Dalhousie Journal of Legal Studies


R. Aaron Libbey


The volume of derivatives in the global financial system has exploded. Before the 1980s, these products were virtually unknown. As of June 2009, the notional market value of outstanding derivatives was in excess of USD $600 trillion. Regulators have been slow to act to date – and where they have acted, the legal, systemic and operational risks associated with derivative financial products have not always been properly determined or resolved. This paper explores the Canadian approach to derivatives regulation, examining its strengths and weaknesses, and looking at improvements that could be made. I argue that the outdated, disorganized and decentralized maze of laws that regulate Canada’s markets is both inefficient and ineffective. In light of the challenges posed by the rapidly evolving derivatives markets and the increasingly global economy, the current system is no longer tenable, and a reshaping of the regulatory scheme is necessary. A modern, consolidated, principles-based regulatory system will better serve investors and businesses, and will be a more effective guardian of the health of the Canadian economy. The first section of this paper explores the fine balance that must be achieved between the regulation of derivatives markets and the need to allow participants the freedom to transact and obtain the full economic benefit from derivative instruments. Section II looks into the Canadian experience with derivatives regulation, examining the sources of ambiguity, the varying provincial regimes, and the problems that have arisen with regulation. Section III suggests a way forward out of the confusion of the current Canadian regulatory system. I propose a Québec-style dedicated piece of legislation, with a principles-based approach, rooted in an ideology of the markets that takes into account the dangers of unchecked participants, and that is overseen by a national regulator as a part of a comprehensive financial regulation system. Before exploring the Canadian regulatory framework applicable to derivatives it is necessary to describe what the term “derivatives” refers to and the nature of the markets within which these financial instruments are used.

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.