Fidelity approved as first IIROC member to offer crypto trading and custody to institutional clients

Alternative Currencies

On November 16,  Fidelity Clearing Canada ULC (FCC) received regulatory approval from the Canadian Securities Administrators (CSA) Decision: In the Matter of Fidelity Clearing Canada ULC et al. [PDF] and the Investment Industry Regulatory Organization of Canada (IIROC) Exemptions Granted by the IIROC Board of Directors – Insurance and Custody Exemptions Relating to Crypto Asset Trading to become the first IIROC member to operate a crypto asset trading platform (CTP) and custody solution for institutional clients. This approval signals that IIROC is prepared to regulate crypto asset dealers, and that it is permissible for one IIROC member to operate both a traditional securities business and a crypto trading business.

Similar to the CTPs that are currently registered as under the CSA’s “interim” Restricted Dealer framework, FCC obtained exemptive relief from the prospectus requirement to offer “Crypto Contracts”as well as the over-the-counter derivatives trade reporting requirements. Interestingly, FCC’s relief has the same two-year sunset as the exemption orders granted to Restricted Dealer CTPs, notwithstanding that FCC is an IIROC member.

FCC’s terms and conditions differ from retail-facing Restricted Dealer CTPs in a few key respects:

  • Affiliated Liquidity Provider and Custodian – FCC’s crypto trade execution and custody services are provided by its affiliate, Fidelity Digital Asset Services (FDAS). FDAS is a trust company licensed by the New York State Department of Financial Services. FCC and FDAS operate independently, and custody services are performed by FDAS personnel who are not connected to FCC.  FDAS does not currently satisfy the C$100 million equity requirement for a foreign “qualified custodian” under National Instrument 31-103 (NI 31-103), nor does it have a System Organization Controls (SOC) 2 Type 1 or Type 2 audit report, which the CSA has required for custodians of Restricted Dealer CTPs.
  • Bitcoin and Ether – Initially, FCC will offer only Bitcoin and will soon expand to offering Ether. Other crypto assets may follow once they are supported by FDAS. 
  • Institutional Clients and Suitability Exemption – FCC’s clients will be Institutional Customers (as defined under the IIROC rules) and FCC will rely on the IIROC suitability exemption for self-directed brokerage platforms, without the “account appropriateness” and loss limit requirements applicable to suitability exempt Restricted Dealer CTPs.
  • Services to IIROC Investment Dealers – FCC may offer services to a IIROC members that are “Introducing Brokers” in respect of which FCC acts as Carrying Broker, provided that FCC takes reasonable steps to verify that the Introducing Broker has received approval from IIROC to offer Crypto Contracts to its clients.
  • IIROC Exemption from Custody Requirement – FCC is exempt from the IIROC requirement to deduct 100% of the market value of securities held in custody with FDAC due to it not being an “acceptable securities location”, subject to FDAC maintaining its status as a New York State-charted trust company, completing its SOC 2 – Type 2 report by December 2022 and satisfying other ongoing due diligence requirements. 
  • IIROC Exemption from Insurance Requirement – FCC’s crypto asset business line is exempt from the IIROC insurance regime, provided that FCC obtains an endorsement relating to crypto assets on its Financial Institution Bond (FIB), and also self-insures for crypto asset-related losses by holding cash in a dedicated trust account in an amount equal to or greater than the amount that would be required under the FIB insurance coverage formula.

FCC’s approval paves the way for other IIROC members that are considering offering crypto assets to their clients, whether as Introducing Brokers to FCC or with their own full-service solution supported by a third party custodian. It also provides Restricted Dealer CTPs with a sense of IIROC’s expectations for when they transition to full investment dealer registration and IIROC membership.