With the growing popularity of structured products and other financial instruments that use derivatives, brokerages are encouraging their advisors to build up their education in derivatives and to get licensed in options and, to a lesser extent, futures.

According to CSI Global Edu-cation Inc. , the Toronto-based financial services education firm, enrolment in both its options licensing and its futures licensing courses jumped 25% in 2006 over enrolment in 2005. Enrolment in the already popular derivatives fundamentals course jumped 10% over the same period.

A registered broker is required to complete the derivatives and options courses in order to trade options, and complete the derivatives and futures courses in order to trade futures.

Enrolment in all three courses has been growing steadily since the beginning of the decade, although not at the high rate seen last year. CSI declined to give out actual enrolment numbers.

While not everyone who takes these courses is in the advisory business, and not all advisors who take the courses will go on to trade in derivatives on behalf of their clients, the jump in enrolment seems to suggest that brokerages are asking their advisors to boost their education levels.

“We know from talking to member firms of the Investment Dealers Association of Canada that some of them are encouraging their advisors, within the first two or three years after being recruited, to take the [derivatives course] and, at times, the licensing courses, just so the advisors can have that in their bag of tricks,” says Marc Flynn, the Montreal-based vice president of regulatory relations and academic standards at CSI.

According to figures obtained from the IDA, the percentage of advisors approved to trade and advise in options has stayed fairly consistent, at approximately 24% of all registered reps over the past three years.

Another 4%-5% were approved to trade in options, but not to advise clients. On the futures side, about 3%-4% were licensed to either trade and/or advise.

INCREASE UNDERSTANDING

However, among the 637 advi-sors at 15 national brokerages surveyed in Investment Executive’s 2007 Brokerage Report Card, released in May, 38% of advisors said they had an options licence, while 10% had a futures licence. Options are more popular among retail investors, while futures tend to be used at the institutional level.

“We would very much encourage our advisors to take the options and derivatives courses, but not necessarily because we want them to do those products directly,” says Gordon Gibson, senior vice president and managing director of National Bank Financial Ltd. in Montreal. “We think, one, it gives them a better understanding of the market as a whole, some of the forces moving the market; and, two, we do see an increasing number of structured products coming down the pike, and we would like our advisors to be able to understand them.”

The derivatives market is booming and a wide variety of structured products featuring derivatives, including principal-protected notes and hedge funds, have become available for the retail market.

In anticipation of this, Flynn says, CSI has bolstered its educational offerings related to derivatives over the past several years, including introducing the derivatives market specialist designation and developing a variety of derivatives-related continuing education courses on such topics as PPNs, hedge funds, options strategy and financial risk management.

The Montreal Exchange, for now Canada’s only derivatives exchange, has also developed a suite of 54 derivatives-related online CE courses. The bourse has also established a graduate diploma in derivatives in tandem with the Université de Quebec à Montréal. The courses and diploma don’t count toward registration as an approved advisor, however.

The MX has strongly lobbied for the inclusion of options training and licensing in the basic proficiency requirements for advi-sors. In the U.S., options licensing, but not futures licensing, is part of Series 7, the approximate equivalent of the Canadian securities course.

BRAKE ON THE MARKET

“We really think the fact that options are not included in basic proficiency requirements is not only a brake on the market, in terms of being an impediment to market growth, but it also represents a real impediment to proper advice and proper risk management for clients,” says Brian Gelfand, vice president of corporate relations at the MX. “If you don’t have a broker who is not only knowledgeable but also licensed to tell you that you can buy covered calls and puts, then you’re not being served properly.”

@page_break@TSX Group Inc. , which will be launching its own derivatives exchange, the DEX, in early 2009, also favours broader derivatives licensing, although it appears to be taking a more cautious, quieter approach than the MX in calling for change.

“We do think that derivatives education that is more broad-based, a U.S.-style approach, and would be more beneficial, not only to the brokers who could offer more services to their clients and generate more revenue sources but also to the clients themselves, who can access more risk-management tools,” says Rob Fotheringham, vice president of trading at the TSX.

“Change like this takes time,” he adds. “One of the responsibilities we have is to educate the brokerage and retail communities about the benefits.”

Although derivatives exchanges would benefit from greater levels of trading in options and futures, there are no clear indications to suggest that brokerages want the options licence included in the basic proficiency requirement nor that they are asking advisors to trade more derivative products.

“There has been absolutely no discussion on that front — at least, not from the IDA-member side,” says Flynn. “From our conversation with the industry, it’s not the additional courses that are stopping people from selling options in Canada. It’s because a lot of the firms don’t seem to want to encourage the selling of that product — at least, not at the small retail level.”

He adds that the more supervision required by advisors, the bigger the risk to the firm: “Firms have decided that for a lot of their retail business, they don’t want their reps selling these products.” IE