On October 27, 2009, the Ontario Securities Commission (OSC) released Staff Notice 91-702 Offerings of Contracts for Difference and Foreign Exchange Contracts to Investors in Ontario [available here]. OSC staff confirm their view that Ontario securities law and other regulatory requirements apply to offerings of contracts for difference (CFDs), foreign exchange contracts (forex), and other similar products to Ontario investors. OSC staff explain that they consider CFDs and forex to be securities, and also derivative instruments, within the meaning of Ontario securities laws. As a result, unless exemptive relief is granted, these products are subject to Ontario registration and prospectus requirements.
Borden Ladner Gervais LLP has been at the forefront of the legal and regulatory developments surrounding CFDs and forex in Canada and has been involved in significant consultations with OSC staff, other members of the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) regarding these products.
The Staff Notice provides a detailed description of CFDs and highlights OSC staff's investor protection concerns with these instruments, which include concerns about the complexity of the product and the offering model, the use of margin or leverage, the ability to determine product suitability, and counterparty risk. OSC staff point out that although the Staff Notice focuses on CFDs, the same principles should also be considered in the context of offerings of forex and other similar OTC derivatives.
A CFD allows an investor to obtain exposure to price movements in an asset, such as a share or other publicly traded security, an index, a foreign currency (foreign exchange contract) or a commodity, without acquiring ownership of the asset. Similarly, forex allows investors to obtain exposure to price movements in different currencies without acquiring ownership of the currencies. The value of a CFD tracks the price movement of a specified quantity of an underlying financial instrument (an underlying instrument). In simple terms, the amount of any profit or loss made on an investment in a CFD is equal to the difference between the quoted price for a CFD in respect of the quantity of the underlying instrument when the CFD is opened and the quoted price for the CFD in respect of the same quantity of the underlying instrument when the CFD is closed.
CFDs are traded on "margin", which means that the purchase price of a CFD is a fraction of the value of the relevant quantity of the underlying instrument. The ability to leverage an investment allows investors to magnify profits or losses by reducing the initial capital outlay required compared with investing directly in the underlying instrument. IIROC has prescribed minimum margin rates for CFDs and has advised the OSC that it is currently reviewing margin rates for other OTC derivatives.
Firms trading in CFDs and forex under Ontario securities laws must be registered as investment dealers, regardless of whether the firm is trading with retail investors or accredited investors. This category of registration requires, among other things, IIROC membership. IIROC rules impose special qualifications to trade in CFDs.
OSC staff acknowledge in the Staff Notice that the prospectus requirements in Ontario securities laws may not be well-suited to offerings of certain types of OTC derivatives and therefore modified requirements, focused on ensuring appropriate transparency as to the nature of the product and investor risk, imposed as terms and conditions of an exemptive relief order may be more appropriate.
Earlier this month the OSC granted exemptive relief to CMC Markets UK plc and CMC Markets Canada Inc. (together, CMC Markets) permitting CMC Markets to distribute CFDs and forex to Ontario investors without the necessity of a prospectus filing. CMC Markets was earlier granted a similar exemption by the Autorité des marchés financiers which allows CMC Markets to distribute CFDs and forex to both accredited investors and retail investors in Québec in accordance with requirements of the Derivatives Act (Québec).
Borden Ladner Gervais LLP is proud to have represented CMC Markets in Canada in applying for and obtaining registration as an investment dealer and membership with IIROC and obtaining the exemptions in both Ontario and Québec. We have agreed to continue to work with the CSA on behalf of CMC Markets with the goal of establishing a harmonized position on the trading and distribution of OTC derivatives, including CFDs and forex, to retail investors across the country. We also will continue to work with IIROC, on behalf of investment dealers who wish to distribute CFDs and forex, to develop product-specific regulation, such as rules regarding margin rates and compliance policies and procedures.
For further information on the exemptions available in Ontario and Québec for the distribution of CFDs and forex in those provinces and the applicable regulatory regime for OTC derivatives, please contact the authors of this Alert or one of the leaders of BLG's Securities and Capital Markets Group. More information about BLG's Securities and Capital Markets Group is available [here].
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.