The proposals would expand the exemption for trades in non-Canadian futures and introduce a new hedger certification requirement for OTC derivatives transactions.
On January 14, 2016, the Autorité des marchés financiers (AMF), Quebec’s financial markets regulator, published a package of proposed amendments to the Derivatives Regulation (the Proposed Amendments) made under the Derivatives Act (Quebec) (QDA). The Proposed Amendments are open for comments for a period of 30 days to February 13, 2016.
The Proposed Amendments address a number of miscellaneous but important areas of the Derivatives Regulation (the Regulation) and would introduce certain material new requirements. In a follow-up press release issued on January 18, 2016, the AMF notes that the amendments are intended to adapt the Regulation to the rapid evolution of derivatives markets.
The proposals include the following:
A fix to the standardized derivatives exemption for trading and advising in foreign-listed futures in Quebec
- Importantly, the Proposed Amendments would round out the so-called “standardized derivatives” exemption for trading and advisory activities in relation to futures traded outside of Quebec by adding an exemption from the product qualification rules under the QDA (the “qualification requirement”) to the existing exemption from the derivatives registration requirement.
- The expanded exemption would apply to a person other than a “recognized regulated entity” (e.g., a recognized exchange or clearing house) who is authorized to create or market a “standardized” (i.e., exchange-traded) derivative or is authorized to carry on similar activities under legislation applicable in a jurisdiction outside Quebec where its head office or principal place of business is located provided that the person carries on business solely with “accredited counterparties” in Quebec in relation to standardized derivatives offered primarily outside Quebec.
- As discussed in a previous post, this amendment, if enacted, would close a gap in the standardized derivatives exemption which would have been created by the revocation effective June 5, 2016 of the so-called blanket derivatives exemption. The expanded exemption would effectively permit trading activities by foreign FCMs for the account of Quebec “accredited counterparties” in relation to products listed on global futures exchanges to continue uninterrupted after that date.
- The proposed amendment would not, however, apply to trading in derivatives products listed on the Montréal Exchange (MX). U.S. and other foreign FCMs seeking to trade these products after June 5, 2016 when the blanket exemption is revoked are expected to apply for full registration in the category of derivatives dealer in Quebec and for membership with the Investment Industry Regulatory Organization of Canada. This application process typically unfolds over the course of several months as applicants submit detailed proficiency, compliance, financial, operational and systems-related requirements and controls for approval. Applications by market participants seeking to be registered by the June 5, 2016 deadline should therefore be filed as soon as possible.
- The proposed amendments to the standardized derivative exemption would effectively streamline the exemption regime for trading and advisory activities in relation to non-Canadian listed derivatives on a basis that is consistent with the OTC derivatives exemption under the QDA (discussed below). The OTC derivatives exemption is not specifically affected by this particular proposal, except, as noted below, in respect of the proposed new “hedger” certification requirement.
A new requirement for certification by “hedgers”
- The AMF is also proposing to introduce a new certification requirement for a person who seeks to qualify as a “hedger” for the purposes of relying on the OTC derivatives exemption under section 7 of the QDA (the OTC derivatives exemption). The requirement would apply to a counterparty that trades exclusively as a “hedger” (i.e., that could not qualify as an “accredited counterparty” under any other branch of the definition).
- The hedger relying on the OTC derivatives exemption would be required to deliver to the AMF an initial certification in the prescribed form within 30 days after the hedger entered into a derivatives transaction and annually thereafter. The certification could be made in a paper or an electronic format. The hedger would also be required to keep a record in a safe location and in a durable form of each derivatives transaction for a period of 7 years after the date on which the derivatives transaction terminates.
- The prescribed form of certification would require that the hedger, having exercised reasonable diligence, certify that it is “hedging” within the meaning of that term under the QDA. In the case of an entity, the certifying officer would also have to specify his or her position at the hedger and the hedger’s legal entity identifier. According to the notice to the Proposed Amendments, the delivery of the certification to the AMF would enable it to “better determine the identity and number of hedgers in order to assess their status as accredited counterparties”.
- The AMF also intends to amend its Policy Statement respecting Accredited Counterparties to reflect these proposed changes.
- Although the certification would only apply to hedgers, this is a novel requirement which will likely raise a number of practical documentary, compliance and operational issues for bank and non-bank counterparties entering into OTC derivatives transactions with hedgers on the basis of the OTC derivatives exemption.
Amendments to education and training requirements for derivatives portfolio managers
The AMF is also proposing to introduce alternative proficiency qualifications for advising representatives, associate advising representatives and CCOs of registered derivatives portfolio managers, including the CFA and Chartered Alternative Investment Analyst charters, and experience requirements that are more specifically relevant to the class of derivatives the registered individual would work with.
Amendments to the prescribed information provided in connection with derivatives qualification
Finally, in connection with the qualification requirement, the AMF is proposing to amend the list of information which a “qualified person” and an applicant for qualification must submit to the AMF. The Proposed Amendments would also require that qualified persons inform their customers of the percentage of client accounts that were profitable during the previous fiscal year.
Market participants affected by these proposals may wish to submit comments to the AMF by the February 13 deadline.