As President and Chief Executive Officer of Bourse de Montréal Inc. (the Bourse), I am very pleased to provide you with some comments in response to the questions you are asking in the course of the consultation on the structure of securities regulation in Canada.

As you know, the Bourse is a major participant in Canadian financial markets. The Bourse is the only standardized market for financial derivatives in Canada, where C$20 billion worth of derivatives are traded on a daily basis. The 3-month futures contract on Canadian banker’s acceptances (the BAX) ranks sixth in the world in its category and the Ten-Year Government of Canada Bond Futures (CGB) also ranks sixth in the world in its category.

The Bourse owns the Canadian Derivatives Clearing Corporation (CDCC), the only financial derivatives clearing house in Canada. CDCC clears derivative products traded on the Bourse and manages a C$300 billion risk portfolio on an ongoing basis. Bourse de Montréal is also increasingly making an imprint on the international stage. It is among the 20 exchanges with the highest volume of derivatives trading in the world. It has also been invited to participate in a new U.S. options exchange, in partnership with major players in the field of derivative instruments in the United States. This is a remarkable performance, considering that the Bourse started specializing solely in derivatives only in 1999.

The Bourse also attracts a large number of foreign investors, who can now access Bourse products from a distance using terminals located in the United States and the United Kingdom. This is all possible thanks to the regulatory authorizations obtained by Mr. Michael Phelps Page 2 the Bourse from the relevant securities authorities, and to the collaboration of the Bourse’s principal regulatory authority, the Commission des valeurs mobilières du Québec (CVMQ).

Considering the nature of its activities and the ever-increasing globalization of financial markets, the Bourse considers the Canadian regulatory structure to be the cornerstone in the effort to ensure that the markets operate smoothly and that the Canadian market is attractive to foreign investors. It is in Canada’s interest to have an efficient, cost effective, simple and safe securities regulation structure that is as harmonized with international regulations as possible.

The above comments were a preamble to the more specific feedback provided below in response to the questions you asked.

What, in your view, are the key strengths and weaknesses of the current structure?

The Bourse’s response is in keeping with its status as an exchange and a self-regulatory organization (SRO) for the market and its participants. The Canadian regulatory system could be perceived as being cumbersome and costly for exchanges and SROs, bec ause regulatory jurisdiction is splintered among several provincial and territorial authorities. However, the reality is quite different. Since the Canadian financial markets were restructured in 1999, the Canadian Securities Administrators (CSAs) have been sharing the responsibilities for the regulation of exchanges and SROs in Canada. Consequently, the disadvantages of regulation by multiple authorities have been eliminated and the system’s efficiency enhanced. Without abandoning their jurisdiction over exchanges and SROs, the CSAs have entered into agreements designed to promote a regulatory regime based on the system of lead regulation. This system allows the exchange and SROs to channel their communications through one single authority, while transmitting the required information to the other authorities.

Some important aspects still need to be improved. For example, it would be desirable for CSAs to agree to recognize an SRO that carries out activities in several provinces or territories, without forcing it to be recognized in each province or territory. A certain level of collaboration among the relevant authorities remains necessary. Moreover, one of the strengths of the current regime is that it allows the local regulatory authority to specialize in the field of the market under its jurisdiction. As a result, the CVMQ could ultimately become the Canadian authority specializing in the regulation of derivatives.

How well are enforcement activities related to capital markets carried out in Canada? Does the present securities regulatory structure enhance or diminish the effectiveness of enforcement? What are the key enforcement issues? Even though each regulatory authority is now responsible for enforcing the provincial or territorial laws and regulations within its jurisdiction, the CSAs are trying, to the extent possible, to standardize regulatory practices across the country. While harmonization has already been largely achieved, more remains to be done. The initiatives undertaken in this regard, such as the project to standardize securities legislation headed by Stephen Sibold, who is also Chairman of the Alberta Securities Commission, are important projects which Bourse de Montréal supports.

Nothing prevents the current regulatory structure from operating adequately. However, the CSAs must promote uniform standards to ensure that the market is working properly and that international trade is encouraged. It may prove to be easier to attract foreign investors if legislation is similar from one province or territory to the next, and if the practical application of the regulations is the same across the country. For example, a securities broker who meets the requirements of a regulatory authority in one province or territory should automatically satisfy the requirements of all the other regulatory authorities.

How does Canada’s regulatory structure affect the international competitiveness of Canadian capital markets and the Canadian economy?

Although it is essential that regulatory costs be greatly reduced by the elimination of duplication, it nevertheless remains that the regulatory structure in Canada does not necessarily have a negative impact on the international competitiveness of our financial markets and the Canadian economy. There are two main types of persons who have an interest in the markets: (1) clients who want to do business and (2) regulatory authorities who want to protect their citizens abroad.

Clients want an efficient and less costly structure. They are attracted by robust activity or innovative or different, yet attractive, products. Hence, it is very important for Canadian markets to increase their liquidity and offer a diversified range of products. To achieve these goals, it is essential to promote public education and the training of market participants, because knowledge of the market encourages investment. Investment grows with use and growth creates liquidity, which in turn attracts foreign investors and enhances international competitiveness. The regulatory structure in Canada must therefore promote public education and training of market participants. In this regard, Bourse de Montréal would like to acknowledge the collaboration it received from its regulatory authority, which facilitated the creation of the Bourse’s Derivatives Institute which is dedicated to the education of market participants and which now extends beyond the boundaries of Canada.

