Canadian Self-Regulatory Organization Revises FX Margin Requirements

The Canadian FX regulatory environment is one of the strictest in the world and has a very unique structure. Aside from the various provincial regulatory agencies, the Investment Industry Regulatory Organization of Canada (IIROC) is also at the center of the framework.

According to a public announcement by the Canadian self-regulatory organization in charge of determining the appropriate FX margin requirements in the country, the increased volatility on the foreign exchange market warrants that the leverage ratio on the USD/CAD currency pair be raised.

The self-regulatory body has issued a revised table for all margin requirements of different currency pairs, with the notable change in the leverage ratio of the US dollar to the Canadian dollar. Up until now, clients have been able to use 1:77 (1.3%). However, starting December 11th, the number will be decreased to 1:62 (1.6%).

The list is updated by IIROC every time there are changes to the margin requirements in the most popular traded currencies. The organization determines the appropriate FX margin requirements according to a certain volatility threshold which is different for every currency group.

For the first group in which the USD/CAD pair falls, the legislation defines that volatility of the currency must be below the volatility threshold specified in the regulatory framework.

The requirements cited in the Dealer Member Margin Rules are the following: “The Canadian dollar equivalent closing price on each of the four trading days succeeding the “base day” shall be compared to the base day closing price. The first of four succeeding trading days on which the percentage change in price (negative or positive) between the closing price on the succeeding day and the closing price on the base day is greater than the unhedged margin rate shall be designated an “offside base day”. If an offside base day has been designated, the offside base day shall be designated the base day for the purpose of making further base day closing price comparisons as aforesaid. If the number of offside base days during any 60 trading day period is greater than 3, the currency shall be deemed to have exceeded the volatility threshold of the currency group.”