Schedule 9 of Form 1, Concentration of Securities Guidance

1. Purpose of Schedule 9

The purpose of Schedule 9 is to address the concentration risk arising when a Dealer Member (Dealer) maintains significant exposures to the value of securities of an issuer company. Schedule 9 is designed to preserve a minimum level of residual capital within the Dealer in the event it might need to exit a concentrated position in a volatile market. Schedule 9 sets out how the capital charge to address concentration risk is determined and when the capital charge applies.

2. Schedule 9 structure

Schedule 9 quantifies an issuer exposure as an “amount loaned”, which can result from either long or short positions. The Schedule 9 methodology aggregates applicable inventory and client account amount loaned exposures and allows for risk-based adjustments to reduce the exposure. A concentration capital charge may apply when there is an over-exposure. An over-exposure occurs when the final adjusted amount loaned exceeds a specified threshold. This threshold limit is determined in relation to preconcentration risk-adjusted capital (RAC). Preconcentration RAC is RAC before securities concentration charge and minimum capital.

Schedule 9 is divided into the following three sections:

• Schedule 9 – Summary sheet
• Schedule 9A – General Security Test
• Schedule 9B – Debt Security Test

Schedule 9A and Schedule 9B exposures are initially calculated and reported separately in their respective schedules. The highest amount loaned exposures from Schedules 9A and 9B feed into the Schedule 9 Summary sheet to aggregate top exposures and calculate potential capital charges.

2.1 Differences between Schedule 9A and Schedule 9B

There are certain prescribed differences between Schedule 9A and 9B as follows:

• securities included for testing
• calculation of short position exposures
• test methodology
• maximum concentration charge

3. Securities included and excluded from concentration tests

Securities are included for testing on either Schedule 9A or Schedule 9B depending on the type of security and associated margin rate. As detailed below, most debt securities are tested on Schedule 9B, while most other securities are tested on Schedule 9A. Dealers may exclude certain securities from concentration testing if the exclusion criteria is met.

3.1 Schedule 9A securities tested

The securities that must be considered for Schedule 9A testing include:

• all long and short positions in equity, convertibles, debt or other securities of an issuer, with the exception of debt securities with a normal margin requirement of <=10%, and
• long and short precious metal positions including all certificates and bullion of the particular precious metal (gold, platinum or silver).

Dealers may exclude from Schedule 9A testing:

• stripped coupons and residuals, margined at >10%, if they are held on a book based system and are in respect of federal and provincial debt instruments,
• mutual funds and ETFs qualifying as money market funds under National Instrument 81-1021 , and
• eligible HISA funds as determined by CIRO.2

3.2 Schedule 9B securities tested

The securities that must be considered for Schedule 9B testing include:

• all long and short positions in debt securities with a normal margin requirement of <=10% including all debt series or classes for an issuer.

Dealers may exclude from Schedule 9B testing certain government debt securities and short-term commercial debt securities as described in the Notes and Instructions to Schedule 9B.

3.3 Security exclusions applicable to both Schedule 9A and Schedule 9B

The securities that may be excluded from the concentration testing on both Schedule 9A and 9B are those securities that:

• are required to be in segregation or safekeeping,
• qualify for margin offsets, and
• are financed by limited recourse loans that meet the industry standard wording set out in the Limited Recourse Call Loan Agreement.

4. Determining concentration amount loaned exposure

The Dealer determines the concentration amount loaned exposure to a particular issuer by aggregating:

• security positions held in inventory, and
• security positions (net of positions required to be segregated) held by clients.

The security positions contained in client accounts are included as an exposure only to the extent that the security positions were being relied on to collateralize a loan or an overdue balance. Fully paid for and excess margin securities that are required to be segregated are excluded from consideration.3

The Dealer determines the Schedule 9A and Schedule 9B amount loaned exposures separately for each issuer, according to the calculation requirements applicable to both tests. The Dealer separately calculates the long position amount loaned and the short position amount loaned as detailed below. The greater of the long and short position represents the unadjusted issuer amount loaned. The methodology for calculating the final adjusted amount loaned exposure for Schedule 9B issuers is different from Schedule 9A as described in section 5 of this guidance.

Appendix A provides an example of the calculation of concentration amount loaned exposures for an issuer on Schedule 9A and 9B, including how the exposure is reported in the Schedule 9 summary sheet.

