Quebec Derivatives Blanket Exemption - Revocation postponed by nine months

Alix d’Anglejan-Chatillon and Ken Ottenbreit - 

The Autorité des marchés financiers (AMF), Quebec's financial services regulator, published Decision No. 2015-PDG-0132 (the Extension Decision) yesterday (August 27, 2015).  The Extension Decision (released in French only) postpones the effective date of the revocation of the so-called blanket derivatives exemption under the Quebec Derivatives Act (QDA) (the Blanket Decision) by nine months, from September 5, 2015 to June 5, 2016. 

The Extension Decision will be particularly welcome news for foreign futures commission merchants (FCMs) which have been trading foreign and MX listed futures for Quebec institutional clients on the basis of various exemptions for a number of years and faced the prospect of having to shut down that business by September 4th.    Buy-side institutional clients in the Quebec market will also have more breathing room to adapt their futures trading arrangements in light of decisions made by foreign FCMs to seek derivatives dealer registration in Quebec or discretionary exemptive relief, or to discontinue their current futures trading business in Quebec.

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AMF revokes Quebec derivatives exemption and issues limited guidance on registration matters - market participants advised to take urgent action

Alix d’Anglejan-Chatillon -

The Autorité des marchés financiers (AMF), Quebec's financial services regulator, has issued a notice to firms which can no longer rely on the so-called blanket derivatives exemption under the Quebec Derivatives Act (QDA) that it expects applications for derivatives dealer registration and SRO membership to be submitted by September 4, 2015 i.e., prior to revocation effective September 5 of the AMF’s blanket derivatives exemption.  

As previously noted, Canadian and foreign market participants (including U.S. and other non-Canadian FCMs) which have relied on this exemption should be taking urgent action to review their current derivatives markets activities in Quebec and determine whether to register under the QDA, whether any other statutory relief may be available, whether there may be a basis to apply for focused discretionary relief under the QDA and whether any current client arrangements with Quebec counterparties should be discontinued by the September 5, 2015 deadline.  

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Cash collateral amendments for Ontario recommended by expert panel

Margaret Grottenthaler -

As we noted last week, an expert panel recommended important reforms to Ontario’s Personal Property Security Act (PPSA) as part of a broader study into modernizing Ontario business law.  The panel proposed amendments to the PPSA permit cash as collateral to be perfected by control as opposed to registration.  The panel further recommended allowing cash, when perfected by control, to have priority over competing security interests.  These proposed changes are intended to harmonize the Ontario PPSA with Revised Article 9 of the Uniform Commercial Code and provisions of the Civil Code of Quebec governing security interests.  

As our readers know we have been strong advocates for these changes.  They would significantly facilitate the use of cash as collateral and be of significant benefit to businesses that seek to use cash collateral to finance their operations, particularly their financial market participation, such as derivatives transactions.  Priority would not depend on registration but on control. Such amendments could therefore potentially reduce transaction costs and allow other secured creditors to have nearly complete assurance that a security interest in cash perfected by control would have priority over every other security interest that has not been perfected by control.  

Hopefully the support of the expert panel will convince the government to introduce these much needed amendments to the PPSA, something that the government promised to do in earlier budgets. For further information, please consult the report of the expert panel.

Modernizing Ontario's Business Law: expert panel releases its "Wish List"

Andrew S. Cunningham and Brian Lynch - 

The following post originally appeared on our M&A blog. The structured finance community will be particularly interested in the part about possible changes to the cash collateral rules under the Ontario PPSA. We plan to publish a post dealing more specifically with the PPSA issues in the coming days.

On February 15, 2015, Ontario’s Minister of Government and Consumer Services asked a 13‑member panel of legal practitioners and academics to survey the province’s business law landscape and provide recommendations on reforming laws to modernize the province’s business environment. In June, 2015, the panel submitted a comprehensive report with 16 recommendations for legislative reform that would promote the following key objectives:

  • Making Ontario a leading jurisdiction for business;
  • Updating legislation dealing with commercial activity, including the PPSA; and
  • Creating an environment with more certainty and efficiency to support market activity and small business growth.
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Québec counterparties will be able to grant pledges over cash collateral starting January 1, 2016

Sterling Dietze

Our post of December 9, 2014 introduced the proposed modifications to the Civil Code of Québec (Civil Code) in Bill 28 to permit, among other things, pledges over cash collateral. The proposed modifications were adopted in final form on April 21, 2015 and will come into force on January 1, 2016.

