Québec’s Bill 77 — Derivatives Act (Act) received Royal Assent on June 20, 2008 with in-force dates — as yet unannounced — to be set by the Québec government. On October 3, 2008, a draft companion regulation (Regulation) was published for a 30-day comment period by the Québec securities regulatory authority, the Autorité des marchés financiers (AMF).
With its broad definitions of “derivatives” and “hybrid products,” the Act implements the all-inclusive method of derivatives regulation proposed by the AMF, with specified exceptions, in draft legislation in August 2007: exchangetraded derivatives, over-the-counter (OTC) derivatives and hybrid products that are not predominantly securities fall within the scope of the Act.
The AMF is the principal regulator of the Montréal Exchange (MX), Canada’s financial derivatives exchange and the Montréal Climate Exchange (MCeX), a new market on which futures contracts on Canada carbon dioxide equivalent (CO2e) units are traded. With the adoption of the Act, Québec continues to be at the forefront of derivatives regulation in Canada.
1. The Act regulates and broadly defines “derivatives” and “hybrid products.”
- A “derivative” means an option, a swap, a future contract or any other contract or instrument whose market price, value or delivery or payment obligations are derived from, referenced to or based on an underlying interest or any other instrument designated by regulation.
A “hybrid product” means an instrument, contract or security that combines elements of derivatives and securities. However, a hybrid product that is predominantly a security falls outside the scope of the Act.
A hybrid product is presumed to be predominantly a security if (i) the offeror receives payment of the purchase price on delivery, (ii) the purchaser is under no obligation to make an additional payment beyond the purchase price during the life of the hybrid product or at maturity, and (iii) the hybrid product’s terms do not include margin requirements based on a market value of its underlying interest.
2. Under the Act, carrying on business as a dealer in derivatives trading or as an advisor concerning derivatives requires registration as such.
- An exemption from dealer and advisor registration is available for OTC derivatives activities or transactions with “accredited counterparties” or as specified by regulation.
- An OTC derivative means any derivative other than a standardized derivative — defined as a derivative that is traded on a published market whose intrinsic characteristics are determined by that market and whose trade is cleared and settled by a clearing-house.
- The list of accredited counterparties in the Act and the Regulation differs from the list of accredited investors in the national private placement instrument (National Instrument 45-106 Prospectus and Registration Exemptions), and the list of Qualified Parties in the B.C. and Alberta OTC derivative blanket orders, and includes various categories of institutional investors and persons with minimum net assets (as defined) of $10 million ? or $5 million if an individual.
3. Under the Act, regulated entities (exchanges, alternative trading systems, clearing-houses, etc.) and regulation service providers carrying on derivative activities in Québec must obtain prior recognition by the AMF.
- The Act and Regulation introduce a 30-day public consultation process for self-certification of new material operating rules of regulated entities.
4. A person who creates or markets a derivative must be qualified by the AMF, which also must authorize the derivative unless that person:
- is a recognized regulated entity; or
- carries on OTC derivative activities only with accredited counterparties.