The Ontario Securities Commission has decided that “contracts for difference” are effectively securities, and will be treated that way by regulators in Ontario.

In a notice issued Tuesday, the OSC sets out its views on the applicability of securities law and other regulatory requirements to offerings of CFDs and foreign exchange contracts in Ontario, both of which are increasingly being offered to investors directly through the Internet.

As a result of their increasing availability, OSC staff conducted a review of these products in consultation with staff from other members of the Canadian Securities Administrators and of the Investment Industry Regulatory Organization of Canada.

Tuesday, the OSC said that staff have concluded that these products — which allow an investor to obtain economic exposure to an asset, such as a share, index, currency or commodity, without acquiring ownership of the asset — constitute “securities” for the purposes of Ontario securities law.

As a result of this conclusion, regulatory staff are of the view that, unless exemptive relief is granted, these products are subject to securities law and other regulatory requirements, including registration and prospectus requirements. Earlier this month the OSC issued an exemption to CMC Markets Canada Inc.

“We are issuing this guidance to respond to enquiries from issuers and dealers about the applicability of Ontario securities law to these products,” said Margo Paul, director of corporate finance at the OSC. “We also want to highlight some of the investor protection concerns we have with these products, particularly where they are being offered to investors by offshore entities through the Internet and without the protections of a registered dealer.”

The litany of investor protection concerns set out in the notice, includes: complexity of the product and the offering model; use of margin or leverage; in the case of certain offerings, highly promotional and potentially misleading selling materials; lack of product suitability determination; in some cases, lack of available information relating to the underlying asset; potential volatility of the underlying asset (for example, currency fluctuations); embedded fees and lack of price transparency; and counterparty risk (including risks associated with the counterparty being situated out of jurisdiction).

The notice also points out that, “In some cases, CFDs are being offered to investors directly through the Internet by unregistered dealers rather than through a registered dealer. To the extent CFDs are being offered without the protections of dealer involvement, we believe these investor protection concerns may be significant.”

The guidance in the notice is focused on offerings of these products to investors and is not intended to address direct or intermediated trading in these products between institutions.

Additionally, the notice reminds issuers, dealers and other market participants that there may be important differences in the regulatory treatment of CFDs, forex contracts and similar products across the CSA. Sellers should therefore review the specific requirements of securities legislation (and, where applicable, commodity futures legislation and derivatives legislation) before offering CFDs to investors, it says.

IE