Montreal Exchange bemoans shortage of derivatives proficiency among brokers

Date: Tuesday, May 3, 2005
Author: GARY NORRIS- Canadian Press CP

TORONTO (CP) - If you don't buy and sell equity options - or understand them - it's probably at least partly because your stockbroker doesn't understand them either, Montreal Exchange executives said this week.

One of the main challenges the MX faces is a lack of brokerage expertise in the area of derivatives, chief executive officer Luc Bertrand and chairman Jean Turmel said during a get-acquainted session with the Toronto business press.

Derivatives - options, futures and other instruments based on the shifting values of stocks, currencies or other underlying assets - have a reputation as dauntingly complex and hazardous. In fact, the ability to buy or sell an asset at a specific price in the future is a major corporate risk-management tool and also can provide low-risk portfolio gains.

"Derivatives are not used as much as they should be in our financial community," Bertrand said, adding that this is because Canada lacks a large "community of sophisticated retail brokers who would be able to properly advise their clients in the use of equity options."

The MX, which under a 10-year agreement in 1999 became Canada's sole derivatives market while the Toronto Stock Exchange dominated cash equity trading, is pushing for better broker ability to handle small-investor derivatives transactions.

The Montreal market's average daily volume has more than quadrupled since 2000 but remains overwhelmingly institutional, Bertrand said.

"The challenge is to increase it on the retail side, to address the proficiency issue at the broker level."

The MX operates a series of online courses and is pressing to have the Canadian Securities Course, the mandatory basic training for stockbrokers, expanded to include the options licence in the securities licence, instead of requiring two additional derivatives courses beyond the CSC.

"We think the retail investor is going to increasingly be demanding more sophisticated services with regards to derivatives use - at least services that are on a par to what his U.S. counterpart is obtaining," Bertrand said.

Improvement is needed not only among individual investment advisers but also in the structure of securities firms, he said, "in terms of compliance, in terms of developing the in-house expertise to do the management of the risk and so forth."

New products being developed at the MX - which has a staff of almost 200, about half in information technology - include options on the Canadian dollar versus the U.S. dollar and the euro.

These are being designed for retail purposes, Bertrand said, and will be "an ideal instrument for those Canadian investors wishing to buy European or U.S. equities and have the ability to hedge the currency risk."

The TSX Group (TSX:X), operator of the Toronto Stock Exchange and TSX Venture Exchange, recently served notice that it intends to enter the derivatives business when the market-splitting agreement expires in 2009. The MX officials expressed confidence in their position - and doubt that Canada could support duelling derivatives exchanges neighbouring the world's biggest capital markets in the United States.

"Every day when we get up we have tons of competition" from American and European markets, Bertrand said.

"But the reality of the Canadian space is that to fragment the business, as it was before 1999, is something that really needs serious consideration."

Turmel didn't rule out the possibility of a future friendly arrangement with the TSX. But he said that "the strategy that we are executing is giving us growth that we feel is much better than what the TSX growth is going to be," and noted that the TSX could find itself fighting aggressive competition from other players in the cash equities market.

"Past 2009, anything could happen," Turmel said. "A greater co-operation between the two is probably warranted."