Margin treatment of unhedged foreign exchange positions held in client accounts

GN-5400-21-003
Type: Rules Notice> Guidance Note
Rule connection:
IIROC Rules
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Executive Summary

Effective Date: December 31, 2021

This Guidance Note has been prepared to provide further guidance on the margin treatment of foreign exchange positions held in client accounts.

  1. Overview

Pursuant to the methodology implemented for foreign exchange positions on September 1, 1996, the margin treatment of unhedged foreign exchange positions depends on:

  • the currency group classification of the foreign currency(ies) involved, and
  • the calculated spot and term risks for the unhedged foreign exchange position.

Foreign currencies are categorized into one of four currency groups. Both quantitative and qualitative market risk factors are considered in determining the currency group for a particular currency [refer to section 5461 of the IIROC Rules1 for specifics].

For each currency group, the margin requirements dictate minimum margin requirements for spot risk [section 5462] and annualized term risk [section 5460] and for maximum term risk [subsection 5466(3)] as follows:

Risk

Group 1

Group 2

Group 3

Group 4

Spot risk

1.00%

3.00%

10.00%

25.00%

Annualized term risk

1.00%

3.00%

5.00%

12.50%

Maximum term risk

5.00%

10.00%

20.00%

50.00%

In the case of spot risk, a margin surcharge will apply where the current exchange rate volatility is excessive [subsection 5462(2)].

  1. Margin treatment of unhedged foreign exchange positions held in client accounts

  1.  Foreign exchange positions subject to margin

All foreign exchange positions in a client account other than cash positions2  are subject to a margin requirement. However, not all non-Cdn.$ denominated positions are considered to be foreign exchange positions. Specifically, positions denominated in the same currency as the currency of the account are excluded [clause 5468(1)(ii)]. The following table summarizes which positions are considered foreign exchange positions that are subject to margin and which positions aren’t:

  Foreign currency denominated cash position Foreign currency denominated non-cash position
Position denominated in same currency as currency of the account Not subject to margin Not subject to margin
Position denominated in different currency from currency of the account Not subject to margin Subject to margin

 

  1. Margin requirements - general

As with other positions, foreign exchange positions are margined differently, depending upon the credit risk classification of the client. The following is a summary of the requirements:

Counterparty Position Margin treatment
Acceptable institutions Foreign exchange futures contracts

No margin, unless a transaction or transactions has not been confirmed within 15 business days of the trade date where full margin applies.

[Form 1-Schedule 4; clause 5468(1)(iii)]

Foreign exchange forward contracts and other foreign exchange positions (excluding cash)

No margin, unless a transaction or transactions has not been confirmed within 15 business days of the trade date where full margin applies.

[Form 1-Schedule 4; sub-clause 5468(1)(i)(a)]

Acceptable counterparties and regulated entities Foreign exchange futures contracts

Mark to market, unless a transaction or transactions has not been confirmed within 15 business days of the trade date where full margin applies.

[Form 1-Schedule 4; clause 5468(1)(iii)]

Foreign exchange forward contracts and other foreign exchange positions (excluding cash)

Mark to market, unless a transaction or transactions has not been confirmed within 15 business days of the trade date where full margin applies.

[Form 1-Schedule 4; sub-clause 5468(1)(i)(b)]

Other counterparties Foreign exchange futures contracts

Foreign exchange margin applies (in addition to normal mark to market adjustment) based on the greatest of the margin required by futures exchange, the clearing corporation and the Member’s clearing broker

[clause 5468(1)(iii)]

Foreign exchange forward contracts

Foreign exchange margin applies (in addition to normal mark to market adjustment)

[clause 5468(1)(ii)]

Other foreign exchange positions (excluding cash)

Margin applies (in addition to normal mark to market adjustment). Margin is:

  • Where the position margin requirement is greater than the foreign exchange margin requirement, the position margin requirement [clause 5468(1)(ii)]
  • Where the position margin requirement is less than or equal to the foreign exchange margin requirement, the sum of position margin requirement and the foreign exchange margin requirement [clause 5468(1)(ii)]

As a result, in the case of foreign exchange positions held in other counterparty client accounts, where there is no established position margin requirement3 , the effective margin requirement is the calculated foreign exchange margin requirement. Since many of the positions that are affected are U.S.$ cross currency spreads, the List of foreign exchange spot risk margin rates includes margin rates for cross currency risk where either the Cdn.$ is the base account currency or the U.S.$ is the base account currency.

  1. Applicable Rules

IIROC Rules this Guidance Note relates to:

  • Rule 5400.
  1. Previous Guidance Note

This Guidance Note replaces MR0351 - Regulation 100.2(d)(iv) – Margin treatment of unhedged foreign exchange positions held in customer accounts.

  1. Related documents

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

Appendix

Appendix A – Security Volatility Program

  • 1In this Guidance, all rule references are to the IIROC Rules unless otherwise specified.
  • 2Cash positions in client accounts are not subject to margin because these positions are included by the Dealer Member in its calculation of net foreign exchange monetary assets for the purposes of determining a foreign exchange capital requirement.
  • 3The positions created as a result of entering into spot foreign exchange contracts are an example of foreign exchange positions that do not have a margin requirement.