Foreign regulatory authorities want to assure the protection of their citizens. Therefore, before permitting cross-border trading, they review the regulatory structure of the authority interested in trading with their country. When they deem this authority’s structure to be satisfactory, international cooperation is simplified. The Canadian regulatory structure is known and respected by all industrialized or emerging countries that are members of the International Organization of Securities Commissions (IOSCO). Canadian securities administrators should be encouraged to participate more in the work of such organizations. In addition, the participation should be strong, specialized and experienced. It is desirable to promote the specialization of regulatory authorities in the securities and derivatives field, to allow them to play a more effective role in international forums.

From a practical standpoint, the Bourse saw the importance of cooperation among regulatory authorities when it went through the process of obtaining permission to allow players on foreign markets to access the Bourse’s system. The two countries targeted (the United States and the United Kingdom) have rendered favorable decisions for the Bourse based on its structure and internal organization, and on the fact that it is regulated by a recognized regulatory authority. Indeed, the CVMQ has entered into information-sharing agreements with the Commodity Futures Trading Commission in the United States and the Financial Services Authority in the United Kingdom. These agreements as well as the good relations between the authorities were instrumental in the rendering of these favorable decisions for the Bourse.

Moreover, the government of Canada may be called upon to intervene in international forums to help Canadian markets succeed. The markets must make themselves known. To this end, all levels of government and exchanges and SROs must work in concert. Even though it is healthy to periodically call into question the Canadian regulatory structure, the important thing now is to consolidate our strengths in order to compete with foreign markets. Besides, foreign market themselves do not have an ideal regulatory system. Taking just the U.S. as an example, they have two commissions that regulate securities and derivatives and a regulatory authority that does the same in each state for certain aspects of securities trading.

How do you perceive the timeliness, responsiveness and flexibility of the current system in developing policies, rules and regulations and, where necessary, in revising or simplifying them to meet new circumstances?

Bourse de Montréal has a rather positive experience in this regard. The speed of change in the markets, particularly the derivatives market, demands close collaboration with the regulatory authorities. The Bourse has so far received this collaboration in the creation of a new market model for derivatives in Canada and in the management of its operations

on an ongoing basis. It should be noted that foreign players were sometimes astonished at the efficiency with which our regulatory authorities managed requests for approval of the new market model as well as the process of demutualization of the Bourse. This efficiency is due primarily to the effort of understanding shown by the authorities as well as the cooperation among provinces in the management of these important issues. What is your assessment of regulatory structures in other countries? Are there lessons to be learned from other countries’ experiences?

It is difficult to pass judgment on the restructuring of regulatory systems in the financial sector abroad. The fact is that first-hand experience is required to fully understand how the system works and where it fails. The Bourse has experience with two countries. In the United States, it deals with two regulatory entities: the Commodity Futures Trading Commission (CFTC) and the United States Securities and Exchange Commission (SEC). The two agencies have their specific jurisdictions and methods of implementing their legislation. Dealing with these agencies is a rigorous and formal exercise. Consequently, their costs and requirements are significant.

In the United Kingdom, the regulatory culture is different, which may facilitate cross - border trade. Moreover, it cannot be said that the regulatory structure in the U.K. – which encompasses the regulatory agencies in the financial sector – is the reason for this vision of the regulatory framework. Apart from regulations, the country’s traditions and the characteristics of its market are also important. The existing structures do not necessarily account for the efficiency of the regulatory framework. Often, the success of these structures depends on the people who manage them.

What would be the best securities regulatory system for Canada?

In the Canadian context, the best securities regulation system is probably one based on the principle of lead regulation. This regime already exists with regard to various responsibilities assumed by the CSAs. Agreements exist, for example, concerning the regulation of exchanges and SROs. Hence, a Canadian exchange carrying out activities in more than one province is exempted from certain regulatory requirements by the provinces concerned, provided the exchange respects the framework of the agreement entered into among the provinces. The exchange then does business with a single window, a single regulatory authority for decision-making matters, but submits data and documents required by the other authorities for information purposes. It is understood, however, that in case of disagreement between the authorities, a mechanism exists for breaking the impasse. Bourse de Montréal has never experienced such an impasse. The regime based on the principle of a principal authority requires the signing of agreements for the sharing of responsibilities without usurping any partner’s jurisdiction. It also requires a fair amount of cooperation and mutual trust and, to the extent possible,

standardized securities legislation, including the field of derivatives. However, the Canadian regions that so desire should be able to maintain their expertise in the market sectors that characterize them. It is also essential for clients of regulatory authorities to feel that their opinions matter and that regional differences are taken into account. The regime based on the principle of a principal authority should be built around staff streamlining, with reliance on the employees’ expertise. It is important for the personnel of the regulatory authorities to be properly trained and experienced in the field under their purview. The expertise acquired by one authority could then be of service to the other authorities.

In summary, Canada could have one of the best securities regulation systems in the world. The provincial and territorial governments should be encouraged to continue their efforts to standardize their regulations and increase their collaboration. It would be desirable for the CSAs in all sectors to set a goal of achieving the most comprehensive form of harmonization and collaboration possible. Instead of thinking about an ideal regulatory system which probably does not exist, it is more important for all involved to work together to make the existing system as efficient as possible and thus foster the development of strong and universally respected Canadian financial markets.

Bourse de Montréal
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