Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, August 2009
INTRODUCTION
The Quebec Autorité des marchés financiers (the Authority) published a draft amending regulation (Amending Regulation) under the Quebec Derivatives Act (the QDA) on July 31, 2009 which provides for a new exemption from the registration requirements of the QDA for foreign dealers or advisers who trade or advise in standardized derivatives (the Standardized Derivatives Exemption).
The Standardized Derivatives Exemption applies where:
- 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 foreign dealer or adviser);
- the foreign dealer or adviser carries on business solely with "accredited counterparties" (ACs) within the meaning of the QDA (we discuss the definition of ACs in greater detail below); and
- the activity involves a "standardized derivative" that is offered primarily outside Quebec. The QDA defines "standardized derivative" as a derivative that is traded on a published market, whose instrinsic characteristics are determined by that market and whose trade is cleared and settled by a clearing house.
Subject to government approval, the Amending Regulation is scheduled to come into force on September 28, 2009, in tandem with National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103).
RELATIONSHIP TO CURRENT OTC DERIVATIVES EXEMPTION AND EXEMPTION FOR SPECIFIED OPTIONS AND FUTURES
Currently, the QDA contains a carve-out from the registration requirements with respect to over-the-counter (OTC) derivatives activities or transactions involving ACs only (the OTC Derivatives Exemption). The Standardized Derivatives Exemption once in force will provide relief complementary to the OTC Derivatives Exemption in relation to standardized derivatives activities. As mentioned, the dealer or adviser must be licensed in its home jurisdiction and the standardized derivative must be offered primarily outside Quebec for the Standardized Derivatives Exemption to apply.
When the QDA was brought into force on February 1, 2009, the Authority adopted a blanket decision (the Blanket Decision) exempting certain specified options and futures from the QDA where such instruments are offered to "accredited investors" (AIs) within the meaning of Regulation 45-106 respecting prospectus and registration exemptions adopted under the Quebec Securities Act (QSA). Please see our January 2009 Blakes Bulletin on Securities Regulation – Quebec Derivatives Legislation in Force as of February 1, 2009 for further discussion of the Blanket Decision.
The Standardized Derivatives Exemption, insofar as it covers the complete universe of standardized derivatives, is wider in scope than the Blanket Decision. At the same time, insofar as the Standardized Derivatives Exemption applies in relation to ACs and not the broader category of AIs, it is narrower than the Blanket Decision. The Standardized Derivatives Exemption is also narrower due to the requirement that the standardized derivative be offered primarily outside Quebec, a condition which does not exist under the Blanket Decision.
While the Standardized Derivatives Exemption enhances the exemption currently available pursuant to the Blanket Decision, there is some overlap between the two. We understand that the Blanket Decision will nonetheless continue in effect until the Canadian securities regulators establish a harmonized position with respect to the regulatory framework for derivatives offered to the public. Until the Blanket Decision is revoked, it will be possible to rely on such exemption where the Standardized Derivatives Exemption is unavailable.
ACCREDITED COUNTERPARTIES
As mentioned, the Standardized Derivatives Exemption is tied to business being carried on by the foreign dealer or adviser with ACs.
ACs include the following entities, whether Canadian or foreign:
- governments and their agencies and wholly-owned entities;
- municipalities;
- financial institutions and their wholly-owned subsidiaries;
- registered dealers and advisers and their representatives;
- pension funds; and
- hedgers.
They also include:
- Canadian or Quebec registered charities;
- persons who establish, in a "conclusive and verifiable manner", that they are knowledgeable of derivatives and who meet prescribed minimum asset tests (C$5 million in the case of individuals and C$10 million in the case of legal persons and other types of entities, with assets consisting of cash, securities, insurance contracts or deposits calculated on the basis of realizable value before taxes, after deduction of corresponding liabilities);
- publicly offered investment funds which invest in derivatives;
- private funds offered to AIs or investors meeting the minimum amount investment exemption under the QSA; and
- other investment funds that are advised by a Canadian or foreign registered adviser.
Please see our October 2008 Blakes Bulletin on Securities Regulation – Quebec Signals Implementation of Derivatives Legislation with Publication of Draft Regulation and our January 2009 Blakes Bulletin on Securities Regulation – Quebec Derivatives Legislation in Force as of February 1, 2009 for further details on the notion of ACs.
RELATIONSHIP TO DEALER AND ADVISER EXEMPTIONS IN NI 31-103
As previously reported, NI 31-103 contains new registration exemptions that will allow non-Canadian companies to trade or provide advisory services in respect of foreign securities to certain Canadian "permitted clients" on a similar basis as for existing registered international dealers or international advisers in Ontario. Please see our July 2009 Blakes Bulletin on Securities Regulation – Registration Exemptions Finalized for International Dealers and Advisers for further details. The concept of "permitted client" under NI 31-103 is not identical to that of ACs under the QDA, although there is considerable overlap. Thus, a person relying on the new registration exemptions under NI 31-103 should understand that where the products being traded or advised in are considered derivatives in Quebec as opposed to securities, the exemptions under NI 31-103 will not apply in Quebec and instead the person must rely on the QDA exemptions.
CERTAIN PROVISIONS OF NI 31-103 APPLICABLE TO REGISTERED DERIVATIVES DEALERS
The Amending Regulation also makes the conduct and compliance obligations of NI 31-103 in relation to dealing with clients and handling client accounts applicable to derivatives dealers registered under the QDA. As a result of deeming provisions of the QDA, this would include securities dealers registered under the QSA who carry on business in derivatives.
OPEN FOR COMMENTS
The Amending Regulation is open for comment until August 31, 2009.
Highlights
- New registration exemption for standardized derivatives complements existing OTC derivatives exemption in Quebec
- Enhances existing exemption applicable only to specified options and futures
- Tied to activity of foreign dealer or adviser being carried on with accredited counterparties, covering a variety of institutional as well as high net worth market participants
- Some overlap between accredited counterparties under Quebec Derivatives Act and permitted clients under National Instrument 31-103; nevertheless foreign dealer or adviser must rely on QDA exemptions for products which constitute derivatives even if registration exemptions under NI 31-103 apply elsewhere
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.