Investor Alert:
CIRO is issuing a warning to Canadian investors regarding Canada Token Trade.
Effective Date: December 31, 2021
This notice provides guidance for Dealer Members (Dealers) on the importance of being diligent in assessing and maintaining adequate credit risk policies and procedures.
For each Dealer to properly manage its credit risks on an ongoing basis, IIROC expects all Dealers to ensure that their credit risk management practices continue to be adequate. To assist in this assessment, this notice provides both general guidance and lists some specific best practices for the management of credit risk.
The management of credit risk is an important part of the overall risk management infrastructure of a Dealer. All Dealers should have credit risk policies and procedures in place that are designed to monitor and evaluate risk to counterparties with which they conduct securities related business transactions.
Credit risk is defined as the risk of economic loss from the failure of a counterparty or other obligor to perform according to the terms and conditions of a contract or agreement. Credit risk exists in all activities that depend on the economic performance of issuers, borrowers, or counterparties. Virtually all capital market and trading transactions involve credit exposure that requires a monitoring framework throughout the life of a transaction until a cash settlement occurs, client indebtedness is repaid or the contract period expires.
Over-the-counter (OTC) derivative transactions such as foreign exchange, swaps, and options can involve particularly large and dynamic credit exposures due to the leverage and other unique features inherent in such products and the lack of central settlement facilities. Accordingly, Dealers should ensure that they identify, measure, monitor and control the various types of credit risks encountered in trading both derivative and non-derivative products.
The quantitative valuation of credit risk is comprised of two components:
The following guidance outlines IIROC expectations on the key elements that should exist in the overall credit risk management infrastructure of a Dealer. The appropriate credit risk controls that should be implemented at each Dealer are dependent on the organizational structure and specific business activities of each Dealer. Each Dealer should ensure that their credit risk management oversight is specifically designed to oversee and control the risks of their particular business. Credit risk management is important for all Dealers, including introducing brokers. While carrying brokers impose their credit risk policies on client accounts introduced to them, introducers may implement even more stringent rules.
IIROC believes that as a minimum all Dealer credit risk practices should include the following:
To assist Dealers in determining the adequacy of their current credit risk management procedures, IIROC has identified some best practices of its Dealers regarding the management of credit risk operations and the content of risk management policy and procedure manuals. The following are best practices and list of some of the better credit risk practices observed at Dealers.
IIROC Rules this Guidance Note relates to:
This Guidance Note replaces Notice 09-0171 - Guidance Note - Best Practices for Credit Risk Management.
This Guidance Note was published under Notice 21-0190 - IIROC Rules, Form 1 and Guidance.