Canadian retail brokers lack the proficiency of their American counterparts, and clients have less access to risk-management products as a result.

Fewer than one in 10 retail brokers in Canada are licensed to sell options, whereas in the U.S., the license is considered standard, said Luc Bertrand, president and CEO of the Montreal Exchange, on a brief swing through Toronto on Monday.

The options licence is part of the Series 7 exam, the U.S. equivalent of the Canadian Securities Course. Bertrand uses “equivalent” loosely. About a quarter of the Series 7 exam is on equity options, he says, which by his estimation is tougher than the CSC.

In Canada, the CSC covers a wide range of topics related to capital markets and financial instruments including equities, derivatives and managed products, but advisors wanting to sell options and derivatives are required to take two additional courses.

In order to be registered to trade in options, advisors must complete the Derivatives Fundamentals Course and the Options Licensing Course.

Bertrand directs a lot of his frustration at the Investment Dealers Association of Canada. “What we are arguing is that Canadian stock brokers should be more proficient in risk management and for that, the IDA, which has the responsibility for proficiency standards of the stock brokers, have to rewrite the whole Canadian Securities Course,” he says. “Nothing is happening.”

The IDA, however, takes issue with some of Bertrand’s comments. Of the 27,310 registrants in the IDA, there are 6,184 approved to trade and advise on options and another 1,060 to trade in options but not advise, explains Paul Bourque, senior vice-president for member regulation with the IDA.

All combined, it works out to roughly a quarter of the IDA members. But even this figure is far below the percentage of U.S. brokers licensed to sell options. Why the difference? “In my view, it’s really an issue of what the market and the businesses want in terms of the proficiency of their staff,” Bourque says. “Certainly, the IDA is not going to get involved in that.”

He points out that the Canadian Securities Institute, an independent, for-profit organization that runs much of the securities training in Canada, is responsible for developing the courseware for brokers. “If there is a need for more training in this regard, I have no doubt the market will respond,” Bourque says.

Currently, the CSI meets with IDA staff and industry representatives on a monthly basis to discuss the proficiency standards for the various registration categories as well as the curriculum and content of CSI courses, including the CSC, says Marc Flynn, vice-president of regulatory relations and academic standards. The CSC covers what the IDA and member firms believe entry-level brokers should know (as it relates to capital markets and financial instruments), he adds. While the CSC does cover derivatives, it does so in order to provide entry-level IAs an overview of their features, benefits and suitability for investors.

While the IDA doesn’t determine what goes into a course, its role is to make sure the course content is sufficient to address the qualification. The IDA won’t tell people what course to take, but rather if the course is good enough, says Bourque.

Clearly, Bertrand doesn’t think it’s enough. In addition to the 55 online courses the MX offers, the exchange has delivered over 300 seminars across Canada on options trading. “We feel there are still great opportunities,” he says.

Bertrand illustrated how options can be used to hedge gains against future losses. For instance, say company XYZ soars 50%. A broker could buy a put or sell a call and by doing so, the broker is buying an insurance policy, he says. That happens in the U.S. but not in Canada, he adds.

The small number of brokers who deal in options and derivatives is one of the biggest barriers to the growth of the Montreal Exchange, which began trading on the Toronto Stock Exchange Tuesday.

“If there were more retail brokers licensed to do our business, we would be looking at all sorts of new product lines to launch,” Bertrand says. “At the end of the day, these financial products are like any other product. They are sold and bought. You need to keep an army of individuals on a daily basis recommending them to their clients.”

If the growth of the Montreal Exchange in recent years is any indication, brokers might be well advised to consider getting their options licence. Since 2002, global derivatives trading has had a compound annual growth rate of 18%. Revenue for the exchange is growing at a CAGR of 25%.

There are a number of factors driving this growth. The Montreal Exchange’s prospectus lists several, including:

  • increasing awareness in all economic sectors of the importance of risk management,
  • greater price volatility in key market sectors like fixed-income,
  • broader access to futures and options markets through technological innovation and the evolution of regulatory frameworks, and
  • relatively low amount of committed capital required to trade derivatives and a growing awareness of the opportunities to hedge market exposure.

Another sign of just how important the options and derivative markets are to Canada is the TSX’s stated intention to launch its own derivatives exchange — the DEX — in 2009, after its non-compete clause with the MX expires. The Montreal Exchange has had a monopoly on options trading in Canada since 1999.

If that’s not enough, the MX built up a market cap of more than $1.4 billion in its first moment of trading. (The exchange went public using a rarely used listing of shares, rather than through an initial public offering, meaning there is no IPO price to compare the trading to).

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(03/27/07)