Canada’s Investment Industry Regulatory Organisation, or rather the IIROC, published a circular today. This circular asked for the input of market participants, the derivatives community, stakeholders, and investors over its new proposed regulatory framework. Aptly titled “Proposed Derivatives Rule Modernization, Stage 1,” the framework plans on providing clarity for derivatives activities in the sectors of CFDs and Forex.
The New Rules
The rules will be published in two different stages. Stage 1 ruleset covers the amendments to everything except the margin requirements of the regulation. The Stage 2 proposal will include amendments to the margin requirements as well as the leverage rules. Stage 2 will only be published later this year.
A matter of note is IIROC’s unique structure. It updates FX margin trading requirements quite regularly to try and counteract FX volatility.
The regulator’s first big move was to update the definitions of derivatives. Before, the definition suffered from being too overly precise for its own good. Now, the regulator has decided to create a “broader-scope” approach that hopes to classify derivatives on its general characteristics rather than specific types. Derivatives were restricted to futures and options contracts before this reclassification.
Institution and Retail Shakeup
IIROC has also revised its definition of what is and isn’t an “institutional client.” The current system of classification inhibits individual clients from being classified as anything other than retail. This is in spite of the possibility of experience and knowledge these individuals might have or assets they’ve accrued.
The new system takes into account that retail clients could also be small businesses or wealthy individuals. These groups have the potential to be knowledgeable in investments and thus less likely to make uneducated investment choices. The new distinction tries to compensate for this, basing the definition instead of the client’s financial assets. Both individuals and firms are capable of being classified as an institutional client should their capitals exceed a certain point. The limits are set at $5 million for individuals and $25 million for businesses.
Following Good Footsteps
The regulatory firm has published a proposal dedicated to things like Forex, CFDs, and cryptocurrency as well. The updates are following the steps of the Ontario Securities Commission in their regulations. IIROC must first approve products with high leverage that are offered to retail clients before they can be available. Prior approval is also needed for leveraged products when changing current offerings as well as introducing new instruments.
IIROC has expressed its desire to “harmonize” with its European counterparts, ESMA. This is in the context of the product approval requirements ESMA has previously put in place. The European regulator also banned all offerings of binary options and has restricted CFD leverages.
The regulator expressed that IIROC will probably do it only rarely, but it needs to have the power to intervene in situations directly. These situations are especially critical with things only IIROC has the authority to stop. An example of this would be a firm proposing a product aimed towards retail clients that are foreign-produced and highly leveraged.