Amendments to the IIROC Rules and Form 1 relating to the futures segregation and portability customer protection regime 

1. Background

The Canadian Derivatives Clearing Corporation (CDCC) is implementing a new customer protection segregation and portability (Seg and Port) regime intended to meet international standards for the protection of clients in the event of a default of a clearing participant. CDCC’s Seg and Port regime is based on the use of a gross customer margin (GCM) model, and empowers CDCC to more rapidly port (transfer) client positions and related collateral from a clearing member that is in default to a different clearing member.

To accommodate the Seg & Port regime, IIROC published for comments amendments to the IIROC Rules in Notice 21-0113. The feedback received and further development in CDCC’s Seg and Port regime led to the republication of proposed amendments to IIROC Rules as detailed in Notice 22-0060.

2. Comments received

We received one public comment letter in response to the 2022 republication of the proposed amendments published in Notice 22-0060. We provide a summary of these comments and our response in Appendix E.

3. The Amendments

The Amendments align our requirements with the corresponding rule changes at CDCC. Their main objective is to:

• reduce the potential funding drain resulting from the GCM model and to reduce the integration between futures accounts and non-futures accounts, and
• increase the likelihood of clients porting their futures positions from a defaulting clearing Dealer Member to a different clearing Dealer Member.

The Amendments:

• require disclosure to clients on the risks, benefits, conditions and requirements of porting futures contracts and futures contract option positions (collectively, futures positions) to a replacement Dealer and require client acknowledgement of the porting disclosure document,
• require daily records to identify and distinguish GCM futures positions and related collateral from other positions and accounts and require that Dealer Members maintain a client identification record for client accounts subject to the GCM model,
• set higher margin requirements for institutional client futures positions and allow use of SPAN margining to harmonize IIROC futures client margin requirements with the new CDCC GCM model,
• apply stricter criteria to continue to qualify for reduced margin for client cross-product hedges between futures positions and underlying securities, and
• eliminate the possibility of client guarantees and use of client excess margin between futures accounts and non-futures accounts.

The blackline text of the Amendments to the IIROC Rules is set out in Appendix A and a clean copy is set out in Appendix B. The blackline text of the Proposed Amendments to Form 1 is set out in Appendix C and a clean copy of the changes is set out in Appendix D.

3.1 Adoption into IDPC Rules

The IIROC Rules will be replaced by the IDPC Rules on January 1, 2023. The Amendments will be adopted into the IDPC Rules and associated Form 1 under the transitional provision in subsection 1105(1)(iv) of the IDPC Rules.

When the Amendments are adopted into the IDPC Rules and associated Form 1 the word “IIROC” will be replaced with “the Corporation” in the following sections of the Amendments:

• Clause 5725(2)(ii)
• Subsection 5776(4)
• Subsection 5790(8)
• Form 1 Part II – Schedule 4 Notes and instructions – Note (1)
• Form 1 Part II – Schedule 4 Notes and instructions – Note (7)

A blackline copy of these sections is in Appendix F.

4. The Guidance

In Notice 22-0060, we stated our intention to publish guidance to provide further clarification on the requirements for porting disclosure documents, books and records and margin requirements related to the futures segregation and portability customer protection regime. Concurrent with this notice, we are publishing Guidance Note GN-3200-22-002, Futures segregation and portability customer protection regime guidance.

5. Implementation

The Amendments (except for clause 3261(1)(ii)) and the Guidance are effective upon the implementation of CDCC’s rule amendments for the GCM Model Initiative on March 31, 2023.

For clause 3261(1)(ii), the effective date is March 31, 2023 for new clients and December 31, 2024 for existing clients.

If the implementation of CDCC’s rule amendments for the GCM Model Initiative is extended beyond March 31, 2023, the implementation of the Amendments will be extended accordingly.

6. Appendices

Appendix A – Blackline copy of Amendments to IIROC Rules

Appendix B – Clean copy of Amendments to IIROC Rules

Appendix C – Blackline copy of Form 1

Appendix D – Clean copy of Form 1

Appendix E – IIROC staffs’ response to public comments on the 2022 proposed amendments

Appendix F – Blackline copy of sections impacted by adoption into IDPC Rule

Appendix B

Investment Industry Regulatory Organization of Canada

Amendments to IIROC Rules and Form 1 relating to the futures segregation and portability customer protection regime

Clean copy of amendments to IIROC Rules

Amendment #1 – IIROC Rule subsection 1201(2) is amended by adding the following definitions in alphabetical sequence:

Amendment #2 – IIROC Rule 3200 is amended by adding new section 3261 as follows:

3261. Futures porting disclosures

1. Where the client account is subject to a futures segregation and portability customer protection regime, a Dealer Member must:
   1. provide the client with a porting disclosure document on the benefits, risks and requirements for porting, including the conditions for porting positions to a replacement clearing member,
   2. obtain the client’s acknowledgement that the client has received and understood the porting disclosure document or similar document described in clause 3261(1)(i), and
   3. notify the client of the obligation of the Dealer Member to provide the clearing corporation with information and reports related to the client’s positions.

3262. – 3269. Reserved.

