each Business Day, equals TCPA s total Outstanding Obligations; b. TCPA calculates Outstanding Obligations in accordance with Rule and does not discharge its Outstanding Obligations in respect of any client until: i. that client has received clear funds from TCPA; or ii. the legal title of the Securities has been registered into that client's name on the Issuer's Securities Register; c. TCPA must only transfer Client Funds to IB if instructed by its clients to do so, and in accordance with such instructions; d. With respect to funds transferred to IB, TCPA must only include in its calculation of Client Assets monies that are held by IB on TCPA s clients behalf in a Special Reserve Bank Account for the Exclusive Benefit of Customers required to be maintained by IB under the Securities Exchange Act of 1934 (SEC Act); e. TCPA reconciles on a daily basis IB s records with that of TCPA s own internal systems in accordance with Rule (g), in order to verify its calculation of Client Assets and Outstanding Obligations; f. TCPA remains compliant with Sections 77P to 77V of the Financial Advisers Act 2008 (FAA), as from time to time amended, re-enacted or substituted, and notifies NZXR immediately should it breach any of these regulations; g. TCPA notifies NZXR immediately upon becoming aware of any non-compliance by IB with any of the regulations it is subject to with respect to customer protection; h. IB remains subject to the customer protection regulations under the SEC Act; and NZX REGULATION DECISION 21 February of 8

3 i. TCPA must disclose to its clients within its client agreement the manner in which Client Funds will be held and protected for the purpose of United States Securities trading. 3. This waiver and ruling is effective until revoked. NZXR reserves the right to revoke or vary this waiver and ruling at any time. 4. The information on which this decision is based is set out in Appendix One to this decision. This decision will not apply if that information is not, or ceases to be, full and accurate in all material respects. 5. The Rules to which this decision relates are set out in Appendix Two to this decision. Reasons 6. In reaching the decision to provide this waiver and ruling, NZXR has considered that: a. IB is regulated by the U.S. Securities and Exchange Commission (SEC) as a registered Broker-Dealer, and the U.S. Commodities Futures Trading Commission (CFTC) as a registered Futures Commission Merchant; b. The protection of Client Assets afforded under the SEC Act is comparable and equivalent to that of the Rules; c. Funds deposited with IB on behalf of TCPA s clients are protected under Subpart A c3-3 of the SEC Act; d. TCPA will continue to complete all daily reconciliations required under Section 18 of the Rules, in addition to reconciling IB s records in respect of TCPA Client Monies with that of its own internal systems; e. Only funds held in IB s segregated customer accounts for TCPA s clients will be included in TCPA s calculation of total Client Assets; f. TCPA will capture all of its clients Outstanding Obligations in its daily reconciliation until such obligations have been discharged in accordance Rule ; and g. TCPA has independently conducted an analysis of the regulatory obligations for handling client money and client property, and is satisfied that its proposed approach to handling Client Funds meets the requirements of the FAA. Publication 7. This waiver will be published. ENDS NZX REGULATION DECISION 21 February of 8

4 Appendix One 1. TCPA is accredited as an NZX Advising Firm under the Rules, and as TCPA receives Client Funds it is considered a Market Participant Accepting Client Assets. 2. TCPA s Broking Business provides its clients access to NZX Markets through its trade platform, utilising the services of an NZX Trading Participant and Clearing Participant. TCPA also provides its clients access to international Securities markets through executing brokers situated in the relevant jurisdiction. 3. For trading in US Securities, TCPA plans to use IB, a registered Broker Dealer with the SEC. 4. TCPA s proposed business model involves TCPA initially accepting Client Funds into its Clients Funds Account in New Zealand for future Securities trading. Where a client wishes to trade US Securities, TCPA will transfer the receipted Client Funds to IB to be deposited into a segregated customer account for future trading. 5. Under Rules and respectively, TCPA must ensure that its: a. Total Client Assets held in a Transfer Account of a Legal Title Transfer Depository Participant, Nominee Account and Client Funds Account taken together with any Buffer must, at all times, equal or exceed its total Outstanding Obligations; and b. Total Client Assets held in a Transfer Account of a Legal Title Transfer Depository Participant, Nominee Account and Client Funds Account taken together but excluding any Buffer must, at the end of each Business Day, equal its total Outstanding Obligations. 6. Rule 18.5 requires that TCPA must: a. Hold Client Assets on trust for its clients at all times; b. Protect Client Assets from the time of receipt; and c. Not discharge any Outstanding Obligation until the client has received clear funds from TCPA, or had the legal title of the Securities registered into that client's name. 7. Under the Rules, TCPA may only include funds held within its own Client Fund Accounts in the calculation of Client Assets, therefore any Clients Funds transferred to IB cannot be included as Client Assets and the corresponding Outstanding Obligation would need to be accounted for in the Client Funds Account to maintain compliance with Rules and TCPA has applied for a waiver of Rules and to allow Client Funds transferred to IB to be included within its calculation of Client Assets for the purpose of the reconciliation required under Rule (h). 9. Within its application, TCPA has advised that: a. It must maintain cleared funds deposited with IB in order to trade in US Securities on behalf of its clients; b. Its clients do not always deposit Clients Funds with TCPA with the immediate intention of trading, and given the delays in transferring funds between TCPA and IB, it considers NZX REGULATION DECISION 21 February of 8

