Regular settlement date to be used for certain foreign exchange hedge trades

GN-4800-21-001
Type: Rules Notice> Guidance Note
Rule connection:
IIROC Rules
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Effective Date: December 31, 2021 

  1. Executive summary

The objective of this Guidance Note is to determine for margin purposes the regular settlement date to be used for certain foreign exchange hedge trades.

The notes and instructions to Schedules 4 and 5 of IIROC Form 1 require Dealer Members (Dealers) to provide margin for trades with either acceptable counterparties or regulated entities (as defined in the general notes and definitions to Form 1) on a trade equity deficiency basis, commencing on the regular settlement date of the trade. Sections 4805 and 4808 of the IIROC Rules1  set out “regular settlement dates” for trades involving certain debt and equity securities as follows:

Security type

Regular settlement date

Government of Canada treasury bills

Trade date (T)

[Sub-clause 4805(1)(i)(a)]

Government of Canada bonds (other than treasury bills) having an unexpired term to maturity of three years or less

Two clearing days after trade date (T+2)

[Sub-clause 4805(1)(i)(b)]

Government of Canada bonds (other than treasury bills) having an unexpired term to maturity of longer than three years

Two clearing days after trade date (T+2)

[Sub-clause 4805(1)(i)(c)]

Provincial, municipal, corporation and other bonds or debentures

Two clearing days after trade date (T+2)

[Sub-clauses 4805(1)(ii)(a) and 4805(1)(iii)(a)]

Other certificates of indebtedness

Two clearing days after trade date (T+2)

[Sub-clause 4805(1)(iii)(a)]

Stock

Two clearing days after trade date (T+2)

[Subsection 4808(2)]

The regular settlement date for foreign exchange spot trades is not specified in the IIROC Rules. Most foreign spot trades settle on either trade date (T) or one clearing day after trade date (T+1).

  1. Issue

When a Dealer executes an unhedged trade in a foreign currency denominated security, it assumes the following risks on trade date:

  • security specific market risk
  • foreign exchange risk, since the trade must be settled in a currency other than Canadian dollars.

To address the foreign exchange risk, many Dealers enter into a foreign exchange spot trade to lock-in the Canadian dollar amount of the transaction. In most cases the trade date and settlement date for the foreign exchange spot trade will be the same as those of security transaction being hedged (i.e., T and T+2, respectively, for a foreign exchange hedge of a stock trade).

For margin purposes, the question that arises is what is the “regular settlement date” for these foreign exchange hedge trades? Should it be: T+1, the settlement date for most foreign exchange spot trades; or the regular settlement date for the security transaction that is being hedged (i.e., T+2 for a foreign exchange hedge of a stock trade)?

  1. Guidance

In the absence of a specifically defined “regular settlement date” in the IIROC Rules for foreign exchange spot trades, we are of the view, that for margin purposes, that the “regular settlement date” to be used for the following foreign exchange spot trades is to be one of the following:

  • T+2, where the trade has been entered into in order to hedge the foreign exchange risk associated with a trade in a foreign currency denominated security that is listed in sub-clauses 4805(1)(i)(c), 4805(1)(ii)(a) and 4805(1)(iii)(a) and subsection 4808(2) and the trade date for the foreign exchange spot trade is the same as the trade date of the foreign currency denominated security
  • T+2, where the trade has been entered into in order to hedge the foreign exchange risk associated with a trade in a foreign currency denominated security that is listed in sub-clause 4805(1)(i)(b) and the trade date for the foreign exchange spot trade is the same as the trade date of the foreign currency denominated security
  • T+1, in all other instances.

Subsequent to this “regular settlement date”, where the counterparty to the foreign exchange spot trade is either an acceptable counterparty or a regulated entity, the trade must be margined on an equity deficiency2  basis, in accordance with the notes and instructions to Schedules 4 and 5 of IIROC Form 1.

  1. Applicable Rules

IIROC Rules this Guidance Note relates to:

  • section 4805,
  • section 4808,
  • Notes and instructions to Schedule 4 of Form 1, and
  • Notes and instructions to Schedule 5 of Form 1.
  1. Previous Guidance Note

This Guidance Note replaces Notice 17-0152 - Guidance Note - Regular settlement date to be used for certain foreign exchange hedge trades.

  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.
  • 2“Equity deficiency” is the difference between (a) the net market value of all settlement date security positions in the client’s account(s) and (b) the net money balance on a settlement date basis in the same account(s).