Tuesday, October 27, 2009

OSC weighs in on derivatives

Posted in the Globe & Mail's Streetwise by Steve Ladurantaye:

The Ontario Securities Commission issued a report Tuesday outlining its position on contracts for differences, which are derivative-based products that have been made available in Ontario and Quebec this week for the first time.

“We would also like to take this opportunity to highlight some of the investor protection concerns we have with offerings of CFDs to investors in circumstances where such offerings are made without the protections of dealer involvement,” the OSC said in a note.

CMC Markets Canada received approval this month to offer the products, three years after first asking permission. When a client buys a CFD, they are betting on the price moving of an underlying product – be it currency, commodity, index or stock. They never actually own anything, and highly leveraged positions tend to open and close quickly.

The commission said that investors have had access to the products for some time through the Internet, and “appropriately registered dealers” may be able to provide some measure of investors protection.

The main sticking point during the three-year discussion was whether the CFDs are actually securities, and if so, whether they had to be sold along with a prospectus. The OSC note says yes, they are and yes, they must.

However, CMC Markets was granted an exemption to the prospectus rule because it agreed to work under a set of guidelines that control margin rates and client suitability, among other things. Any new dealer would also have to apply for an exemption before offering the CFDs to retail investors.

“We acknowledge that the prospectus requirement may not be well-suited to offerings of certain types of OTC derivative products, including CFDs and forex contracts ... OSC staff will consider exemption applications on a case-by-case basis.”

The full discussion can be found here.

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