5 the most practical approach for clients wishing to trade US Securities to be for Client Funds to be transferred and held with IB in advance of any trading instructions; c. In order to maintain compliance with Rules and , TCPA will be required to match within its own Client Funds Accounts any Clients Funds transferred to IB where the associated Outstanding Obligation is yet to be discharged; d. It considers the application of Rules and to be unduly onerous on the basis that it: i. Requires TCPA to maintain significant quantities of its capital in its Client Funds Accounts at all times; ii. Duplicates protection already afforded to Client Assets by the SEC Act; and iii. Renders the cost of providing this service to clients prohibitively expensive for TCPA; and e. Its proposed model does not incur any additional risk to Client Assets given the level of protection afforded by IB s regulatory obligations to the SEC and CFTC. NZX REGULATION DECISION 21 February of 8

6 Appendix Two 18.1 CLIENT ASSETS Client Assets means: (a) Client Funds received and held by a Market Participant Accepting Client Assets for undelivered buy contracts or received and held on account including, but not limited to, Margin Cover, funds on deposit, call accounts and application monies; and (b) Clients Securities received and held by a Market Participant Accepting Client Assets for delivered unpaid sell contracts. For the purposes of this Rule 18, references to money, funds and amounts include money, funds and amounts in any currency OUTSTANDING OBLIGATIONS Outstanding Obligations means an agreement or arrangement between a Market Participant Accepting Client Assets and its client where: (a) Securities of that client have been transferred into the Transfer Account of a Legal Title Transfer Depository Participant as a result of direct instructions from that client s Trading Participant and the funds owing for the transfer of those Securities to the buying client on the sale or proposed sale of those Securities have not yet been received by the Relevant Clearing Participant. Securities may not be transferred from a Transfer Account until such time as the Trading Participant has received an NZX confirmed trade; or (b) that client is a buying client and has paid money to the Market Participant Accepting Client Assets prior to those Securities being registered in that client s or its Nominee Company s name. This includes funds received by the Trading Participant prior to a Trading Participant entering that client s Order into the Trading System; or (c) that client has paid money to a Market Participant Accepting Client Assets for any other purpose, and the amount paid has not been applied (less reasonable brokerage or commission) for that purpose CLIENT FUNDS ACCOUNT Client Funds Account means: (a) a trust account held by a Market Participant Accepting Client Assets solely for the benefit of its clients at a Bank approved by NZX; and (b) a Depository Account held by a Market Participant Accepting Client Assets solely for the benefit of its clients. NZX REGULATION DECISION 21 February of 8