There were some important last-minute modifications to Bill 28 which clarify a number of rules:

  • the consent required for a Québec counterparty to grant a pledge to a creditor that is also the debtor of the monetary claim need not be in writing;
  • Control agreements also do not need to be in writing;
  • A secured party will be able to obtain control of a financial account by becoming the account holder and this will give it priority over other secured creditors that may have control;
  • the realization regime for these pledges will not require registration at the Québec central registry in any practical realization scenario; and
  • the applicable Quebec conflict of laws rules have been clarified to harmonize them with those applicable under Article 9 of the Uniform Commercial Code (United States) (UCC).
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OSC, AMF and MSC propose relief to end users from trade reporting for certain inter-affiliate trades

The Ontario Securities Commission, the Autorité des marchés financiers and the Manitoba Securities Commission have announced that “end users” will not be required to comply with derivatives trade reporting requirements in respect of trades between an end user and an affiliate in certain circumstances. An “end user” is essentially a reporting counterparty that is not a derivatives dealer, a clearing agency, or, in Quebec and Manitoba, a Canadian financial institution.

End users are subject to the trade reporting obligation as of June 30, 2015 under local trade reporting rules adopted in these three provinces. However, the AMF and the MSC have granted temporary relief for end users in respect of certain inter-affiliate trades pending codification of this relief in their respective local rules. The OSC has indicated in its staff notice that it intends to propose amendments to the local Ontario trade reporting rule to provide similar relief.

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"No sale": B.C. court holds that a purported acquisition of scrap metal was in substance a financing deal rather than a true sale

Andrew Cunningham -

A recent British Columbia Supreme Court case took a fresh look at the old question of how to tell a true sale from a financing or loan transaction. The ruling in Coutinho & Ferrostaal GmbH v. Tracomex (Canada) Ltd. is a welcome addition to the relatively sparse body of case law on this topic, as it reaffirms and applies a number of the principles set out in the 2003 Ontario decision in Metropolitan Toronto Police Widows and Orphans Fund v. BC Tel Communications Inc. (Widows and Orphans).

The facts of Coutinho are too complicated (and, truthfully, too boring) to recount in detail. Suffice it to say that various players in the scrap metal industry were interested in a stockpile of old railroad rails located just outside Vancouver. The dispute was ultimately about who owned the rails after a series of transactions had taken place among parties of various nationalities who, by the end, all seemed to be accusing one other of various forms of duplicity. The court eventually (and wisely) decided the ownership issue in favour of the plaintiff, Coutinho & Ferrostaal (C&F), which appears to have been the most innocent of the dramatis personae.

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Revisiting the "specified derivatives" rulebook for Canadian investment funds - an old idea whose time has come

Alix d'Anglejan-Chatillon  -

As previously reported, staff of the Ontario Securities Commission (OSC) has issued welcome guidance in the absence of clearly articulated restrictions on the re-hypothecation of collateral supporting specified derivatives transactions in portfolios of prospectus-qualified investment funds.  The guidance, however, also serves to highlight some of the challenges faced by portfolio managers, their counterparties and legal advisers when it comes to managing these derivatives portfolios on a basis that is both compliant with the very technical rulebook governing transactions in “specified derivatives” under National Instrument 81-102 Investment Funds (81-102) and consistent with standard market terms and practices in the broader OTC derivatives industry.

OTC derivatives markets reform is gradually taking shape in the major global derivatives markets.  As the contours of this new regulatory order begin to settle in the United States and Europe, the Canadian Securities Administrators (CSA) and federal regulators continue to piece together a made-in-Canada framework of rules that will mandate, among other changes, derivatives trade data reporting, central counterparty clearing, registration, trading and custody of OTC derivatives and enhanced custody and collateral requirements for non-cleared derivatives.  Here, as in other markets, these new ground rules are being specifically developed to address systemic, counterparty, liquidity, credit and other key risks in the Canadian and cross-border OTC derivatives market and to make that market more transparent, liquid and safe

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Yukon's Securities Transfer Act now in force

Yukon recently proclaimed the Securities Transfer Act and related amendments to the Personal Property Security Act (related to security interests in investment property) into force effective May 1, 2015 (Yukon Gazette, February 15, 2015). This leaves PEI as the only province or territory without a Securities Transfer Act or a perfection by control regime for investment property.

Quebec AMF to revoke derivatives blanket exemption decision effective September 5, 2015

Alix d'Anglejan-Chatillon -

The  Autorité des marchés financiers (AMF), Quebec's financial services regulator, issued an important decision yesterday which provides for the revocation effective September 5, 2015 of Decision No. 2009-PDG-0007 General Decision Respecting the Exemption from the Application of Sections 54, 56 and the First Paragraph of Section 82 of the Derivatives Act (the Blanket Decision).  The decision can be found beginning on page 413 of the April 30, 2015 Bulletin.

The AMF had issued the Blanket Decision on January 22, 2009 in conjunction with the enactment of the Quebec Derivatives Act (QDA) to provide transitional relief for transactions and other activities in relation to certain specified derivatives, subject to certain conditions. Canadian and foreign market participants which have relied on this exemption should review their current derivatives markets activities in Quebec and determine whether any other statutory relief may be available, whether there may be a basis to apply for focused discretionary relief under the QDA or whether any current client arrangements with Quebec counterparties should be discontinued by the September 5, 2015 deadline.

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