4.1 Calculating the amount loaned in respect of long positions

For both Schedule 9A and Schedule 9B, the Dealer calculates the amount loaned exposure on the long positions as follows:

• the loan value of long securities in margin accounts on settlement date,
• the weighted market value (calculated pursuant to the weighted market value calculation set out in Schedule 4, Note 8(i)(a), Cash Accounts Instruction) and/or loan value (calculated pursuant to the loan value calculation set out in Schedule 4, Note 8(i)(b), Cash Accounts Instruction) of long securities in a regular settlement cash account when any portion of the account is outstanding after settlement date,
• the market value (calculated pursuant to the market value calculation set out in Schedule 4, Note 8(ii)(a), DAP and RAP Accounts Instruction) and/or loan value (calculated pursuant to the loan value calculation set out in Schedule 4, Note 8(ii)(b), DAP and RAP Accounts Instruction) of long securities in a delivery against payment cash account when such securities are outstanding after settlement date,
• the loan value (calculated pursuant to the Notes and Instructions to Schedule 2) of net long inventory positions on trade date, and
• the loan value of new issues carried in inventory twenty (20) business days after new issue settlement date.

4.2 Calculating the amount loaned in respect of short positions

For Schedule 9A, the Dealer calculates the amount loaned exposure on the short positions as follows:

• the market value of short positions in margin accounts on settlement date,
• the market value of short positions in a regular settlement cash account when any portion of the account is outstanding after settlement date,
• the market value of short positions in a delivery against payment account when any portion of the account is outstanding after settlement date, and
• the market value of net short inventory securities on trade date.

For Schedule 9B, short amount loaned exposures are determined in the same manner as long exposures.

4.3. Adjustments to reduce amount loaned exposure in a security

For both Schedule 9A and Schedule 9B, the Dealer may deduct from the amount loaned on an individual client exposure in a security:

• security positions and precious metal positions that represent excess margin in the client’s account, if applicable4 ,
• In the case of margin accounts, 25% of the market value of long positions in any:
  • non-marginable securities in the account
  • securities with a margin rate of 100% in the account

provided such securities are carried in readily saleable quantities only, and

• in the case of cash accounts, 25% of the market value of long positions in any securities whose market value weighting is 0.000 (pursuant to Schedule 4, Note 8, Cash Accounts Instruction (a)) in the account, provided such securities are carried in readily saleable quantities only.

5. Schedule 9B methodology

The Schedule 9B methodology for determining the final adjusted amount loaned differs from the Schedule 9A methodology because it includes additional adjustments that allow:

• netting across maturity bands, and
• risk-weighted adjustments to amount loaned.

These additional adjustments support the Schedule 9B testing methodology that scales debt securities with a normal margin requirement of <=10% into the Schedule 9 framework.5 For reference, these additional adjustments are detailed in the Notes and Instructions to Schedule 9B.

5.1 Netting across maturity bands

As noted in subsection 3.3 of this guidance, security positions that qualify for a margin offset may be excluded on both Schedule 9A and 9B. The remaining debt security positions in the Dealer’s own inventory may be net across maturity bands to calculate a net long (short) inventory position for an issuer. This netting allowance is subject to the defined seniority relationships. Individual client account positions are also eligible for this netting allowance. 6

5.2 Risk-weighted adjustments to amount loaned

The amount loaned on Schedule 9B may be reduced by applying risk-weighting adjustment factor(s). These adjustment factors are applied at the security issue level and determined according to minimum current credit ratings from a designated rating organization (DRO). Dealers should refer to Canadian securities laws to determine current DROs and equivalent credit ratings.7

Dealers may apply a 2-step methodology for determining the risk-weighting adjustment factor as follows:

• Step 1 - calculate a debt issuer exposure according to the highest determined risk-weighting adjustment factor for all debt security exposures held for an issuer. If the risk-weighted amount loaned does not exceed any thresholds no additional action is required.
• Step 2 - use DRO ratings for each debt security exposure to apply lower risk-weights to the debt securities with higher credit ratings. The risk-weighted amount loaned for a debt issuer can be determined by either:

  • aggregating the risk-weighted amount loaned that has been calculated for each individual debt security of the debt issuer,

    or

  • multiplying a weighted average adjustment factor by the total amount loaned for a debt issuer.

Appendix B provides a simplified example of the calculation of a risk-weighted amount loaned for an aggregate issuer exposure using a weighted average adjustment factor.

