Amendments To The Quebec Derivatives Regulation Announced - Proposed Exemption For Exchange-Traded Derivatives Offered Primarily Outside Quebec

Author:Ms Alix d'Anglejan-Chatillon
Profession:Stikeman Elliott LLP

On July 17, 2009, the Canadian Securities

Administrators (the CSA) published their final

proposal for National Instrument 31-103 -

Registration Requirements and Exemptions (31-103). Subject

to governmental and other local approval requirements, 31-103 will

come into force on September 28, 2009 (the Implementation Date).

The adoption of 31-103 in Quebec can be expected to accelerate the

further implementation of the Quebec Derivatives

Act (QDA) which came into force in Quebec on

February 1, 2009 and governs trading and advisory activities

relating to all forms of derivatives.

On July 31, 2009, as part of this implementation process, the Autorité des marchés

financiers (AMF), Quebec's financial

services regulator, published a proposed Regulation to amend the Derivatives

Regulation (the Proposed Regulation). The

Proposed Regulation incorporates by reference various

registration-related instruments and material provisions of 31-103

and sets out an important registration exemption for non-Quebec

dealers and advisers in exchange-traded derivatives offered

primarily outside Quebec provided they limit their activities to

"accredited counterparties".

The draft instrument is open for comment until August 31, 2009

and is scheduled to come into force on the Implementation Date,

subject to ministerial approval following the end of the 30-day

comment period.

Key Requirements of the QDA

The QDA imposes a requirement to register as a derivatives

dealer or adviser for any person that engages in those activities

in Quebec. The QDA also sets out a recognition requirement for

"regulated entities" (including exchanges, alternative

trading systems not registered as derivatives dealers or other

published markets, clearing houses, information processors and

self-regulatory organizations) that carry on derivatives activities

in Quebec. The QDA further requires that any person other than a

"recognized regulated entity" that seeks to "create

or market" a derivative must be qualified by the AMF (the

derivatives qualification requirement) and that the derivative must

be approved by the AMF (the derivatives approval requirement). The

QDA also contains rules for the purposes of determining whether

so-called "hybrid products" are to be regulated as

derivatives under the QDA or as securities under Quebec securities


The OTC Derivatives Exemption - By way

of background, section 7 of the QDA

sets out an important blanket exemption for OTC derivatives

"involving accredited counterparties only or in any other

cases specified by regulation" from the application of certain

specified provisions, including the derivatives dealer and adviser

registration requirements, the derivatives qualification and

approval requirements, and certain limited procedural and

enforcement-related provisions, except in the case of market

manipulation and fraud (the OTC Derivatives Exemption). The list of

"accredited counterparties" includes most of the leading

Quebec institutional investors, as well as accredited persons

meeting certain subjective (knowledge and experience) and objective

(minimum financial assets) tests and qualified


Exchange-Traded Derivatives - As noted

in our previous updates, the QDA does not currently contain any

exemption for exchange-traded derivatives activities that is

equivalent to the OTC Derivatives Exemption. With the coming into force of the

QDA on February 1, 2009, this marked a significant

departure from the existing "accredited investor"

exemptions under Quebec securities legislation on the basis of

which many Canadian, U.S. and other foreign dealers had

historically engaged in exchange-traded derivatives activities

outside of Quebec for Quebec-resident institutional investors.

The AMF Blanket Decision –

In the interim, the AMF had responded to the above concerns in part

by issuing a blanket decision on January 22, 2009 (the AMF Blanket

Decision) that sets out a temporary exemption from the...

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