Proposed Amendments to Quebec Derivatives Regulation
The Autorité des marchés financiers (AMF) published for comments on February 1, 2017 proposed amendments (Proposed Amendments) to the Derivatives Regulation (Québec) (“QDR”).
The Proposed Amendments address three matters: filing requirements when dealing with hedgers, prohibiting the offering of binary options to individuals, and reporting obligations of qualified persons.
Filing Requirements When Dealing With Hedgers
The Quebec Derivatives Act (“QDA”) provides an exemption from almost all of its requirements when accredited counterparties engage in activities or transactions in over-the-counter (“OTC”) derivatives. Accredited counterparties as defined in the QDA are in general institutional investors such as pension funds and financial institutions but also include companies holding minimum net assets of more than $10 million and individuals holding minimum net assets of more than $5 million and meet other prescribed conditions. A hedger as defined in the QDA is also an accredited counterparty but the definition is based on the nature of the person’s activities.
The Proposed Amendment imposes filing requirements when an accredited counterparty engaging in an OTC derivatives transaction with a hedger who does not qualify as an accredited counterparty under another branch of the definition of an accredited counterparty in the QDA. In lieu of the certification requirement initially proposed by the AMF in January 2016, the Proposed Amendments require that accredited counterparties engaging in OTC transactions with such hedgers would have to send to the AMF, on a quarterly basis (within 30 days after the end of the quarter in which the transaction occurred), the following information:
- legal entity identifiers of the accredited counterparty and the hedger;
- if the hedger is not eligible to receive a legal entity identifier, the hedger’s name, address, and the identifier used by the accredited counterparty to identify such hedger; and
- the unique transaction identifier assigned by the trade repository to the transaction.
Prohibition of Binary Options
The Proposed Amendments unless the offering is expressly authorized by the AMF prohibit offering binary options to individuals. The AMF states in the notice accompanying the Proposed Amendments that it is proposing such a prohibition because of the growing number of complaints received regarding the trading of binary options which are offered illegally to retain customers in Quebec via unauthorized on-line trading platforms. Such options, also called “all or nothing” options have a very short term (less than 30 days) and entitle the holder to receive either a fixed yield or a zero yield, depending on the underlying interest’s meeting a predetermined condition, without entitling the holder to buy or sell the underlying interest.
Reporting Obligations of Qualified Persons
Qualified persons, that is, persons who create or market derivatives but which are not regulated entities recognized by the AMF, have to deliver their financial statements to the AMF on an annual basis. The Proposed Amendments would relax the requirement that such financial statements be prepared in accordance with Canadian GAAP applicable to public companies and would allow preparing such statements in accordance with different accounting principles generally accepted in Canada or in a foreign jurisdiction, including IFRS and US GAAP.
Comments on the Proposed Amendments are welcome until March 4, 2017.
 Under the QDA, a “hedger” is “a person who, because of the person’s activities, (a) is exposed to one or more risks attendant upon those activities, including supply, credit, exchange and environmental risks and the risk related to fluctuations in the price of an underlying interest; and (b)seeks to hedge that risk by engaging in a derivatives transaction, or a series of derivatives transactions, where the underlying interest is the underlying interest directly associated with that risk or a related underlying interest”.
 Under the QDA, a “regulated entity” is defined as “an exchange, an alternative trading system not registered as a dealer, or another published market, a clearing house, a settlement system, a matching service utility, an information processor, a trade repository, a self-regulatory organization or any person the [AMF], where it considers it necessary for the proper operation of the market, designates as a regulated entity”.
OTC derivatives Quebec Derivatives Act