The Autorité des marchés financiers (AMF) recently published for comment the draft regulation (Regulation) intended to implement the Québec Derivatives Act (QDA). The QDA received royal assent on June 20, 2008. The Regulation is expected to come into force concurrently with the QDA itself, which is expected to come into force in 2009.

As noted in our July 24, 2008 Osler Update, the QDA contains many cross-references to regulations aimed at complementing the general legislative framework established for derivatives trading in Québec. The following four major subject areas are addressed in the Regulation:

  • the minimum asset level to qualify as an “accredited counterparty”;
  • the self-certification process for rules and products;
  • the qualification criteria for persons other than recognized regulated entities to offer derivatives to the public; and
  • the form of risk disclosure document to be provided by dealers to their clients.

Note that these last two areas are not relevant to over-the-counter activities or transactions only involving accredited counterparties.

Provisions relating to the categories of dealer registration, conditions to be met by applicants for registration and rules governing the activities of registered dealers, advisers and their respective representatives have not yet been addressed in the QDA or the Regulation, nor have the corresponding proficiency requirements. These items may well be addressed in conjunction with the implementation of national reforms for securities dealer and adviser registration more generally.

Accredited Counterparties

The Regulation sets the minimum asset level for entities other than prescribed institutions, such as governments and financial institutions, to qualify as an accredited counterparty at levels that are significantly higher than the comparable thresholds for parties trading securities on an exempt basis – namely, CDN$5,000,000 in the case of individuals and CDN$10,000,000 for any other parties. The value of the assets is calculated on the basis of the aggregate realizable value of cash, securities, insurance contracts and deposits before taxes but after deduction of the corresponding liabilities. It must be established in a “conclusive and verifiable manner.”

It should be noted that this threshold is not the only qualification criteria. The QDA also requires a person to establish, in a conclusive and verifiable manner, that he or she has the requisite knowledge and experience to evaluate:

(i) the derivatives information provided;

(ii) the appropriateness of his or her need of proposed derivatives strategies; and

(iii) the characteristics of the derivatives to be traded on his or her behalf.

The Regulation remains silent on the methods by which these criteria will be established. It also requires that the value of the person’s net assets be sufficient to fulfill the person’s delivery or payment obligations under the terms of the derivatives to which the person is a party, in light of the positions held in the person’s account and the orders the person is seeking to have executed.

Self-Certification of Rules and Products

The QDA introduced the concept of self-certification, which allows recognized, regulated entities to adopt new rules or products, or amend existing rules, without the need to request approval from the AMF. The Regulation details this self-certification process.

Material operating rules must be submitted for public consultation for a minimum 30-day period during which time members, participants and other interested parties may send comments to the regulated entity or to the AMF. Upon expiry of this consultation period, the regulated entity may make the rule enforceable by filing with the AMF a notice self-certifying the rule along with:

(i) the approved text;

(ii) a summary of all comments made during the consultation process;

(iii) a summary of any research, studies or comparative evaluations carried out with respect to the measures proposed in the rule;

(iv) an analysis of the advantages and disadvantages of the proposed measures and the reasons for which it should be approved; as well as

(v) a confirmation that the adoption of the new rule or the amendment of the existing rule, as applicable, has been made in accordance with the regulation.

Rules that have a minor impact on the entity, its members or market participants, that pertain to routine operational processes or administrative practices, or that are intended to correct clerical errors or fulfill harmonization or compliance purposes are exempted from the public consultation process and analysis requirements described above. The use of any of the foregoing exemptions must be justified to the AMF. In response, the AMF can then challenge the exemption rationale and require a public consultation. While emergency situations may also allow recognized regulated entities to bypass the consultation process, the Regulation does not specify what constitutes an emergency situation.

Rules relating to new products are also exempted from the public consultation process. The regulated entity is only required to send to the AMF the approved text along with general information on the new derivative (whether standardized or over-the-counter).

Public Offering of Derivatives

A person other than a recognized regulated entity must be qualified by the AMF prior to offering derivatives to the public. The AMF may refuse such qualification based on public protection reasons. Derivatives offered to the public must have received prior authorization from the AMF, either explicitly or implicitly, upon expiry of the 21-day objection period prescribed by the Regulation.

Information to be submitted to the AMF in each case is prescribed by the Regulation and any material change in such information (as defined in the Regulation) must be communicated to the AMF within 10 days of such change.

Persons qualified to offer derivatives to the public are also required to submit to the AMF, within 90 days of the end of their fiscal year, audited financial statements, an update of the information presented in the application for qualification and the number of contracts entered into in Québec for all derivatives offered to the public during the last fiscal year.

Risk Disclosure

The Regulation also regulates communications between dealers and their clients. Dealers must provide every client (other than accredited counterparties trading over-the-counter derivatives) a copy of the document appended to the Regulation and describing specific risks related to futures contracts and options as well as risks common to all derivatives. Dealers also must obtain a written acknowledgement from the client indicating the date of receipt of the required documentation.

Consultation Period

Any comments about the foregoing regulatory provisions must be submitted in writing to the AMF before November 3, 2008. The Regulation will then be submitted to the Government for approval, with or without amendment. Additional regulation or policy statements may also be published for comment in the coming months.