Guidance on the regular settlement date to be used for certain foreign exchange hedge trades

1. Executive summary

The Canadian Investment Regulatory Organization (CIRO) is publishing guidance to provide clarity on the regular settlement date to be used for certain foreign exchange hedge trades when determining the settlement date margin requirements for foreign currency trades with acceptable counterparties and regulated entities.

This guidance is effective May 27, 2024.

2. Rules related to regular settlement date

The regular settlement date for foreign exchange spot trades is not specified in the Investment Dealer and Partially Consolidated (IDPC) Rules1  . Most foreign currency spot trades settle on either the first business day after trade date (T+1) or the second business day after trade date (T+2). Sections 4805 and 4808 of the IDPC Rules set out regular settlement dates for trades involving certain debt and equity securities.  For most debt securities, the regular settlement date is T+1, whereas the regular settlement date for equity securities is the settlement date generally accepted according to industry practice for the market in which the transaction occurs.

Dealer Members2  (Investment Dealers) are required to provide margin for trades with acceptable counterparties and regulated entities (as defined in the general notes and definitions to IDPC Form 1) on an equity deficiency basis, commencing on the regular settlement date of the trade in accordance with the notes and instructions to Schedules 4 and 5 of IDPC Form 1.

3. Foreign exchange spot trades

When an Investment 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 Investment Dealers enter into a foreign exchange spot trade to lock-in the Canadian dollar amount of the transaction. While in most instances the trade date and settlement date for the foreign exchange spot trade will be the same as those of the security transaction being hedged, there may be instances where there is a mismatch between the settlement dates. For example, the foreign exchange hedge trade may settle on T+1 but the foreign currency denominated security transaction may settle on T+2.

4. Guidance on regular settlement date

For margin purposes, the regular settlement date to be used for the foreign exchange spot trades should be the same regular settlement date as the foreign currency denominated security, where the trade date for the foreign exchange spot trade is the same as the trade date of the foreign currency denominated security. For example, the regular settlement date of the foreign currency spot trade is:

• T+1, where the foreign currency spot trade hedges the foreign exchange risk associated with a trade in a foreign currency denominated security that has a regular settlement date of T+1 (e.g. foreign security within North America),
• T+2, where the foreign currency spot trade hedges the foreign exchange risk associated with a trade in a foreign currency denominated security that has a regular settlement date of T+2 (e.g. foreign security outside North America).

In all other instances, the regular settlement date is T+1 when determining margin for a foreign exchange spot trade.

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 deficiency3  basis, in accordance with the notes and instructions to Schedules 4 and 5 of the IDPC Form 1.

5. Applicable Rules

IDPC Rules this Guidance Note relates to:

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

6. Previous Guidance Note

This Guidance Note replaces GN-4800-21-001 Guidance Note - Regular settlement date to be used for certain foreign exchange hedge trades.

7. Related documents

This Guidance Note was published under Bulletin 23-0150.

• 1In this guidance, all rule references are to the IDPC Rules unless otherwise specified.
• 2As defined in subsection 1201(2) of the IDPC Rules.
• 3“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).