The Québec National Assembly recently proclaimed the Derivatives Act (Québec) (the Act) in force as of February 1, 2009, subject to certain exceptions (discussed below).

We summarized the key principles of that legislation in our July 2008 Investment Management Advisory Québec National Assembly Adopts Legislation to Govern Derivatives, and in our October 2008 Investment Management Advisory Autorité des marchés financiers Publishes Draft Regulation to the Derivatives Act (Québec). Click here and here for copies of those Advisories.

The Act regulates trading and advising in all forms of derivatives with residents of Québec. The definition of “derivative” in the Act is intentionally broad and includes options, swaps, futures contracts and 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 contract or instrument designated by regulation or considered equivalent to a derivative on the basis of criteria determined by regulation. The Act applies to both “standardized derivatives” (essentially derivatives traded on published markets) as well as over-the-counter (OTC) derivatives.

The Autorité des marchés financiers (the AMF) published on January 23, 2009 the final Derivatives Regulation made under the Act (the Regulation) and three policy statements providing additional commentary on “accredited counterparties”, the self-certification of regulated entities and hybrid products (products which have elements of both a “security” and a “derivative”). For a copy of the AMF notice on the coming into force of the Act, the Regulation and policy statements (the Notice), please click here.

Given that the Act is now in force, market participants conducting business in derivatives with Québec residents should be aware of the following issues.

Additional Compliance Obligations - Firms carrying on a derivatives-related business in Québec should review their existing compliance policies and procedures, account opening documentation and client agreements to ensure that they address the requirements set out in the Act. None of the Act, the Regulation or the AMF’s pronouncements refer to a formal transition period, although the AMF notes in the Notice:

We are mindful that the coming into force of the Act will require many financial sector participants to implement new derivatives-related compliance measures.… In order to ensure a smooth transition during the first six months following the coming into force of the Act, the Authority therefore expects market participants to phase in compliance obligations arising from the new requirements set out in the Act.

Registration of Dealers and Advisers and Reliance on the “Accredited Investor” Exemption - The sections of the Act that mandate dealer and adviser registration for firms and individuals trading or advising in derivatives are not yet in force. These requirements have been deferred until the coming into force of proposed National Instrument 31-103 Registration Requirements (NI 31-103), which is expected to occur by fall 2009. In the meantime, dealers and advisers registered under the Securities Act (Québec) (the QSA) and authorized to trade or advise in derivatives, may continue to carry on the business of dealing or advising in derivatives in Québec and those who wish to start these activities can still obtain registration from the AMF under the QSA.

The AMF recently issued a blanket decision that preserves the ability of dealers to trade in derivatives previously governed by the QSA (both OTC and exchange-traded) on a registration-exempt basis with Québec residents who qualify as “accredited investors”, as that term is defined in National Instrument 45- 106 Prospectus and Registration Exemptions. This blanket order is intended to operate during the interim period before NI 31-103 and the registration requirements of the Act are finalized. For a copy of the blanket decision (our office translation), please click here. Although the AMF does not yet have an official position on this, we believe that the adviser registration exemption provided for in the Securities Regulation (Québec) remains available for advising on derivatives to specified accredited investors notwithstanding the coming into force of the Act.

Retail Offering of OTC Derivatives - The portions of the Act that set out the qualification process for an offering of OTC derivative products to retail investors have also been suspended by the AMF, with the aim that a Canada-wide uniform approach will be established by the Canadian Securities Administrators. Given this suspension, the AMF has not made regulations specifying conditions for “qualified person” status to be granted to a firm to allow it to create and market OTC derivatives with retail investors and no such offerings are currently permitted. However, we understand that the AMF will consider case-by-case exemptions to permit retail offerings of OTC derivatives in Québec. This means that any dealers who are currently offering OTC derivatives products, including foreign exchange derivatives, with Québec resident retail investors must apply for discretionary relief under the Act in order to continue these activities after February 1, 2009.

The Act and the Regulation impact market participants that participate in the derivatives industry in Canada. BLG’s Investment Management lawyers can assist you in understanding the impact of these developments on your business and how you can implement the new derivatives regime. Please contact your usual lawyer in BLG’s Investment Management Group, the authors of this Alert, or any one of BLG’s Investment Management Group practice leaders.