On February 1, 2017, the Autorité des marchés financiers (AMF), Quebec’s financial markets regulator, published proposed amendments to the Derivatives Regulation (the Proposed Amendments) made under the Derivatives Act (Quebec) (QDA). The proposals are open for comments for a period of 30 days to March 4, 2017.
The Proposed Amendments include a prohibition that would effectively ban the sale of short-term binary options in the Quebec market. The proposal, if adopted, would prohibit the sale to a Quebec-resident individual of a binary option or derivative where:
- the holder is entitled, at maturity, to either a predetermined fixed yield if the underlying interest meets a predetermined condition, or a zero yield if the underlying interest does not meet a predetermined condition;
- the holder cannot buy or sell the underlying interest; and
- maturity is less than 30 days.
The proposed ban would apply across the board to the retail offer of derivatives with the above characteristics, whether or not the offeror is registered as a derivatives dealer in Quebec and otherwise complies with the requirements and available exemptions of Quebec derivatives legislation. The Proposed Amendments would permit the AMF, on the conditions it determines, to “expressly authorize the offering of [the derivative] if it considers that the authorization would not be prejudicial to investors” and provide that “[t]he [AMF]’s decision is final”. The notice to the instrument does not provide any guidance on the types of instruments the AMF would be prepared to authorize and the terms and conditions it would expect to impose. Further clarity on this point to more clearly differentiate fraudulent schemes from legitimate derivatives trading activities would be helpful.
The notice to the proposal states that “[b]inary options are like wagers. Platforms offering these products illegally are similar to on-line casino sites. Investors are usually asked to wager on changes in the value of a currency, market index or stock in the short term—often just a few minutes. When that time is up, the investor receives a pre-determined payout or loses his wager. It’s an “all or nothing” proposition, a little like a game of chance. Even when investors earn “virtual” gains, they often cannot pocket the rewards. What’s more, they frequently fall victim to identity theft.”
The Canadian Securities Administrators (CSA) have expressed concerns about the growth in the number of websites promoting offshore binary options trading platforms that are specifically targeting Canadians.
The measure also follows an active and well publicized campaign by the AMF to warn Quebec retail investors off the products and seeks to address a growing number of complaints from retail investors. It is also in line with a number of advisories by the leading securities regulators globally, including the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission.
Complaints of fraud associated with illegal binary options or digital options trading platforms typically include refusal to credit customer accounts or reimburse funds to customers, identity theft and manipulation of software to generate losing trades.
The AMF would be one of the first regulators globally to ban the retail sale of binary options.