OSC issues staff notice providing guidance for Contracts for Difference and FX Contracts
Mark E. McElheran and Philip J. Henderson
In response to numerous inquiries, the Ontario Securities Commission (OSC) issued a notice on October 27 outlining OSC Staff's view on the applicability of securities laws to offerings of Contracts for Difference (CFDs), foreign exchange contracts (FX contracts) and similar OTC derivative products. While the notice focused on CFDs, the guidance is intended to apply generally to FX contracts and OTC derivatives as well. Further, it is OSC Staff's intention that the interim guidance provided will remain effective until such time that a harmonized approach to the regulation of OTC derivatives is developed by the Canadian Securities Administrators and/or Ontario introduces derivatives legislation.
According to the notice, OSC Staff consider CFDs to be securities and, as such, CFD providers offering such products to Ontario investors must comply with Ontario's registration and prospectus requirements absent statutory exemptions or exemptive relief. In reaching its conclusion, OSC Staff considered the Supreme Court of Canada decision in Pacific Coast Coin Exchange v. Ontario (Securities Commission), [1978] 2 S.C.R. 112 and the subsequent jurisprudence. In particular, OSC Staff referred to the parallels between the facts of Pacific Coast "and the current trend towards offerings of CFDs to investors through the internet."
According to OSC Staff,
[t]hese parallels include the fact that the products involve contracts that are marketed as a form of investment, the contracts involve similar forms of underlying interest, the contracts make extensive use of margin in order to magnify profits and losses, and there is significant reliance by the investor on the CFD provider to act as a counterparty, design and operate the internet platforms, and hedge risk appropriately in order to ensure the CFD provider is able to satisfy its payment and performance obligations.
The notice also noted that the relevant caselaw "emphasizes the need to consider the economic realities of the transaction and to focus on the substance rather than the form of a transaction."
However, as the prospectus requirement may not be well-suited for certain types of OTC derivative products, OSC staff "may be prepared to recommend relief" under certain circumstances. The situations in which an exemption may be provided are discussed in the notice and such an exemption was recently granted to CMC Markets U.K. and its Canadian affiliate. In that case, the OSC decided to allow CMC Canada to distribute CFDs and FX contracts to Ontario investors without having to file a prospectus provided that, among other things, CMC U.K. remained registered with the U.K. Financial Services Authority, CMC Canada maintained its registration as an investment dealer with the OSC and as a member of Investment Industry Regulatory Organization of Canada and all distributions were conducted pursuant to the rules of Quebec's Derivatives Act (QDA) and the Autorité des marchés financiers. In granting the exemption, the OSC stated that the requested relief would "substantially harmonize the Commission's position on the offering of CFDs to investors in Ontario with how those products are offered to investors in Quebec" under the QDA.
