Recent Exemptive Relief Provides Additional Flexibility for Offering Derivatives to Retail and Institutional Investors
We have recently obtained separate exemptions for clients relating to the offering of derivatives to Canadian investors. As described below, one exemption permits each of the applicants and non-individual permitted client counterparties to enter into over-the-counter (OTC) derivative transactions, without having to comply with dealer registration and prospectus requirements. The other exemption is the first "passport" exemption which permits "contracts for difference" (CFDs), including foreign exchange (forex) contracts to be distributed to retail investors (without a prospectus) in almost all provinces and territories. The latter exemption is also significantly different than the single province exemptions previously granted for CFDs, because it involves a Canadian dealer utilizing the online platform of an arm’s length global solutions provider.
Institutional OTC Derivative Transactions
In response to the uncertainty and fragmentation associated with the regulation of OTC derivative transactions in Canada, Deutsche Bank AG (Bank) and DB Commodities Canada Ltd. (DBCC), a wholly-owned subsidiary of the Bank, sought and obtained a passport decision of the Ontario Securities Commission (OSC) dated October 11, 2011 (OTC Derivative Decision), that permits each of them and other non-individual "permitted clients," as that term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Obligations, to enter into OTC derivative transactions without having to comply with the dealer registration and prospectus requirements of the securities legislation of Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut.
The OTC Derivative Decision is intended to complement comparable exemptions that are currently available in British Columbia, Alberta, Saskatchewan, Québec and New Brunswick, and it thereby serves to provide the Bank and DBCC with a uniform framework for the conduct of exempt OTC derivative transactions throughout Canada, pending the adoption of legislation or a rule that specifically governs such transactions.
CFDs (including forex contracts) Now Available to Retail Investors Almost Cross Country
On October 14, 2011, the OSC granted relief under the Canadian Securities Administrators’ "passport" system on behalf of each of the provinces and territories of Canada (other than Alberta and Québec), to Friedberg Mercantile Group Ltd. (Friedberg) that will permit Friedberg’s execution only division to distribute CFDs (including forex contracts) to investors in each of those Canadian jurisdictions without a prospectus.
This exemptive relief allows Friedberg to utilize the trading platform of any leading global provider of private and white label CFD trading solutions (Solutions Provider), and to manage the risk in its client positions by simultaneously placing the identical CFD on a back-to-back basis with the Solutions Provider or any affiliate, so long as they are either an "acceptable counterparty" or a "regulated entity" (as those terms are defined in IIROC’s Joint Regulatory Financial Questionnaire form). This exemptive relief provides considerably more operational flexibility to independent Canadian dealers than was provided in previous relief.
Although quite different in many respects, we believe that these two exemptions not only reflect the continuing desire of the Canadian Securities Administrators to take a harmonized approach to the regulation of derivatives, but also a willingness to consider providing exemptive relief in appropriate policy circumstances.
For further information on these exemptions, or the regulatory regime in Canada generally, please contact the authors of this update or your usual contact at our firm.
Gary M. Litwack
Michael C. Nicholas
Securities Regulation & Investment Products