IIROC is proposing amendments to the IIROC Rules and to Form 1 (collectively, the Proposed Amendments) regarding the floating index margin rate methodology (the Methodology) applicable to qualifying Canadian and U.S. index products. The primary objective of the Proposed Amendments is to reduce procyclicality in IIROC’s Methodology.

Procyclical requirements or practices are those that are positively correlated with business or credit cycle fluctuations and that may cause or exacerbate financial instability. Margin rules that stipulate lower margin requirements during periods of low volatility and higher margin requirements during periods of high volatility are procyclical.

The Proposed Amendments:

• set floor margin rates for qualifying Canadian and U.S. index products included on IIROC’s list of floating and tracking error margin rates,
• revise the floating index margin rate calculation for individual and offset (tracking error) positions to a “greater of” the floor margin rate and the floating margin rate percentage methodology,
• define “qualifying index” for the purposes of determining floating margin rates, which includes categorizing qualifying index types as either a broad based index or a sector index, and
• codify IIROC’s discretionary authority to modify the regulatory margin interval calculation.

Impacts

We anticipate the Proposed Amendments will generally benefit Dealers, clients, and other stakeholders.

The benefits of reducing procyclicality are generally recognized and can be summarized as promoting financial stability and resiliency in periods of high market volatility. We believe these benefits outweigh the opportunity costs associated with reduced leverage during periods of low market volatility.