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Executive Summary
Effective Date: March 31, 2023
This Guidance Note has been prepared to provide further guidance on the margin treatment of foreign exchange positions held in client accounts.
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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:
| Risk | Group 1 | Group 2 | Group 3 | Group 4 |
|---|---|---|---|---|
| Spot risk | 1.00% | 3.00% | 10.00% | 25.00% |
| Annualized term risk | 1.00% | 3.00% | 5.00% | 12.50% |
| Maximum term risk | 5.00% | 10.00% | 20.00% | 50.00% |
In the case of spot risk, a margin surcharge will apply where the current exchange rate volatility is excessive [subsection 5462(2)].
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Margin treatment of unhedged foreign exchange positions held in client accounts
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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:
| Foreign currency denominated cash position | Foreign currency denominated non-cash position | |
|---|---|---|
| Position denominated in same currency as currency of the account | Not subject to margin | Not subject to margin |
| Position denominated in different currency from currency of the account | Not subject to margin | Subject to margin |
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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:
| Counterparty | Position | Margin treatment |
|---|---|---|
| Acceptable institutions | Foreign exchange futures contracts | Foreign exchange margin applies (in addition to normal mark to market adjustment) based on the greatest of the margin required by the futures exchange, the clearing corporation and the Dealer Member’s clearing broker. The margin deficiency must be reported in the Dealer Member’s risk adjusted capital if the margin call is not collected within one trading day of the date of the deficiency. [Form 1-Schedule 4; clause 5468(1)(iii)] |
| Foreign exchange forward contracts and other foreign exchange positions (excluding cash) | No margin, unless a transaction or transactions has not been confirmed within 15 business days of the trade date where full margin applies. [Form 1-Schedule 4; sub-clause 5468(1)(i)(a)] |
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| Acceptable counterparties and regulated entities | Foreign exchange futures contracts | Foreign exchange margin applies (in addition to normal mark to market adjustment) based on the greatest of the margin required by the futures exchange, the clearing corporation and the Dealer Member’s clearing broker. The margin deficiency must be reported in the Dealer Member’s risk adjusted capital if the margin call is not collected within one trading day of the date of the deficiency. [Form 1-Schedule 4; clause 5468(1)(iii)] |
| Foreign exchange forward contracts and other foreign exchange positions (excluding cash) | Mark to market, unless a transaction or transactions has not been confirmed within 15 business days of the trade date where full margin applies. [Form 1-Schedule 4; sub-clause 5468(1)(i)(b)] |
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| Other counterparties | Foreign exchange futures contracts | Foreign exchange margin applies (in addition to normal mark to market adjustment) based on the greatest of the margin required by the futures exchange, the clearing corporation and the Dealer Member’s clearing broker [clause 5468(1)(iii)] |
| Foreign exchange forward contracts | Foreign exchange margin applies (in addition to normal mark to market adjustment) [clause 5468(1)(ii)] |
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| Other foreign exchange positions (excluding cash) | Margin applies (in addition to normal mark to market adjustment). Margin is:
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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.
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Applicable Rules
IIROC Rules this Guidance Note relates to:
- Rule 5400.
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Previous Guidance Note
This Guidance Note replaces GN-5400-21-003 – Margin treatment of unhedged foreign exchange positions held in customer accounts.
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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.