Most of the provisions of the Québec Derivatives Act as well as the Québec Derivatives Regulation came into force on February 1, 2009. The QDA had received royal assent on June 20, 2008. The legislation follows the decision of the province of Québec to adopt a new principles-based legislative framework governing the trading of both exchange traded derivatives (standardized derivatives) and over-the-counter derivatives (OTC derivatives) in the province.
The QDA governs regulated entities (such as exchanges, alternative trading systems not registered as dealers and other published markets, clearing houses, information processors and self-regulatory organizations), regulation services providers, intermediaries who carry on business as dealers or advisers, and other persons who trade standardized and OTC derivatives. It addresses, among other subjects, the recognition of regulated entities by the Autorité des marchés financiers (AMF), the self-certification of rules and products by regulated entities as well as registration requirements to carry on business as a dealer or adviser with respect to derivatives.
As noted in our Osler Corporate Review of July 24, 2008 and our Osler Update of October 30, 2008, at the time of its adoption the QDA contained numerous cross-references to regulations to be adopted at a later date, and the impact of this new legislation could not be fully assessed. Summarized below are recent regulatory developments as well as answers to practical issues raised by market participants, most notably, the extent to which dealers and advisers are required to comply with registration requirements under the QDA.
Registration Requirements under the QDA and Available Exemptions
The Québec Derivatives Act (QDA) exempts OTC derivatives activities involving accredited counterparties from several of its requirements, including dealer and adviser registration requirements. The QDA does not extend this exemption to standardized derivatives activities with accredited counterparties. This constitutes a significant departure from the previous regime under the Québec Securities Act (QSA) pursuant to which dealers and advisers trading, or managing investments using, standardized derivatives could benefit from registration exemptions such as the “accredited investor” exemption. Neither does the QDA contain a registration exemption for non-Canadian dealers and advisers engaged in limited trading and advising activities in Canada along the lines of the “international dealer” and “international adviser” exemptions found in the Proposed National Instrument 31-103 - Registration Requirements.
Among the provisions of the QDA that did not come into force on February 1, 2009 are the sections that address the categories, terms and conditions relating to registration of dealers and advisers under the QDA. These sections refer to regulation that has not yet been published. As a result, the exact nature of the registration requirements and the practical consequences of the implementation of the QDA for Canadian and foreign dealers and advisers doing business in Québec are still unclear.
However, the AMF has issued a blanket decision providing an exemption from the QDA registration requirements to dealers and advisers whose activities involve derivatives:
(a) that were governed by the QSA before the coming into force of the QDA and that are
(i) options or negotiable futures contracts pertaining to securities, or Treasury bond futures contracts;
(ii) options on commodity futures contracts or financial instrument futures contracts; and
(iii) commodities futures contracts, financial futures contracts, currencies futures contracts and stock indices futures contracts; and
(b) that are undertaken with "accredited investors" only (as this expression is defined for the purposes of National Instrument 45-106 – Prospectus and Registration Exemptions).
Consequently, notwithstanding the coming into force of the QDA, no immediate action is required on the part of dealers and advisers to continue to carry out trading and advising activities for “accredited investors” involving derivatives governed by the QSA prior to February 1, 2009.
Furthermore, dealers and advisers registered under the QSA may also continue to carry on their activities as long as they remain registered under the QSA, subject to compliance with the obligations set out in the QDA for management of business and conduct.
Note that this relief remains temporary (although no expiration date is provided in the blanket decision) and is intended to maintain the status quo until completion of the national reform of registration requirements in Canada, currently anticipated in late 2009 or early 2010.
The Québec Derivatives Regulation (QDR) also came into force on February 1, 2009. As set out in our above-referenced Osler Update of October 30, 2008, the QDR: determines the minimum assets of a person for purposes of the definition of “accredited counterparty;” establishes the self-certification process for operating rules of regulated entities; and sets the form of risk disclosure document to be provided by dealers to their clients.
The authorization procedure for derivatives offered to the public by persons other than recognized regulated entities (as set out in the draft regulation published for comment in October 2008) has been removed from the QDR. The coming into force of the corresponding provisions of the QDA has been deferred to enable the Canadian Securities Administrators to complete harmonization initiatives for derivatives offered to the public.
On January 23, 2009, the AMF published three policy statements interpreting principles set out in the QDA and providing guidance to market participants to ensure compliance with the new legislative framework.
Policy Statement Respecting Accredited Counterparties
This policy statement states that it is the responsibility of the party who engages in a derivatives transaction to determine whether its counterparty is accredited and whether the blanket exemption set out in the QDA for OTC derivatives activities is applicable. A party may rely on factual statements made by its counterparty at the time a derivative contract is entered into, unless the party has reasonable grounds to believe that such statements are false, and is not required to ensure that the counterparty retains this status during the life of the derivative. Accredited counterparties should review existing agreements and consider amending same to include reciprocal representations as to their status as “accredited counterparties” under the QDA.
Furthermore, factual information on the basis of which entities other than prescribed institutions (e.g., governments and financial institutions) qualify as accredited counterparties should be documented. Unfortunately, this policy statement does not provide any insight on the methods to establish the qualification criteria “in a conclusive and verifiable manner” as required by the QDA.
Policy Statement Respecting Hybrid Products
This policy statement provides guidance on the application of the three-part test set out in the QDA to determine whether a “hybrid product” (defined in the QDA as an instrument, contract or security that combines elements of derivatives and securities) is presumed to be predominantly a security and, therefore, continues to be governed by the QSA.
Policy Statement Respecting Self-Certification
This policy statement discusses the self-certification process that a recognized regulated entity must follow when amending its operating rules. Rules with a minor impact, emergency rules and rules pertaining to new derivatives are not subject to public consultation. This policy statement provides guidance on:
(a) the classification of rules;
(b) the powers of the AMF in case of disagreement with the entity on the classification;
(c) the definition of an emergency rule; and
(d) the detailed information that the AMF expects to receive in connection with a rule in respect of a new derivative.
Market participants trading or advising in derivatives should perform a general review of their activities in light of the provisions of the QDA, the QDR and the related Policy Statements to establish new derivatives-related compliance measures - bearing in mind that securities regulation continues to be applicable in certain circumstances until regulation on a matter not already covered by the QDR is made and brought into force in accordance with the QDA.