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Executive Summary
Effective Date: December 31, 2021
IIROC is publishing guidance to clarify the requirements for unresolved differences arising from the reconciliation of mutual fund money balances and security positions.
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How do mutual fund differences arise?
The common causes of mutual fund differences include:
- client position transfers between Dealer Members (Dealers),
- client position transfers between accounts at the same Dealer,
- dividends or dividend reinvestments,
- redemptions,
- purchases,
- switches, and
- processing of PAC/AWD entries.
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How are mutual funds reconciled?
There are two methods of reconciling mutual funds:
- Monthly file - An electronic file is obtained from the fund company detailing all mutual fund positions as recorded on the fund company’s records. The file is compared to the Dealer’s records to generate an exception report.
- Monthly statement – A statement is sent by the fund company to the Dealer. The Dealer compares the positions on the statement to its own records and manually prepares a list of exceptions.
For reconciliation and margining purposes, each individual fund in a family of funds is considered to be a separate security, as payment options (i.e. front-load, back-load, etc.) and risk differ. Additionally, the determination of unresolved differences and the related margin calculations must be made at an individual client account level.
For any month in which such mutual funds are reconciled on a quarterly, semi-annual, or annual basis, the fund is considered to be reconciled on a monthly basis (i.e. is a Type A fund) and no capital provision is required. Capital is only required on unreconciled differences.
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How are mutual fund difference determined for margin purposes?
The following are guidelines for the reconciliation of mutual funds:
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Security positions
Security positions cannot be netted:
- across different fund companies,
- across different funds within the same family of funds, or
- between positions held by different clients in the same fund.
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Money balances
Money balances can be netted only where net money settlements are made with the fund company.
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Mark to market
All positions must be marked to market.
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Margin rates for unresolved mutual fund differences
For margining purposes mutual funds have been classified into three types.
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Type A mutual funds
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Definition
Type A mutual funds are funds that provide monthly files or statements.
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Capital requirement
Capital is only required on any unresolved differences.
Provision must be made, as at the reporting date of the IIROC Form 1, for the market value and capital requirements on out of balance short securities and other adverse unresolved differences that are still unresolved as of the due date of the IIROC Form 1.
Items are considered unresolved unless:
- A written acknowledgment from the counterparty of a valid claim has been received, or
- A journal entry to resolve the difference has been processed as of the due date of the regulatory report.
This does not include journal entries writing off the difference to profit or loss in the period subsequent to the date of the IIROC Form 1.
The following guidelines should be followed when calculating the capital requirement on unresolved items:
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Types of unresolved differences |
Amount required to margin |
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Money balance: |
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None |
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Money balance |
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Unresolved long with money on the Dealer’s book |
Money balance on the trade minus market value of the security plus the applicable inventory margin |
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Unresolved long without money on the Dealer’s books |
None |
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Unresolved short with money on the Dealer's Books |
Market value of the security minus money balance on the trade plus the applicable inventory margin |
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Unresolved long/short on the other Dealer's books |
None |
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Short security break (e.g. mutual funds, stock dividends) or unresolved short without money on the Dealer's books |
Market value of the security plus the applicable inventory margin |
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Type B mutual funds
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Definition
Type B mutual funds are funds that:
- do not provide files or statements for the month being reported on,
- Dealers do not extend loan value on, and
- have not had any transactions for at least six months, except for transfers or liquidating trades.
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Capital requirement
The margin required on these mutual funds is 10% of the market value of each individual client position, calculated as at the reporting date.
However, when known differences exist with respect to an individual client position in a Type B mutual fund, the capital which must be provided on that position is the greater of:
- the capital that would be required if the individual client position was a Type A mutual fund (as described above), and
- 10% of the market value of the individual client position, as at the reporting date or the date that capital is being calculated.
The capital requirement applicable to Type B mutual funds should be applied on the date the fund is determined to be a Type B mutual fund and must be maintained as long as the fund remains a Type B mutual fund.
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Type C mutual funds
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Definition
Type C mutual funds are funds that do not fall under the definition of Type A or B.
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Capital requirement
The capital required on these mutual funds is 100% of the market value of the entire position, calculated as at the reporting date.
However, when known differences exist with respect to an individual client position in a Type C mutual fund, the margin which must be provided on that position is the greater of:
- the capital that would be required if the individual client position was a Type A mutual fund (as described above), and
- 100% of the market value of the individual client position, as at the reporting date or the date that capital is being calculated.
