On October 8, 2009, the Ontario Securities Commission (OSC) granted relief to CMC Markets UK Plc and CMC Markets Canada Inc. (together, CMC Markets) that will permit CMC Markets to distribute "contracts for difference" (CFDs) and foreign exchange contracts (forex) to Ontario investors without the necessity of a prospectus filing. A copy of the OSC order is available [here]. CMC Markets was earlier granted a similar exemption by the Autorité des marchés financiers (AMF) which allows CMC Markets to distribute CFDs and forex to both accredited investors and non-accredited investors (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 the Investment Industry Regulatory Organization of Canada (IIROC) and obtaining the above-noted exemptions in both Ontario and Québec. We will continue to work with the Canadian Securities Administrators (CSA) on behalf of CMC Markets with the goal of establishing a harmonized position on the trading and distribution of over-the-counter (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.
Amongst other conditions, the relief granted to CMC Markets in Ontario and Québec is conditional on (i) the distribution of a risk and product disclosure document to investors, (ii) CMC Markets UK Plc remaining registered with the UK Financial Services Authority and (iii) CMC Markets Canada Inc. remaining registered as an investment dealer with the OSC and AMF and a member of IIROC.
The value of a CFD tracks the price movement of a specified quantity of an underlying financial instrument (an underlying instrument), such as a share or other publicly traded security, an index, a foreign currency (foreign exchange contract) or a commodity. Investment in a CFD allows an investor to obtain exposure to the movement in the price of an underlying instrument without actually owning that 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.
With the coming into force of National Instrument 31-103 Registration Requirements and Exemptions on September 28, 2009, firms that seek to distribute CFDs and forex (products that have a leverage or margin component) to Canadian investors (both accredited and non-accredited investors) generally must be registered as investment dealers with the applicable provincial securities regulatory authorities and become members of IIROC. We understand that the CSA will not permit firms registered as exempt market dealers to trade in CFDs and forex even if the investors qualify as "accredited investors" under National Instrument 45-106.
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 in Canada, 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 [click 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.
