August 22, 2008 / 8:11 PM / in 9 years

Derivatives flagged as Canadian regulatory issue

TORONTO (Reuters) - A large institutional investor and Canada’s central bank suggest that Canadian securities rules may need to be broadened to deal with derivative instruments.

In submissions to an advisory panel on securities regulation, the Ontario Teachers’ Pension Plan, which manages more than C$100 billion in assets, and the Bank of Canada each lauded the new Derivatives Act in the province of Quebec, which was passed in June.

Quebec’s legislation “is a constructive step in strengthening the regulatory framework” for exchange-traded and over-the-counter derivatives, the central bank said.

Derivatives can include futures, swaps and options contracts, which are based on the value of other securities, and more complex financial transactions. Quebec is home to the Montreal Exchange, Canada’s only derivatives exchange.

Derivatives markets are regulated separately from cash equities and bond markets, but “the interrelationships between these markets should be considered in the regulatory framework,” the Bank of Canada said in its submission to the advisory panel.

Canadian securities markets are regulated by 13 provincial and territorial authorities, and the panel, led by former Conservative politician Tom Hockin, is supposed to develop a model Common Securities Act for federal and provincial finance ministers by the end of 2008.

Ontario Teachers’ Pension Plan told the panel that the range of investment products trading in capital markets now goes well beyond the previous concept of “securities,” and many areas are not covered by current laws.

“For example, the derivatives market is to a large degree unaddressed by securities legislation in Canada,” Ontario Teachers’ said.

The panel should consider “a sphere” of capital and investment markets regulation that goes beyond the traditional definition of “securities” and takes the evolving development of new investment products into account, the pension fund stated.

The submissions were among more than 70 the panel received. Dozens of them were published online this week at www.expertpanel.ca.

The banking industry warned that the fragmented system is ill-suited to rapid changes in financial markets. It said provincial regulators have a limited understanding of new risks that can emerge and how they will affect investors.

Citing “the blurring of asset classes and the proliferation of new tradable financial instruments that reallocate risks,” Royal Bank of Canada said that “securities regulators that are provincially focused and operating mostly in their historical comfort zones will be limited in their ability to understand and assess how and if these new risks will impact investors in Canada...”

Bank of Nova Scotia said the panel’s work is especially timely in the wake of the global credit crunch.

“Canada’s regulatory fragmentation is becoming a critical drawback at a time when systemic risk mitigation has become one of the most important aspects of capital markets regulation,” Scotiabank noted.

A slew of task forces, review panels and advisers have proposed ways to streamline Canadian securities regulation in recent years. A group called the Wise Persons’ Committee recommended a national regulator in 2003, and in 2006 a panel led by lawyer Purdy Crawford produced a “blueprint” for a Canadian Securities Commission.

($1=$1.05 Canadian)

Reporting by Lynne Olver; editing by Rob Wilson

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