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
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
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
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
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
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