The capital requirement applicable to Type C mutual funds should be applied on the date the fund is determined to be a Type C mutual fund and must be maintained as long as the fund remains a Type C mutual fund.
Examples of capital requirement calculations for a number of mutual fund transactions, which may result in mutual funds differences, are included in Appendices 1, 2 and 3.
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Applicable Rules
Rules/forms this Guidance Note relates to:
- Form 1, Part 1 – Statement B supplemental
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Previous Guidance Notes
This Guidance Note replaces:
- Notice MR0013 – Mutual Fund Reconciliation, and
- Compliance Interpretation Notice C-136 – Capital Provisions for Unresolved Mutual Fund Differences.
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Related documents
This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.
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Appendices
- Appendix 1 – Type “A” Mutual Fund
- Appendix 2 – Type “B” Mutual Fund
- Appendix 3 – Type “C” Mutual Fund
Appendix 1 – Type “A” mutual fund
ASSUMPTIONS FOR EXAMPLES #1 TO #4:
- Price on trade date is $10.00 per unit for Equity Fund and $11.00 per unit for Growth Fund
- Price movement to $11.00 per unit for Equity Fund and $10.00 per unit for Growth Fund
- No - load Funds traded
- All redemptions of this Fund Family are processed through one account
- All purchases of this Fund Family are processed through one account
- Money balances and units can be linked by individual client
EXAMPLE #1 – DIVIDENDS OR DIVIDEND REINVESTMENT
Dividends or dividend reinvestments are usually processed by the Fund Company but not recorded by the Dealer Member due to a timing lag. The Dealer Member does not know the amount of the dividend until informed by the Fund Company which may be after the Fund Company has already adjusted their own records and produced the monthly file or statements.
For example, a client of Dealer Member A has 400 units of Equity Fund in her account at May 31 with a market value of $10.00 per unit. On May 31, the fund paid a dividend of $0.30 per share. The dividend was reinvested and the client acquired 12 additional units in the fund (400 units x $0.30/ $10.00)
On Dealer Member A’s records:
The Dealer Member records would not show the amount of the dividend, therefore, would still be showing a total of 400 units.
On the Fund Company's records
The Fund Company records would reflect the amount of the dividend and would show total units of 412.
Difference
The difference would be the amount of the dividend, which is 12 units.
Capital Requirements calculated at June 30th for the May 31st Monthly Financial Report (MFR)
This is a long security position difference with no money difference and the margin required would be nil.
EXAMPLE #2 - REDEMPTIONS (1,000 UNITS OF EQUITY FUND AT $10.00)
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Initial position: |
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Money side |
Security position 1,000 Long - Client's account 1,000 Short - Box account |
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On trade date: |
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Money side Dr. Redemption account $10,000 Cr. Client's account $10,000 |
Security position 1,000 Long - Redemption account 1,000 Short - Client’s account |
| On Settlement Date: | |
| A. Assuming proper and matched settlement takes place | |
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Money side Dr. Cash $10,000 Cr. Redemption account $10,000 |
Security position 1,000 Long - Box account 1,000 Short - Redemption account |
| Redemption account is flat and box account is flat. The client has been credited the $10,000 and his security position flattened. Therefore, no capital is required. | |
| B. Assuming money settled, but money amounts did not match | |
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Money side Dr. Cash $9,950 Cr. Redemption account $9,950 |
Security position 1,000 Long - Box account 1,000 Short - Redemption account |
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Money side - Net $50 debit should be provided as a capital requirement for unresolved money differences. Provision of the net amount of $50 is reasonable under these circumstances. The exposure is the difference between the contracted amount and the amount received from the Fund Company. Security position - If there had been differences in the number of units the differences should be provided for as part of security differences reconciliations and considered in the determination of total margin required. |
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| C. Assuming the trade did not settle | |
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Money side Since the trade did not settle, the Redemption account would continue to show a $10,000 debit balance. |
Security position Since the trade did not settle, the following security position balances would remain: 1,000 Long - Redemption account 1,000 Short - Box account |
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Money side - The debit could be offset by credits in the same fund for positions held by the same client . The debit could not be offset by credits relating to the balances or positions with a different Fund Company or a different client. Security position - Long break with money. The capital required would be calculated as the mark-to-market plus applicable inventory margin. In this case a gain exists due to the favourable market movement (since the client should get the original redemption price even if the trade has to be redone). The capital required is ($10.00-$11.00) x 1,000 + inventory margin 50% of $11,000 or $4,500. |
