Margin treatment of unhedged foreign exchange positions held in client accounts

1. Overview

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 IDPC 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:

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

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

2.1 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-Canadian dollar 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:

2.2 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:

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 US dollar cross currency spreads, the list of foreign exchange spot risk margin rates includes margin rates for cross currency risk where either the Canadian dollar is the base account currency or the US dollar is the base account currency.

3. Applicable Rules

IIROC Rules this Guidance Note relates to:

• Rule 5400.

4. Previous Guidance Note

This Guidance Note replaces GN-5400-21-003 – Margin treatment of unhedged foreign exchange positions held in customer accounts.

5. Related documents

This Guidance Note was published under Notice 23-0038.

• 1In this Guidance, all rule references are to the Investment Dealer and Partially Consolidated (IDPC) Rules unless otherwise specified. The IDPC Rules replaced the IIROC Rules on January 1, 2023.
• 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.