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FinOps FAQ: Capital and Margin Rules



One of the main roles of IIROC’s Financial and Operations Compliance department (FinOps) is to assess whether firms have enough capital for the type and scope of their business activities. FinOps monitors firms for compliance with IIROC financial rules to reduce the possibility of financial failure due to excessive leverage or risky business practices.


Frequently asked questions

 


  1. Where can I locate IIROC’s financial rules?

  2. How can I determine if a security is eligible for margin?

  3. What if there are no capital and margin requirements set out in Rule 100 for the particular security that I am looking for?

  4. Is there any other information available on the application of Rule 100?

  5. Where can I get a copy of the lists that are used for determining counterparty credit risk classification?

  6. Can I treat an institution as an acceptable institution or an acceptable counterparty even though they are not listed in the acceptable institutions / acceptable counterparties database?

  7. Where can I get a copy of the lists that are used for determining whether a custodial location is acceptable for regulatory purposes?

  8. Where are the standard industry agreements located on your website?

  9. Can an employee of a Dealer Member guarantee the trading account of another employee of the same firm or a client's account?

  10. Can a family member of an investment advisor guarantee the investment advisor's account?

  11. Can a Dealer Member provide a financial guarantee to a third party?

 

1. Where can I locate IIROC’s financial rules?

IIROC's financial rules are located in the Dealer Member Rules section of IIROC’s Rule Book. The relevant Dealer Member Rules are:

Rule 6

Dealer Member holding companies, related companies and diversification

Rule 16

Dealer Members’ auditors and financial reporting

Rule 17

Dealer Member minimum capital, conduct of business and insurance

Rule 27

Dealer Members’ rights respecting clients' indebtedness

Rule 30

Early Warning System

Rule 35

Introducing broker / carrying broker arrangements*

Rule 100

Margin requirements

Rule 300

Audit requirements

Rule 400

Insurance*

Rule 1200

Clients' free credit balance

Rule 1400

Disclosure to clients of Members’ financial condition and other information

Rule 2200

Cash and securities loan transactions

Form 1

Joint Regulatory Financial Questionnaire and Report

To view these Rules, please see the IIROC Dealer Member Rules.

 

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2. How can I determine if a security is eligible for margin?

Rule 100 sets out the minimum capital and margin requirements for the vast majority of securities that are held by a Dealer Member or its customers. Whether or not a security is eligible for margin and if so, the minimum rate to be used is set out in this Rule. The major categories of securities covered by the Rule (along with the Rule reference) are:

Rule 100.2(a)

Bonds, debentures, treasury bills and notes

Rule 100.2(b) and (c)

Bank paper and acceptable foreign bank paper

Rule 100.2(d)

Unhedged foreign exchange

Rule 100.2(e)

National Housing Act (N.H.A.) mortgages

Rule 100.2(f)

Listed and unlisted securities - general requirements

Rule 100.2(f)(iv)

List of securities eligible for reduced margin (“LSERM”) - customer requirements

Rule 100.2(h)

Mortgage-backed securities

Rule 100.2(i)

Precious metal certificates and bullion

Rule 100.2(l)

Mutual funds

Rule 100.4

Offsets involving debt, swaps, capital shares, convertible shares and exercisable securities

Rule 100.5

Underwriting

Rule 100.8

Commodity futures and futures contract options

Rule 100.9

Customer positions in equity and index related derivatives

Rule 100.10

Dealer Member positions in equity and index related derivatives

Rule 100.11

Over the counter options

Rule 100.12

Capital requirements for Dealer Member inventory positions

Rule 100.12(a)

List of securities eligible for reduced margin (“LSERM”) - Dealer Member requirements

Rule 100.17

Term repurchase agreements

Rule 100.18

Instalment receipts

Rule 100.19

When issued trading of new and additional issues

Rule 100.21

Maximum margin required for convertible securities

To view these Rules, please see the IIROC Dealer Member Rules.

 

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3. What if there are no capital and margin requirements set out in Rule 100 for the particular security that I am looking for?

While Rule 100 sets out the minimum capital and margin requirements for the vast majority of securities, there are instances in the rules where either individual issues or types of securities have no established requirements. When these situations occur, IIROC staff issues guidance notices to establish the appropriate requirements. In the absence of specific requirements or guidance, a Dealer Member may request a ruling from the Member Regulation Policy Department on the proper capital and margin treatment for a specific transaction or position. When a ruling is requested, it must be in writing and full details of the transaction/position must be provided. See IIROC Rules Notices, IDA Member Regulation Notices and IDA Compliance Interpretation Bulletins for more information.