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EXAMPLE #3 - PURCHASES (1,000 UNITS OF EQUITY FUND AT $10.00)
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Record receipt of cash from client: |
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Money side Dr. Cash $10,000 Cr. Client' s account $10,000 |
Security position
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On trade date: |
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Money side Dr. Client's account $10,000 Cr. Purchase account $10,000 |
Security position 1,000 Long - Client’s account 1,000 Short - Purchase account |
| On Settlement Date: | |
| A. Assuming proper and matched settlement takes place | |
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Money side Dr. Purchase account $10,000 Cr. Cash $10,000 |
Security position 1,000 Long - Purchase account 1,000 Short - Box account |
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The client account is long the units, the purchase account is cleared and the NCI box account is short the units B. Assuming money settled, but money amounts did not match |
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Money side Dr. Purchase account $11,000 Cr. Cash $11,000 |
Security position 1,000 Long - Purchase account 1,000 Short - Box account |
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Money side - Net $1,000 DR. in the Purchase account. Therefore, capital requirement is $1,000. Security position - There would be no security position difference as both the Fund Company and the client account show the position. No margin required. |
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| C. Assuming the trade did not settle | |
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Money side Since the trade did not settle, the Purchase account would continue to show a $10,000 credit balance |
Security position Since the trade did not settle, the following security position balances would remain: 1,000 Long - Client’s account 1,000 Short - Purchase account |
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Money side - No margin required. Credit available to offset debits relating to the same client only where net money settlements are made with the Fund Company. Security position - The Fund Company does not show a position but the client account does. Unresolved short with money difference. The capital required is ($11.00-$10.00) x 1,000 units + inventory margin 50% of ($11.00 x 1,000) or $6,500 Any credit calculated cannot be offset against other debits. |
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EXAMPLE #4 - SWITCHES WITHIN SAME FAMILY OF FUNDS
When a client switches between different fund types within the same family of funds, timing differences can arise between the Dealer Member and the Fund Company in recording the transactions. The way most mutual fund order processing systems work now is that the order is not passed to the back-office system (ADP/ISM/Dataphile) until receipt of the order is confirmed by the Fund Company’s system. Timing differences may arise because trades processed by the Fund Company but not by the Dealer Member as of the reconciliation date.
For example, a client has 300 units of Growth Fund in his account with a Dealer Member. On May 31st the client switches their holdings in the Growth Fund to the Equity Fund.
Fund Company’s records:
Redeem all the units of Growth Fund and then use the proceeds to purchase units of Equity Fund. All these transactions have a trade date of May 31, and therefore are included in the monthly file sent to the Dealer Member for reconciliation purposes.
Dealer Member’s records:
Transactions were not processed on May 31.
Margin Requirements calculated at June 30th for the May 31st MFR
Since both the redemption and purchase were not processed by the Dealer Member, the reconciliation would show differences of:
- 300 units Short Growth Fund and
- 330 units Long Equity Fund.
The short positions should be margined by taking the market value plus the applicable inventory margin, in this case 50%. [An offset for the market value of the long position can be taken to reduce the margin otherwise required on the short position because these two fund types have the same load characteristics. This applies only to switches where the Fund Company has not processed both sides of the transaction on the monthly file.]
Market Value:
| Equity Fund |
= 330 short x $11.00 per unit |
| Growth Fund |
= 300 long x $10.00 per unit |
Capital required:
= Margin required on short – market value of long
= [Market value of short + 50% x market value of short] - market value of long
= [$3,630 + 50% x $3,630] - $3,000
= $2,445
If only one side of the switch has been processed, the capital requirements would be calculated as previously described for redemptions or purchases (See Examples #2 and #3 above).
Appendix 2 – Type “B” mutual fund
The following facts were assumed in the example listed below:
- Fund Company does not provide a monthly file or statement
- No loan value extended on the fund
- No activity in the fund, except for transfers or liquidating trades, for at least six months
- Total market value of positions at the Fund Company is $10 million.
The capital required would be $1 million ($10 million market value x 10%).
Appendix 3 – Type “C” mutual fund
The following facts were assumed in the example listed below:
- Fund Company does not provide a monthly file or statement
- Fund does not fall under the Type B mutual fund
- Total market value of positions at the Fund Company is $10 million.
The margin required would be $10 million ($10 million market value x100%).