Canada’s mega regulator, the Investment Industry Regulatory Organization (IIROC), today published a circular that seeks input from the derivatives community, market participants, investors and other stakeholders. Titled ‘Proposed Derivatives Rule Modernization, Stage 1,’ the document outlines a proposed regulatory framework which provides clarity for derivatives activities, including .
IIROC is publishing its proposed rules in two separate stages, with today’s Stage 1 explaining all amendments other than those relating to . Stage 2 will include proposed amendments to current leverage rules and margin requirements, but will be published for public comment at a later date.
Of note, IIROC enjoys a unique structure as it regularly updates FX margin trading requirements subject to FX volatility.
Firstly, the regulator has updated its derivatives-related definitions which will no longer be restricted to futures and options contracts. Instead, IIROC plans to use “a broader-scope general definition approach,” through detailing the general features of a derivative rather than defining specific types.
The self-regulatory organization has also revised the “institutional client” definition. The new approach aims to avoid drawbacks of the current classification methodology where all individual clients are considered retail, regardless of their investment knowledge or assets they have under administration.
While a retail client can be a wealthy individual or a small business, both are often knowledgeable and, therefore, less likely to make uneducated investments. As such, the predominant distinction between retail and institutional clients will be their financial assets, with individuals and firms may be eligible to reclassify as a professional client whenever their capitals exceed $5 million $25 million, respectively.
IIROC ‘harmonizes’ requirements with ESMA rules
IIROC has also published a dedicated proposal for CFDs, Forex and, more interestingly, . The first part of proposed updates seeks to mimic the requirements currently applied by Ontario Securities Commission. More specifically, all highly leveraged products offered to retail clients must be approved in advance by IIROC. Brokers must obtain prior approval for their leveraged products either when releasing new instruments or introducing any changes to the current offerings.
The regulator also said its updated rules will ‘harmonize’ IIROC requirements with product approval requirements introduced , which banned offering binary options and restricted leverage on CFDs.
If further explains: “While it is anticipated that IIROC will rarely use this power, it is important that IIROC has this power to intervene, particularly in situations where no other domestic regulator has the power to intervene (such as where a firm is proposing to offer a foreign-produced highly-leveraged product to retail clients).”
CFD sellers would also have their rights restricted with regard to the level of promotion of CFD contracts in order to eliminate existing regulatory arbitrage situations. Further, an additional risk warning would be required clearly indicating the level of risk to which CFD buyers would be exposed. The risk disclosure statement provided must be approved by IIROC.
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