Loan value granted to significant security positions held in Dealer Member and client accounts 

GN-5300-21-001
Type: Rules Notice> Guidance Note
Rule connection:
IIROC Rules
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Executive Summary

Effective Date: December 31, 2021

This Guidance Note is being issued with the objectives of reminding Dealer Members (Dealers) of existing regulatory requirements and providing Dealers with guidance with respect to the unique credit issues that arise in the situation where loan value is being granted to a significant security position that is held in one or a small number of accounts. This situation has been referred to as “single account securities concentration” even though the concentration may involve more than one account. The notice will: 

  • detail the current regulatory requirements with respect to the valuation and margining of securities, 

  • define what is considered to be a significant security position, 

  • detail the factors that indicate that single account securities concentration risk is present, 

  • provide guidance as to when and how adjustments to loan value should be made to address the presence of single account securities concentration risk, and 

  • detail the possible actions that may be taken by IIROC where a Dealer is unable to adequately support the loan value granted to a significant security position with single account securities concentration risk. 

Table of contents
  1. What are the current regulatory requirements with respect to the valuation of securities? 

Pursuant to the notes and instructions to Schedules 2 and 4 of Form 1, all security positions, whether held in a Dealer account or a client account, are to be valued at their current market value. In order to determine the market value assigned to a particular securities position, the market upon which the security trades and the relative liquidity of the position must be considered. These considerations are detailed in the General Notes and Definitions to Form 1 where the term “market value” is defined. 

  1. What are the current regulatory requirements with respect to the margining of securities? 

Series 5000 of the IIROC Rules1 sets out the various margin rates for securities. These rates are the minimum regulatory rates that are required to be used for Dealer and client account positions and they are set based on the type of security (i.e., debt or equity) and other factors such as the credit rating, traded price, market on which the security trades, et cetera. 

In addition to the basic margin requirements, there are also requirements that address situations where the Dealer has credit risk exposures relating to sizeable security positions loaned against, either on a firm wide basis or on an account specific basis. These requirements address situations where: 

  • The loan value of securities issued by a particular company, either due to holdings in Dealer accounts or due to lending against the security in client accounts, is too large in relation to a Dealer’s risk adjusted capital. In this situation the Dealer is subject to a securities concentration charge, which is a charge against its capital. 

  • A particular account position qualifies as control block position. In this situation, the position would “not be acceptable for margin purposes” pursuant to section 5340 and therefore this position should have no loan value assigned to it. Control block positions where no loan value should be assigned include those where the control block position has been made eligible for distribution.  

  1. What would be considered to be a significant security position? 

For the purposes of this notice, the term “significant security position” is any position that is listed on the management reports that are used for identifying those security positions that are the largest amount loaned exposures to the Dealer. It is these reports in which the loan value granted to security positions held in Dealer and client accounts may materially affect the capital position of the Dealer if misstated. 

  1. When does a significant security position held in an account result in single account securities concentration risk? 

There are a number of factors that may indicate that a significant security position is subject to single account securities concentration risk. These factors include the significant security position being: 

  • held in one or a small number of Dealer and client accounts, 

  • material in relation to the public float of the security issue, 

  • material in relation to the average daily trading volume of the security issue, and 

  • a material portion of the security holdings being used as collateral for margin lending within one or a few related accounts (including guarantee / guarantor accounts). 

  1. What adjustments to the loan value granted for a particular security position should be considered when single account securities concentration risk is present? 

A Dealer should have credit policies in place that establish limits on the amount the firm is willing to lend to a client or small number of clients with respect to an individual security issue. A Dealer should also, through established procedures, be able to identify specific accounts where single account securities concentration is present. Reliance on identifying single account securities concentrations through the completion of the securities concentration charge calculations (set out on Schedule 9 of Form 1) would not be considered to be an adequate procedure. 

Where a Dealer has identified an account or accounts with single account securities concentration risk, it should be reducing the loan value granted to the significant security position taking into account factors including: 

  • the relative marketability of the significant security position, 

  • the relative credit quality of the significant security position, and 

  • the significant security position’s percentage of the overall loan value of securities held in the account or accounts. 

Where a Dealer has determined that the loan value granted to a significant security position in an account should be reduced, Dealers should account for this by either:  

  • reducing the loan value granted to the position and, in turn, increasing the capital they provide for the now under-margined account(s), or  

  • establishing a specific single account securities concentration risk reserve, as a charge against capital. 

  1. Possible actions that may be taken by IIROC where a Dealer Member is unable to adequately support the loan value granted to a significant security position with single account securities concentration risk 

As stated previously, Dealers must have in place adequate policies and procedures with respect to identifying and managing the occurrence of single account securities concentration risk. In addition, where such risk is identified, the Dealer must have procedures in place to assess whether the amount of loan value granted to a particular significant security position held in an account or accounts continues to be appropriate. 

Where a Dealer: 

  • does not have in place these policies and procedures, or 

  • cannot support the loan value granted to a particular significant security position, where single account securities concentration risk is present, 

IIROC may decide to exercise, at its discretion, the early warning level 2 restrictions set out in rule 4100. The restrictions that may be imposed include the requirement to segregate client free credit balances up to an amount determined by IIROC to alleviate its regulatory concerns. 

  1. Applicable Rules 

IIROC Rules this Guidance Note relates to: 

  • Rule 4100, 

  • series 5000, and  

  • section 5340. 

  1. Previous Guidance Note 

This Guidance Note replaces MR0159 - Loan Value granted to Significant Security Positions Held in Member firm and Customer Accounts. 

  1. Related documents  

This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.

  • 1In this Guidance, all rule references are to the IIROC Rules unless otherwise specified.