Abstract

This study examines the use of exchange traded derivatives by pension funds and investment management firms to explore the factors limiting the growth of Canadian exchange traded derivatives. Using survey data on investment management firms we investigate various aspects of derivatives use by these firms. An interesting finding is that even though a majority of the firms are permitted to use derivatives, only a few actually use them. This result implies that conclusions drawn with data from sources like N-SAR forms, which include information on permission to use different types of derivatives but not the actual use of such instruments, may be unreliable. The statistical analyses performed using the Canadian Pension Fund Investment Manager Database and the Canadian Pension Fund Database demonstrate that derivatives are used by a few large institutional investors with internal expertise and that exchange traded derivatives are less popular among them. We conclude that improved product designs and liquidity in the market may help increase trading on the Montreal Exchange. In addition, we believe that educating investors as well as investment professionals on derivatives is necessary for the development of the Canadian exchange traded derivatives market.