Client excess margin adjustment to amount loaned for purposes of determining concentration exposures

24-0085
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Executive Summary

This Bulletin clarifies the requirements for calculating client excess margin adjustments to amount loaned when Dealer Members are determining concentration exposures. A substantive change to this calculation resulted from the implementation of the IIROC Rules. This substantive change was not identified at the time of the transition from the Dealer Member Rules to the IIROC Rules. As a result, Dealer Members may be applying different methodologies for determining amount loaned when clients have excess margin available.

Dealer Members must comply with the IDPC Form 1 Schedule 9 requirements as set out in the Schedule 9 Notes and Instructions, and described below, to determine concentration exposures. Questions concerning this Bulletin, including the timeline for achieving compliance where required, may be directed to Financial and Operations Compliance.

1. Background

Dealer Member Rule (DMR) 100.20 set out the requirements for Dealer Members in determining capital charges for concentration of securities. DMR 100.20 was repealed effective December 31, 2021 when the IIROC Rules became effective.1 DMR 100.20 was repealed on the basis that the concentration requirements are set out in the Notes and Instructions to Schedule 9 of IIROC Form 1. Repealing DMR 100.20 resulted in a substantive change to the determination of the amount loaned adjustment for client excess margin. This substantive change was not identified at the time of transition from the DMRs to the IIROC Rules. The IIROC Rules were subsequently adopted as the Investment Dealer and Partially Consolidated (IDPC) Rules on January 1, 2023.

2. Repealed Dealer Member Rules

Under DMR 100.20(b)(iii), for the purposes of calculating the amount loaned, the Dealer Member could adjust the amount loaned “on any one security” by deducting from the loan value of the position “any excess margin in the client’s account” (DMR 100.20 Methodology). In practice the DMR 100.20 Methodology has been applied on the basis that the entire client excess margin could be used to reduce the exposure in each security in the account. This practice results in re-using the client excess margin to reduce exposures for multiple securities. As a result of the rule repeal, the DMR 100.20 Methodology is no longer an acceptable methodology.

3. IDPC Form 1 Schedule 9 requirements

Dealer Members must comply with the IDPC Form 1 Schedule 9 requirements as set out in the Schedule 9 Notes and Instructions to determine concentration exposures. When determining the amount loaned on a position exposure “security positions and precious metal positions that represent excess margin in the client’s account may be excluded” (Schedule 9 Methodology). The Schedule 9 methodology allows flexibility for the Dealer Member to optimize the amount loaned adjustments between the securities within the client account but does not allow client margin excess to be re-used for multiple security exposures. There are two options to applying the Schedule 9 Methodology, such as:

  1. allocating or prorating the client excess margin amongst the positions in the client account and then excluding the positions that represent that portion of the client excess margin, or
  2. starting the amount loaned calculation based on the positions that are not required to be in segregation since segregation is determined based on the excess margin in the client account. (described in the second sentence of IDPC Form 1, Schedule 9 Notes and Instructions, Note (7)(iv)(b)).

The Schedule 9 Methodology applies overall to both Schedule 9A and Schedule 9B. The client margin excess can be used to reduce amount loaned for securities reported on either Schedule 9A or Schedule 9B but the total adjustments cannot exceed the client excess margin available.

4. Impact

Dealer Members’ systems or service providers may still be applying the DMR 100.20 Methodology which results in a lower concentration exposure result than the Schedule 9 Methodology. There may be a significant impact to transitioning certain Dealer Members from the DMR 100.20 Methodology to the Schedule 9 methodology. For example, Dealer Members with significant concentration exposures that rely on adjustments for client excess margin under the DMR 100.20 Methodology to reduce the amount loaned will have a material difference in their calculation of amount loaned under the Schedule 9 methodology.

Appendix A shows sample calculations of the DMR 100.20 Methodology and the Schedule 9 Methodology to illustrate how these methodologies may result in significant differences in the amount loaned. The sample calculations use equity securities with a 30% margin rate which are reported on Schedule 9A. Although the sample calculations do not include debt securities, the result is similar for debt securities reported on Schedule 9B.

5. Appendices

Appendix A – Sample calculations of adjusted amount loaned

 


Appendix A - Sample calculations of adjusted amount loaned

Calculation 1

DMR 100.20 Methodology

Determining amount loaned when adjusted for any excess margin in client account (for each security).

Client Debit = 400,000

Client Excess = 300,000

SecurityMarket ValueAmount loaned (Loan value at 70%)Adjustment to amount loanedAdjusted amount loaned 
ABC400,000280,000300,000NIL
DEF350,000245,000300,000NIL
GHI250,000175,000300,000NIL
Totals1,000,000700,000  

DMR 100.20 Methodology results in none of the securities being reported on Schedule 9A because the client excess has been applied to each security to reduce the amount loaned to less than zero.

Calculation 2 

Schedule 9 Methodology - Option 1

Determining amount loaned by allocating the client excess margin amongst the securities in the client account and excluding the positions that represent that portion of the client excess margin.

Client Debit = 400,000

Client Excess = 300,000

SecurityMarket valueAmount loaned (Loan value at 70%)Adjustment to amount loanedAdjusted amount loaned
ABC400,000280,000280,000NIL
DEF350,000245,00020,000225,000
GHI250,000175,000 175,000
Totals1,000,000700,000300,000400,000

Schedule 9 Methodology-Option 1 results in security DEF and GHI being reported on Schedule 9A with an adjusted amount loaned of 225,000 and 175,000 respectively and security ABC would be excluded from Schedule 9A. The client excess was allocated to the securities in the account on an optimized basis by reducing the highest amount loaned first. The 300,000 client excess could be allocated differently between the securities in the account, as long as the total adjustment does not exceed the 300,000 client excess.

Calculation 3 

Schedule 9 Methodology - Option 2

Starting the amount loaned calculation based on positions that are not in segregation.

Client Debit = 400,000

Client Excess = 300,000

SecurityMarket valueLoan value at 70%Market value of securities in segregationMarket value of securities not in segregationAmount loaned (Loan value of securities not in segregation)
ABC400,000280,000400,000NILNIL
DEF350,000245,00028,571321,429225,000
GHI250,000175,000NIL250,000175,000
Totals1,000,000700,000428,571571,429400,000

Schedule 9 Methodology-Option 2 results in security DEF and GHI being reported on Schedule 9A with an amount loaned of 225,000 and 175,000 respectively and security ABC would be excluded from Schedule 9A. This result is the same as Schedule 9 Methodology - Option 1 since this calculation also assumes segregation is optimized to segregate the securities with the highest loan value first.

  • 1Implementation of IIROC Rules is described in Notice 21-0190. The table of concordance in Appendix 4 of Notice 16-0052 and Appendix 3 of Notice 19-0144 describes repealing DMR 100.20(b)(iii) as being a non-substantive change.
24-0085
Type: Rules Bulletin >
Technical
Distribute internally to
Credit
Internal Audit
Legal and Compliance
Operations
Regulatory Accounting
Retail
Senior Management
Training
Rulebook connection
IDPC Rules
Division
Investment Dealer

Contact

Financial and Operations Compliance

Other Notices associated with this Enforcement Proceeding: