The Alberta Securities Commission (ASC) proposes to revoke its Blanket Order 91-505 (BOR 91-505) and concurrently issue a replacement blanket order.
BOR 91-505 provides a prospectus exemption for distributions of a futures contract to a qualified party as defined therein. It also provides a limited exemption from the dealer registration requirement for over-the-counter (OTC) trades in (1) futures contracts where each party to the trade is a qualified party, and (2) physical commodity contracts (as defined therein). The replacement of BOR 91-505 is being proposed to accommodate certain changes to the Securities Act (Alberta) (ASA) expected to be proclaimed in force on or about October 31, 2014, which amendments are aimed at creating a framework for the regulation of derivatives.
According to the ASC, the proposed amendments to the ASA will include:
- the repeal of the terms "futures contract" and "exchange contract" and a revised definition of "security" that no longer includes reference to a futures contract;
- the introduction of a definition of "derivative" which excludes from it a product that has the attributes of a derivative if the product is also a security, e.g., by virtue of being a note, option or investment contract;
- the creation of a regulatory framework for derivatives that contemplates a registration requirement for those in the business of trading derivatives but does not contemplate a prospectus requirement in connection with the distribution of a derivative; and
- a revised definition of "trade" which contemplates among other things the entering into of a derivative; a material amendment to, terminating, assigning, selling or otherwise acquiring or disposing of a derivative; as well the novation of a derivative, other than a novation with a clearing agency.
The proposed replacement blanket order will continue to provide exemptions from the prospectus and registration requirement for (a) any person or company trading a physical commodity contract; or (b) trades of derivatives and derivative-like securities that occur between counterparties both of whom are "qualified parties".
The proposed replacement blanket order defines a physical commodity contract as a derivative or derivative-like security that is not listed on an exchange, contains an obligation to make or take future delivery of a commodity (other than cash or currency) and is intended by the counterparties to be physically settled.
The definition of qualified party in the proposed replacement blanket order refers generally to governments, financial institutions, registrants, and other persons or companies that meet prescribed financial tests. The definition of qualified party has been updated and additional clarification in respect of commercial end-users has been provided.
The exemption in the proposed replacement blanket order is subject to a condition that the person comply with such requirements as the Executive Director of the ASC may impose on the trade, including one or more of the following:
- reporting the trade to a trade repository recognized or exempted from recognition by the ASC;
- effecting the trade, or class of trades, on an exchange recognized or exempted from recognition by the ASC;
- clearing, or clearing and settling the trade, or class of trades, through a clearing agency recognized or exempted from recognition by the ASC; and
- for trades or a class of trades not cleared through a clearing agency, requiring the person have at least a prescribed minimum excess working capital.
Although currently the ASC and other members of the Canadian Securities Administrators (CSA) have issued a number of proposals in respect of the derivatives including the matters listed above, as of the publication of this notice, none of those matters appears to have been implemented. If the proposed replacement blanket order is adopted in advance of the implementation of the matters listed, it will be important for those seeking to rely on the exemption to monitor the ASC and CSA processes and the implementation of the various matters.
The ASC noted that the proposed replacement blanket order will be only an interim measure as it is working with other members of the CSA and other regulators to develop a harmonized regulatory regime for OTC-traded derivatives.