CANADA: IIROC Proposes Amendments to its Dealer Rules and Futures Market Segregation Form 1

These are required because of implemented and expected upcoming changes at the two Canadian futures market central clearing counterparties (CCPs) – ICE Clear Canada (ICCA) and Canadian Derivatives Clearing Corporation (CDCC). These CCPs are making changes to comply with the Principles for Financial Market Infrastructures (PFMI) published by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO), and adopted by the Canadian. Securities Administrators (CSA) and the Bank of Canada (BOC).

The Amendments refer specifically to changes resulting from Principle 14: segregation and portability (Seg & Port).

The primary objective of the Amendments is to codify DMR requirements that restrict linkages between a Dealer Member’s futures business and its other business lines that are not subject to the futures market Seg & Port regime.

The Amendments:

• set higher customer margin requirements for futures positions in order to harmonize IIROC futures customer margin requirements with the new CCP Gross Customer Margin (GCM) model
• apply stricter criteria in order to use offset margin requirements for customer cross-product hedges between securities positions and futures positions
• eliminate the possibility of customer guarantees between securities accounts and futures accounts
• eliminate the use of a customer’s excess margin in the customer’s futures account to satisfy a margin deficiency in their securities account, or vice versa
• eliminate the use of customer free credits from securities accounts in the futures business
• require separate ledger accounts and identifiers to distinguish futures accounts and related collateral from other customer accounts.

In addition, the following significant outstanding matters still need to be resolved:

• the specific model and margin approach that CDCC will implement
• how the CCPs will treat customer excess collateral held at the CCP
• how IIROC will treat customer excess collateral held at the CCP for capital reporting purposes.

Impacts

Dealer Members will need to allocate resources to update their books and records, and supporting systems, to meet the new requirements for futures accounts. The Amendments may require Dealer Members to alter some of their business arrangements with futures customers that also maintain securities accounts.

Most significantly, the Amendments have the potential to affect materially the marketplace. The Amendments may result in higher margin requirements for certain institutional customers, which may significantly affect both unhedged futures trading and cross-product hedge trading involving futures and underlying cash market securities. However, as a mitigating factor, futures market participants should be familiar with the GCM model, which already operates in major futures markets throughout the world.

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