Canada: Quebec Signals Implementation Of Derivatives Legislation With Publication Of Draft Regulation

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Securities Regulation, October 2008


Quebec's Autorité des marchés financiers (Authority), the lead regulator for derivatives in Canada, recently published a draft regulation intended to implement the Quebec Derivatives Act (QDA). The QDA was adopted in June 2008 and is expected to come into force in stages beginning in 2009 (provisions governing dealers and advisers will likely be timed to come into force at the same time as national reforms governing registration). For a summary of the QDA, see our July 2008 Blakes Bulletin on Securities Regulation – Quebec Adopts Derivatives Legislation.

The draft Derivatives Regulation (Draft Regulation), which has been published for comment and requires approval by the Quebec Minister of Finance, sets out:

  • the minimum assets of an accredited counterparty;

  • the process and measures governing self-certification of operating rules of regulated entities;

  • the qualification rules for persons who create or market derivatives; and

  • the communication of information to clients of derivatives dealers.


The QDA provides that accredited counterparties include, in addition to government entities, financial institutions and other regulated entities, persons who are knowledgeable of derivatives who meet prescribed minimum asset tests. The concept of accredited counterparty is important since over-the-counter derivatives activities or transactions involving such parties are not regulated under the QDA, meaning such activities or transactions can take place without the person offering same being subject to the qualification process of the QDA and without derivatives dealers or advisers being subject to registration in such context. The Draft Regulation establishes the minimum asset level at C$5-million in the case of individuals and C$10-million in the case of legal persons or partnerships, trusts, funds, associations or other groups which do not constitute legal persons. The asset base must consist of cash, securities, insurance contracts or deposits and must be calculated on the basis of realizable value, before taxes, but after deduction of corresponding liabilities. The QDA requires that persons seeking to rely on this exemption must establish that they meet the minimum asset level in a "conclusive and verifiable manner". It is noteworthy that the financial test prescribed by the Draft Regulation is more stringent than that applicable to institutional clients and high net worth individuals under Canadian private placement exemptions applicable to trades in securities.


Upon the implementation of the QDA, recognized regulated entities such as the Montreal Exchange, Canada's derivative exchange, or the Canadian Derivatives Clearing Corporation, will be able to "self-certify" operating rules, instead of having to obtain the approval of the Authority as is currently the case. The Draft Regulation sets out the self-certification process, in particular by requiring a public consultation period of at least 30 days in the case of material rules. To this end, the entity must send the proposed rule to its members and participants, as well as to the Authority, which will publish the proposal in its bulletin. After completion of the public consultation process, the entity can submit notice of self-certification of the rule to the Authority, enabling the rule to become enforceable. Notice includes submission to the Authority of all comments made during the consultation process and an analysis of the advantages and disadvantages of the measures proposed by the rule. A number of exceptions to the requirement for public consultation are provided for in the Draft Regulation, including in respect of rules pertaining to routine operational processes or administrative practices, rules having minor impact on members or participants, rules intended for harmonization purposes or rules adopted in emergency situations. As well, rules in respect of new derivative products (for example a rule which sets out a trading or clearing condition), while they must be submitted to the Authority together with information describing the product and its offering, are not subject to public consultation.


The Draft Regulation provides for the qualification process that an entity must follow in order to be able to offer derivatives to the public. As well, the Draft Regulation provides for the authorization process needed in order for the qualified person to be able to offer a particular product. For a person to be qualified, it must submit certain information to the Authority, including a complete description of its activities as well as three years of audited financial statements. The Authority retains discretion to refuse qualification if it considers it necessary for the protection of the public. Once qualified, the entity will be subject to an annual reporting requirement, having to report any changes in the information previously provided to the Authority and the number of contracts entered into in Quebec for all derivatives offered to the public during the most recently completed year, as well as submit its audited financial statements for such year.

For a derivative to be authorized, the person who creates or market same must submit the following information to the Authority:

  • a detailed description of the derivative;

  • disclosure of the risk which this derivative involves;

  • a complete description of the method of trading of the derivative; and

  • disclosure of all related costs.

The Authority has 21 days within which to object to the product, failing which it is deemed to be authorized under the QDA.


The Draft Regulation prescribes the form of risk information statement which dealers are required to provide to non-accredited counterparty clients pursuant to the QDA and requires dealers to obtain a dated acknowledgment of receipt.


A number of policy statements have yet to be published which are expected to "round out" the legislative core principles of the QDA, particularly with respect to regulatory oversight and governance of regulated entities.


The Draft Regulation is open for comment until November 3, 2008. As noted above, although no implementation date has been proposed, it is expected that the QDA is intended to come into force in phases, commencing in early 2009.


  • Lead regulator for derivatives in Canada publishes draft regulation to implement recently-enacted derivatives legislation

  • Minimum net financial assets of non-governmental, non-regulated accredited counterparties set at C$5-million for individuals and C$10-million for legal entities

  • Describes new self-certification process for rules and products of regulated entities

  • Sets out process for public offering of derivatives

  • Draft policy statements which will round out legislative core principles yet to be published

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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