Canada: Proposed Changes To Quebec Derivatives Regulation Will Impact Dealers, Advisers And Hedgers

This Bulletin highlights the impact of proposed amendments to the Quebec Derivatives Regulation (QDR) on dealers and advisers that are not registered in Quebec to trade standardized derivatives, on persons who intend to rely on the trading exemption available for "hedgers" and on individuals subject to certain proficiency requirements under the Quebec Derivatives Act (QDA). 

As noted in our September 2015 Blakes Bulletin: Quebec Blanket Decision Affording Relief for Certain Derivatives Activities to be Revoked in June 2016, the pending revocation of a 2009 Blanket Decision, which provides for an exemption from both the registration and the qualification requirements of the QDA for activities with accredited investors involving specified futures and options, means that dealers or advisers that are not registered in Quebec engaging with Quebec clients as accredited counterparties will need to rely upon and fit their trading activities within the exemption for standardized derivatives (Standardized Derivatives Exemption). While the proposed amendments will fill a gap in the Standardized Derivatives Exemption, that exemption will nonetheless continue to be restricted to exchange-traded derivatives offered primarily outside Quebec. This means that, when the 2009 Blanket Decision is revoked, market participants whose activities with Quebec-based clients involve futures or options listed on the Montréal Exchange will either have to become registered in Quebec as a derivatives dealer or will have to make the necessary changes to their systems and procedures so that affected trades are made through a Quebec registrant.

The proposed amendments to the QDR will also create new certification and record-keeping requirements for persons who rely on trading exemptions based solely on their status as "hedgers" and will provide increased flexibility to satisfy QDA proficiency requirements applicable to advising derivatives representatives, associate advising derivatives representatives and chief compliance officers of derivatives portfolio managers. 

The draft regulation published by the Autorité des marchés financiers (Authority) is open for comment until February 13, 2016.

STANDARDIZED DERIVATIVES EXEMPTION: LIMITATIONS FOR DEALERS AND ADVISERS

The current Standardized Derivatives Exemption grants relief from the dealer and adviser registration requirements of the QDA for non-Quebec dealers or advisers carrying on business with Quebec-based accredited counterparties involving standardized derivatives such as options or futures (excluding Montréal Exchange products). It is available for a person in respect of dealing or advising activities involving standardized derivatives (derivatives traded on a published market, whose intrinsic characteristics are determined by that market and whose trade is cleared) if the following conditions are satisfied:

  • ​The person is authorized to act as a dealer or adviser or exercise similar functions in a jurisdiction outside Quebec where its head office or principal place of business is located 
  • The person carries on business solely with "accredited counterparties" within the meaning of the QDA (note that the categories of accredited counterparties are generally more restrictive than the broader class of "accredited investors" in the securities law context)
  • The standardized derivative is offered primarily outside Quebec

The current Standardized Derivatives Exemption is silent with respect to the separate qualification requirement of the QDA, which requires persons who create or market derivatives in Quebec to be qualified by the Authority. The proposed amendments to the QDR address this gap by specifically covering the qualification requirement in the exemption. 

Despite the proposed amendments to the QDR, the Standardized Derivatives Exemption will remain restricted to trades of exchange-traded derivatives that are offered primarily outside Quebec. Accordingly, market participants whose activities with Quebec-based clients involve futures or options listed on the Montréal Exchange will not be able to rely on the Standardized Derivatives Exemption to carry on those activities after the revocation of the 2009 Blanket Decision on June 5, 2016.  Such participants will either have to become registered in Quebec as a derivatives dealer, or will have to make the necessary changes to their systems and procedures so that relevant trades can be made through a Quebec registrant. Applicants for registration who are not already dealer members of the Investment Industry Regulatory Organization of Canada (IIROC) will also need to file an application for membership with IIROC as this is a precondition for registration as a derivatives dealer with the Authority. 

NEW HEDGER CERTIFICATION AND RECORD-KEEPING REQUIREMENTS

The proposed amendments to the QDR also propose a certification requirement for persons who are acting exclusively as hedgers and who wish to rely on their status as a "hedger" in order to be treated as an accredited counterparty. Such persons will be required to deliver a certification in prescribed form within 30 days after entering into a derivatives transaction, and annually thereafter. The prescribed form requires a hedger to certify that the derivatives transaction or series of transactions entered into constitute "hedging" within the meaning of the QDA. The amendments would also impose a record-keeping requirement on hedgers, requiring records of derivatives transactions to be retained for the duration of the transaction and for seven years after the transaction expires or terminates.

A "hedger" is defined in the QDA as a person who, because of the person's activities:

  1. ​Is exposed to one or more risks attendant upon those activities, including supply, credit, exchange and environmental risks and the risk related to fluctuations in the price of an underlying interest, and
  2. Seeks to hedge that risk by engaging in a derivatives transaction, or a series of derivatives transactions, where the underlying interest is directly associated with that risk or a related underlying interest

The accompanying notice indicates that "the delivery of this certification will enable the Authority to better determine the identity and number of hedgers in order to assess their status as accredited counterparties." 

It should be emphasized that the certification requirement will only apply to a person who relies solely on the hedger category in order to qualify as an accredited counterparty. A person who qualifies under another category will not be required to provide the certification. 

STREAMLINED PROFICIENCY REQUIREMENTS FOR REGISTERED INDIVIDUALS

The proposed amendments to the QDR will also provide greater flexibility for advising derivatives representatives, associate advising derivatives representatives and chief compliance officers of derivatives portfolio managers to meet the training, education and experience requirements imposed by the QDA. The amendments recognize specific experience and training for the relevant individuals for qualification purposes. For example, as an alternative to having passed the required exams of IIROC, a person may qualify by holding a Chartered Financial Analyst charter or a chartered alternative investment analyst charter. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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