Exemptions Granted by the IIROC Board of Directors – Insurance and Custody Exemptions Relating to Crypto Asset Trading

21-0213
Type: Rules Notice> Exemption
Rule connection:
IIROC Rules
UMIR
Legacy DMR Rules
Distribute internally to:
Institutional
Legal and Compliance
Senior Management
Operational
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Contact:

Victoria Pinnington
SVP, Market Regulation
Telephone:
Email:

On August 13, 2021, the IIROC Board of Directors granted the following exemptions to Fidelity Clearing Canada (FCC), related to FCC’s intention to transact in crypto assets:

  • An exemption to obtain Financial Institution Bond (FIB) insurance coverage, pursuant to Dealer Member Rule sections 17.5, 400.2, 400.3, 400.3B, 400.4, 400.5 and 400.6 (Insurance Exemption)
  • An exemption to provide capital for crypto asset positions held at FCC’s custodian Fidelity Digital Asset Services, LLC (FDAS), pursuant to Line 20 of Statement B of Dealer Member Rule Form 1 (Custody Exemption).
  1. Authority to Grant Exemptions

Dealer Member Rule 17.15 permits the Board to exempt a Dealer Member from any provision of the Dealer Member Rules where it is satisfied that to do so would not be prejudicial to the interests of  Dealer Members, their clients or the public. In granting an exemption, the Board may impose such terms and conditions as are considered necessary.

  1. Exemptions Granted and Conditions

Insurance Exemption

The IIROC Board of Directors granted an exemption from the general requirement to maintain adequate insurance in Dealer Member Rule section 17.5 and from the specific requirements in Dealer Member Rule sections 400.2, 400.3, 400.3B, 400.4, 400.5 and 400.6, and any successor IIROC requirements, to maintain sufficient FIB insurance coverage for all dealer business lines.

This exemption is subject to the following conditions:

  • FCC shall obtain a proper insurance endorsement in its FIB policy pertaining to crypto assets once it becomes available to FCC.
  • FCC must continue to maintain adequate FIB insurance coverage for all matters other than for crypto asset-related losses.
  • FCC must fund a trust account (the FCC Trust Account) dedicated to covering crypto asset-related losses with an amount equal to or greater than that required under IIROC’s minimum FIB insurance coverage formula.
  • FCC must ensure that the FCC Trust Account is opened at an acceptable institution and is operated in a manner acceptable to IIROC.
  • FCC is prohibited from using client free credit cash balances to fund the FCC Trust Account.
  • FCC must either:
    • deduct the amount normally required to be provided under IIROC’s minimum FIB insurance coverage formula for separate FIB crypto asset insurance coverage when determining its risk adjusted capital, or
    • obtain a guarantee from an affiliated company that qualifies as an acceptable institution for the amount that would otherwise need to be deducted in section 6.(a).
  • These terms and conditions may be amended upon prior written notice to FCC.

Custody Exemption

The IIROC Board of Directors also granted an exemption from the requirement for a Dealer Member to deduct 100% of the market value of the securities held in custody at a non-acceptable securities location in the calculation of risk adjusted capital as collectively set out in Line 20 of Statement B of Form 1 and the “Capital Requirements” paragraph (ii) of the related Notes and Instructions, and any successor IIROC requirements.

This exemption is subject to the following conditions:

  • FCC must ensure and regularly confirm to IIROC that FDAS, at all times:
    • maintains its good standing status as a New York State-chartered trust company,
    • maintains its good standing status with, and continues to be, regulated by the New York State Department of Financial Services (NYS DFS), and
    • complies with the NYS DFS capital and insurance requirements.
  • FCC will obtain from FDAS SOC 2 Type 1 reports for both custody and execution prior to December 31, 2022 and SOC 2 Type 2 reports for both custody and execution for the years following December 31, 2022.  The SOC 2, Type 2 report will be provided to IIROC on an annual basis thereafter.
  • Each year FCC will provide IIROC with a copy of the annual audited financial statements prepared for FDAS.
  • FCC must ensure that the crypto assets held for it’s clients by FDAS are initially only bitcoin and ether.
  • Until such time as FDAS qualifies as an acceptable institution or IIROC grants an exemption to FCC that would permit FDAS to qualify as an acceptable institution, FCC agrees that all cash held by FDAS is subject to a capital charge of 100%.
  • FCC must execute a custody agreement with FDAS that is in a form acceptable to IIROC and must ensure that any proposed material amendments to the agreement are approved by IIROC.
  • FCC will promptly notify IIROC if any United States regulatory authority makes a determination that FDAS, for FCC’s client’s crypto assets, is not permitted by the regulatory authority to hold client crypto assets.
  • FCC will notify IIROC, promptly, of any material breach or failure of FDAS systems of controls or supervision in relation to the crypto assets held by FDAS, and the steps taken by FCC to address each such breach or failure.
  • FCC will provide IIROC with the same client reporting as outlined in the CSA Decision In the Matter of Fidelity Clearing Canada ULC dated November 16, 2021.
  • These terms and conditions may be amended upon prior written notice to FCC.

As is standard for exemption orders of this type, the exemption order also specified that:

  • The Board of Directors reserves the right to revoke FCC’s exemption, at any time, upon notice to the applicant.
  • This exemption order is void upon the earliest of the following taking place:
    • The implementation of any material amendments to the rules by IIROC or the provincial securities commissions relating to insurance requirements and/or the capital requirements arising from securities held in custody at a non-acceptable securities location. IIROC, and not FCC, will determine whether any rule amendments implemented are considered to be related to insurance requirements and/or the capital requirements arising from securities held in custody at a non-acceptable securities location and are considered to be material, thus rendering this exemption order void.
    • FCC’s breach of any of the representations of the applicant in its application for this exemption order.
    • FCC’s breach of any of the conditions breach of any of the conditions imposed with respect to the Insurance Exemption and Custody Exemption.

In addition, in connection with FCC’s related business model change filing to transact in crypto assets,  FCC made certain representations and agreed to provide certain undertakings to IIROC.

Staff will only recommend approval of an exemption of this type under exceptional circumstances, and where the Dealer Member demonstrates that it has taken all reasonable steps to comply with IIROC Rules.

  1. Questions and Further Information

For questions and further information regarding this Notice, please contact:

Victoria Pinnington
SVP, Market Regulation
Telephone:  416-646-7231
e-mail:  [email protected]