 

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4. Is there any other information available on the application of Rule 100?

Each year IIROC holds a Member & Panel Auditor Seminar to provide specific training to Dealer Member staff and panel auditors on a number of issues. Generally, at least one session is provided on significant changes to Rule 100 made during the past year. Furthermore, there may be additional sessions dealing with specific capital and margin related topics of interest. In the past few years these sessions have covered the following topics: capital requirements for Dealer Member inventory offsets, securities concentration charge, capital requirements for underwriting positions and provider of capital concentration charge.

Also, the following margin rate lists are updated regularly and are available on the Supporting Schedules page:

  • List of securities eligible for reduced margin (LSERM)
  • List of foreign market indices whose constituent securities are eligible for margin
  • List of floating and tracking error margin rates for qualifying Canadian index products
  • List of floating and tracking error margin rates for qualifying U.S. index products
  • Acceptable over-collateralization rates for financing transactions with acceptable counterparties
  • List of foreign exchange (FX) spot risk margin rates for Canadian and U.S. base currency accounts
  • Foreign currency group.

 

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5. Where can I get a copy of the lists that are used for determining counterparty credit risk classification?

The following lists relating to counterparty credit risk classification are available on the Supporting Schedules page:

  • Acceptable institutions / acceptable counterparties database
  • Countries that qualify under the definition of Basle Accord Countries [used to determine whether a foreign counterparty may qualify as an acceptable institution or an acceptable counterparty]
  • Exchanges / associations whose members qualify as regulated entities
  • List of approved inter-dealer bond brokers [used to determine those inter-dealer bond brokers that may be margined in the same manner as acceptable counterparties]
  • List of acceptable clearing corporations and acceptable securities locations (depositories and clearing agencies) [depositories and clearing corporations that qualify as acceptable clearing corporations receive better credit treatment as per the Notes and Instructions to Schedule 5 of IIROC Form 1]

 

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6. Can I treat an institution as an acceptable institution or an acceptable counterparty even though they are not listed in the acceptable institutions/acceptable counterparties database?

Yes, as long as you make sure that such an institution qualifies as an acceptable institution or an acceptable counterparty based on the most recent audited financial statements available for the institution. The requirements for qualifying as an acceptable institution or an acceptable counterparty are set out in the General Notes and Definitions of IIROC Form 1, the Joint Regulatory Financial Questionnaire and Report.

 

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7. Where can I get a copy of the lists that are used for determining whether a custodial location is acceptable for regulatory purposes?

The following lists relating to custodial locations are available on the Supporting Schedules page:

  • List of acceptable clearing corporations and acceptable securities locations (depositories and clearing agencies) [depositories and clearing corporations that qualify on this list qualify as acceptable securities locations without the IIROC Dealer Member having to execute a separate custodial agreement]
  • List of financial institutions / entities / mutual funds with signed Custodial Agreement [entities on this list have signed a Bare Trustee Custodial Agreement with IIROC and they qualify as acceptable securities locations for the specific investment products listed without the IIROC Dealer Member having to execute a separate custodial agreement]
  • List of entities considered suitable to hold LBMA gold and silver good delivery bars [entities on this list qualify as acceptable securities locations for holding gold and silver bars that meet the London Bullion Market Association’s (LBMA) gold and silver good delivery bars standards; the IIROC Dealer must still execute a separate precious metals custodial agreement].

 

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8. Where are the standard industry agreements located on your website?

Copies of standard industry agreements are maintained in a separate section within the Supporting Schedules page.

 

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9. Can an employee of a Dealer Member guarantee the trading account of another employee of the same firm or a client's account?

An employee can guarantee another employee's trading account as long as the guarantor has sufficient excess margin in his/her account. An employee may not guarantee a client account. However, IIROC Rule 100.15 provides for certain exemptions for partners, directors or officers of a Dealer Member to guarantee a client’s account, provided certain conditions are met.

 

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10. Can a family member of an investment advisor guarantee the investment advisor's account?

IIROC Rule 100.15(d) allows immediate family members of the investment advisor to guarantee the investment advisor's account.

 

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Can a Dealer Member provide a financial guarantee to a third party?

According to the Notes and Instructions to Statement B of IIROC Form 1, a Dealer Member may give, directly or indirectly, financial assistance to an individual and/or corporation by means of a loan, guarantee, the provision of security or of a covenant or otherwise, if the amount of the loan, guarantee, provision of security or of the covenant or any other assistance is limited to a fixed or determinable amount and the amount is provided for in full in computing the Dealer Member’s Risk Adjusted Capital.

 

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