5.3 Risk-weighting adjustment factors <80%

For securities on Schedule 9B that qualify for the risk-weighted adjustment factor8 , the highest adjustment factor is 80%. If the Dealer applies an adjustment factor less than 80% it must:

• be supported by a DRO rating, and
• follow the multiple DRO methodology9 , if the Dealer’s risk management relies on multiple DRO ratings.

6. Calculation of concentration charge and Schedule 9 summary sheet reporting

The final adjusted amount loaned totals are carried forward from Schedule 9A and 9B to the Schedule 9 summary sheet. Any applicable concentration capital charges on over-exposures are calculated on the Schedule 9 summary sheet.

6.1 Concentration thresholds

The concentration thresholds that apply are summarized in the chart below:

6.2 Concentration charge calculation

The concentration capital charge is equal to 150% of the excess of the final adjusted amount loaned over the threshold, unless the over-exposure is eliminated within five business days of when it first occurs. Capital charges may not apply to all over-exposures and are subject to maximum limits as detailed below.

6.3 Limit on number of issuers requiring capital calculation

Concentration capital charges are only applied against:

• the largest three over-exposure issuer positions originating from Schedule 9A, and
• the largest three over-exposure issuer positions originating from Schedule 9B.

Over-exposures measured against a concentration threshold of 1/3 RAC are ranked first on Schedule 9.

6.4 Maximum issuer capital charges

The maximum concentration capital charge limits for an over-exposure in a particular issuer are summarized in the chart below:

6.5 Schedule 9 Summary Sheet

The Schedule 9 summary sheet must include the largest ten issuer positions and precious metals positions reported on Schedules 9A and 9B, whether or not a concentration capital charge applies. Where there are over-exposures in less than ten issuers, the Dealer must report the ten issuers with the highest final adjusted amount loaned. In this case, the ranked exposures reported may consist of:

• top ten from Schedule 9A,
• top ten from Schedule 9B, or
• a mix of Schedule 9A and 9B issuers.

Where there are over-exposures in more than ten issuers, the Dealer must report all such issuers.

7. Reporting concentration over-exposures to CIRO

Where there is an over-exposure in a security and the concentration charge would produce either a capital deficiency or an early warning violation, the Dealer must report the over-exposure concentration situation to CIRO on the date the over-exposure first occurs.

Section 4111 of the IDPC Rules requires the Dealer to maintain at all times risk adjusted capital greater than zero as calculated in accordance with Form 1. The Dealer’s internal controls should include monitoring potential concentration of securities on an ongoing basis. Dealers are reminded that, at a minimum, they are required under section 4114 to calculate their capital position on a weekly basis and retain evidence of such calculation. The calculation must consider the Schedule 9 requirements and any concentration charges.

8. Applicable Rules

IDPC Rules this Guidance Note relates to:

• Rule 4100,
• Rule 5200,
• Rule 5300,
• Section 5430,
• Schedule 2 of Form 1,
• Schedule 4 of Form 1, and
• Schedule 9 of Form 1.

9. Previous Guidance Note(s)

This Guidance Note replaces:

• GN-4100-21-004 – Schedule 9 of Form 1, concentration of securities (October 14, 2021).

10. Related Documents

This guidance was published under Bulletin of Approval/Implementation 24-0084.

This guidance is related to the following Bulletin(s):

• Rules Bulletin 24-0085 – Technical – IDPC Rules - Client excess margin adjustment to amount loaned for purposes of determining concentration exposures.

11. Appendices

Appendix A – Calculation of concentration amount loaned exposures.

Appendix B – Calculation of a weighted average adjustment factor for the purpose of Schedule 9B.

Appendix C – Schedule 9 – Frequently asked questions (FAQs)

Appendix C – Schedule 9 – Frequently asked questions (FAQs)

• 1See Appendix C, FAQs – Question 2.
• 2See Appendix C, FAQs – Question 3.
• 3See Appendix C, FAQs – Question 7.
• 4See Appendix C, FAQs – Question 8.
• 5See IIROC Notice 21-0028.
• 6See Appendix C, FAQs – Question 9.
• 7See Appendix C, FAQs – Questions 10 & 11.
• 8See Appendix C, FAQs - Question 12.
• 9See Appendix C, FAQs – Question 14.
• 10Exposures in related, or “non-arm’s length securities” and non-marginable securities of an issuer held in a cash account are always measured against a concentration threshold of 1/3.