The Autorité des marchés financiers is publishing a concept paper that proposes a new regulatory regime for derivatives markets in Quebec.

The AMF notes that trading in derivatives has grown dramatically in Quebec and around the world. The existing regulatory framework regards operations in this market as part of securities trading. “However, financial market developments have prompted the AMF to reconsider its regulation of derivatives,” it says.

“We want Québec to be equipped with modern and flexible regulatory instruments that are in step with developments in the sector and take into account market realities in Canada and throughout North America,” noted AMF president and CEO Jean St-Gelais.

The AMF says that the document outlines the principles that it is proposing for the development of a regulatory framework for derivatives. “Prepared by a group of analysts specializing in various operational areas at the AMF and submitted to an advisory committee made up of industry representatives, the document is intended to solicit and gather comments from industry participants and other interested parties,” it notes. “The proposals highlight an approach based on a number of general principles that would be enforced through regulations and policy statements.”

The regulatory structure it proposes consists of a Derivatives Act based on core principles — rather than prescriptive and specific rules — combined with significant collaboration between the AMF and self-regulatory organizations. “Regulation based on core principles would allow for rapid adaptation to changing business structures, the introduction of new products and market developments. It would also reduce the regulatory burden, without affecting the quality of supervision,” the paper says.

The paper proposes a broad definition of derivatives, which would give the AMF jurisdiction over all existing and future derivatives contracts. Over-the-counter products traded by mutual agreement between sophisticated parties would be exempt however. “The AMF would intervene only when these products are offered to retail investors, or in the case of fraud or market manipulation,” it notes.

It says that the recognition process for derivatives exchanges, derivatives clearing houses and membership associations would stem from the core principles. They would have to demonstrate how they are complying and continuing to comply with the core principles. “Self-certification of new rules, rule amendments and the introduction of new products would facilitate timelier adoption of these changes, but the burden of demonstrating compliance with the core principles would be assumed entirely by a regulated entity,” it says.

“In addition, a public comment period as well as the AMF’s powers of review and direction would help enforce compliance with the core principles. Intermediary oversight would, to a large extent, continue to be the responsibility of the regulated entities, who would develop rules on professional training, solvency and other registration requirements,” it says. In order to perform its regulatory mission, the AMF would maintain its powers of inspection, review, directive, investigation, sanction and delegation.

“In this document, we have recommended principles for derivatives regulation and given guidance for provisions in a Derivatives Act, rules and policy statements. It is hoped that these recommendations, as well as our analyses and proposed orientations, will generate further discussion and comments on derivatives oversight,” it says.

Comments are due by July 25.