7 Each Market Participant Accepting Client Assets must open and maintain at least one Client Funds Account of the type referred to in Rule (a) in each currency for which it accepts funds. Subject to this Rule, a Market Participant Accepting Client Assets may open and maintain any number of Client Funds Accounts. This Rule 18 applies to every Client Funds Account maintained by a Market Participant Accepting Client Assets A Client Funds Account held by a Market Participant Accepting Client Assets may include a Buffer, being money belonging to the Market Participant Accepting Client Assets which is deposited into a Client Funds Account and retained for the purposes of facilitating settlement and to manage any shortfalls that may arise in respect of settlement Any Buffer deposited in a Client Funds Account by a Market Participant Accepting Client Assets must be reasonable in the circumstances and in accordance with relevant Guidance Notes, Procedures and Good Broking Practice CLIENT ASSETS AND OUTSTANDING OBLIGATIONS Total Client Assets held in a Transfer Account of a Legal Title Transfer Depository Participant, Nominee Account and Client Funds Account by a Market Participant Accepting Client Assets (as the case may be) taken together with any Buffer must, at all times, equal or exceed that Market Participant s total Outstanding Obligations Total Client Assets held in a Transfer Account of a Legal Title Transfer Depository Participant, Nominee Account and Client Funds Account by a Market Participant Accepting Client Assets (as the case may be) taken together but excluding any Buffer must, at the end of each Business Day, equal that Market Participant s total Outstanding Obligations Each Market Participant Accepting Client Assets may only recognise those Securities that belong to clients in its calculation of Total Client Assets pursuant to Rule and Securities belonging to the Market Participant Accepting Client Assets and client Securities that do not require protection that are held in either a Transfer Account of a Legal Title Transfer Depository Participant or Nominee Account may not be included in the calculation of Total Client Assets under Rule and CLIENT ASSETS HELD ON TRUST Each Market Participant Accepting Client Assets must hold Client Assets on trust for its clients at all times Each Market Participant Accepting Client Assets must protect Client Assets from the time of receipt of those Client Assets. Each Market Participant Accepting Client Assets obligations in relation to Client Funds are not discharged until: (a) that client has received clear funds from the Market Participant Accepting Client Assets; or (b) the legal title of the Securities has been registered into that client s name on the Issuer s Securities Register REQUIREMENTS FOR CLIENT FUNDS ACCOUNTS Each Market Participant Accepting Client Assets must: (a) in respect of any Client Funds Account which is not a Depository Account: (i) obtain from the Bank holding the Client Funds Account a written acknowledgement of the trust status of the account, and must ensure that the words Client Funds Account, "Client Trust Account" or such other similar words as are required by NZX REGULATION DECISION 21 February of 8

8 legislation appear in the account name of that Client Funds Account; and (ii) supply to NZX current copies of the written acknowledgement of the trust status of the Client Funds Account; (b) not deposit Client Funds into an account that is not a designated Client Funds Account; (c) notify NZX immediately of any changes to any of its Client Funds Accounts; (d) notify NZX of the following matters periodically as set out in the relevant Guidance Note: (i) whether the Market Participant Accepting Client Assets intends to deposit Buffers in its Client Funds Accounts; and (ii) the basis on which Buffers will be calculated (which must be in accordance with relevant Guidance Notes, Procedures and Good Broking Practice) and deposited into the Market Participant Accepting Client Asset s Client Funds Accounts; (e) ensure that each Client Funds Account is not overdrawn at any time, for the purposes of this Rule (e) this includes both the general ledger bank book and the physical Bank account. For the avoidance of doubt, a Client Funds Account in credit cannot be used to offset a deficit in another Client Funds Account; (f) not use funds in the Client Funds Account as security for any obligation of the Market Participant Accepting Client Assets or any other person; (g) reconcile the records for each of the Client Funds Account held by the Market Participant Accepting Client Assets with the records of CDO or the Bank (as the case may be) holding the Client Funds Account in all currencies on a daily basis. (h) using data from Rule (g), perform reconciliations as required, in accordance with relevant Guidance Notes, Procedures and Good Broking Practice, in order to monitor compliance with Rule , including a reconciliation as at the end of each Business Day assessing and determining compliance with Rule ; (i) each Market Participant Accepting Client Assets must immediately notify NZX if, for any reason, the Market Participant Accepting Client Assets is unable to perform a daily reconciliation pursuant to Rule (g) or (h); and (j) record movements in and out of each Client Funds Account for all Settlement System transactions on a transaction by transaction basis Each Market Participant Accepting Client Assets must immediately notify NZX if: (a) its bank book ledger balance, any physical Bank account or Depository Account balance for any of its Client Funds Accounts become overdrawn for any reason; (b) if any reconciliation performed under Rule (h) reveals any non-compliance with Rule ; (c) if there has been a breach of Rule (b); or (d) if there has been a breach of Rule NZX REGULATION DECISION 21 February of 8