Amendment #3 – IIROC Rule section 3814 is amended to add subsection 3814(3) as follows:

3814. Commodity record

1. A Dealer Member must maintain a commodity record or ledger, for each commodity as of the trade date, of all long positions or short positions in futures contracts carried for the Dealer Member's account or for the account of clients.
2. The commodity record or ledger must contain the name or designation of the account in which each position is carried.
3. As part of the records required under subsection 3814(1), a Dealer Member must maintain a daily record that separately identifies the client positions and associated collateral for futures contracts and futures contract options that are subject to the domestic gross customer margin model.
4. A Dealer Member must maintain a client identification record, for accounts subject to the domestic gross customer margin model, that includes the client identification information required by the clearing corporation for porting of client accounts.

Amendment #4 – IIROC Rule sections 5130 is amended to replace the term “clearing corporation” with “recognized option clearing corporation” as follows:

5130. Definitions

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9. For positions in and offsets involving derivative products, the term:

   “recognized option clearing corporation”	The Canadian Derivatives Clearing Corporation, the Options Clearing Corporation or any other corporation or organization recognized by the Board.
   “escrow receipt”	A document issued by a financial institution approved by a recognized option clearing corporation certifying that a security is held and will be delivered by that financial institution when a specified option is exercised.

Amendment #5 – IIROC Rule sections 5617 through 5624 are amended to add an additional subsection to restrict client account offsets. In the French version, those sections are also amended to correct a recurring grammar error:

5617. Offsets involving government debt securities and Government of Canada notional bond futures contracts with same underlying issuer and same maturity bands

1. Where a Dealer Member or a client has the following pairing:
    

   	Long (short) position		Short (long) position
   (i)	Canada debt securities	and	Government of Canada notional bond futures contract

   and the positions have the same currency denomination and market value and are within the same maturity band, the two positions may be offset and the minimum margin required for both positions may be computed with respect to the net long or net short position only.

2. For a client account offset as set out in subsection 5617(1), the futures contracts must be excluded from the domestic gross customer margin model.

5618. Other offsets involving government debt securities and Government of Canada notional bond futures contracts

1. Where a Dealer Member or a client has one of the following long (short) government debt security position and short (long) Government of Canada notional bond futures contract position pairings:
    

   	Long (short) position		Short (long) position
   (i)	Canada debt securities in different maturity band	and	Government of Canada notional bond futures contract
   (ii)	Canada Provincial debt securities in same or different maturity band	and	Government of Canada notional bond futures contract
   (iii)	Canada Municipal debt securities with a high issuer credit rating in same maturity band	and	Government of Canada notional bond futures contract

   and the positions have the same currency denomination and market value, the two positions may be offset and the minimum margin required for both positions may be computed as 50% of the greater of the margins normally required on the long (or short) and the short (or long) positions.

2. In subsection 5618(1) “Canada Municipal debt securities with a high issuer credit rating” are debt securities issued or guaranteed by a Canadian municipal government with a long-term issuer credit rating of “A” or higher by a designated rating organization.

3. For a client account offset as set out in subsection 5618(1), the futures contracts must be excluded from the domestic gross customer margin model.

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   .

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5622. Offsets involving Canadian chartered bank acceptances and Canadian bankers acceptance futures contracts with same maturity bands

1. Where a Dealer Member or a client has the following pairing:
    

   	Long (short) position		Short (long) position
   (i)	highly rated chartered bank acceptances	and	Canadian banker acceptance futures contract

   and the positions have the same currency denomination and market value and are within the same maturity band, the two positions may be offset and the minimum margin required for both positions may be computed with respect to the net long or net short position only.

2. In subsection 5622(1) “highly rated chartered bank acceptances” are bank acceptances currently rated “A” or higher by a designated rating organization.
3. For a client account offset as set out in subsection 5622(1), the futures contracts must be excluded from the domestic gross customer margin model.

5624. Offsets involving commercial and corporate debt securities and Government of Canada notional bond futures contracts

1. Where a Dealer Member or a client has one of the following long (short) commercial and corporate debt security position and short (long) Government of Canada notional bond futures contract position pairings:
    

   	Long (short) position		Short (long) position
   (i)	highly rated non-convertible commercial and corporate debt securities	and	Government of Canada notional bond futures contract

   and the positions have the same currency denomination and market value and are within the same maturity band, the two positions may be offset and the minimum margin required for both positions may be computed as the greater of the margins normally required on the long (or short) and the short (or long) positions.

2. In subsection 5624(1) “highly rated non-convertible commercial and corporate debt securities” are non-convertible commercial and corporate debt securities currently rated “A” or higher by a designated rating organization.
3. For a client account offset as set out in subsection 5624(1), the futures contracts must be excluded from the domestic gross customer margin model.

Amendment #6 – IIROC Rule section 5671 is amended to remove reference to client accounts as follows:

Offsets only available for Dealer Member inventory positions

DEBT SECURITIES

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5671. Offsets involving Canadian government debt or Canadian listed equity securities and futures and forward contracts

1. Where a Dealer Member has a position in bonds, debentures or treasury bills issued or guaranteed by the Government of Canada or in equity securities listed on the Toronto Stock Exchange and the account has an offsetting futures or forward contract position on the same security, the positions may be offset and the minimum margin required for the positions may be computed with respect to the net long or net short position only.

Amendment #7 - IIROC Rule sections 5714 and 5725 are amended to replace the term “clearing corporation” with “recognized option clearing corporation” as follows:

5714. Treatment of option positions issued by different recognized option clearing corporations

1. If a Dealer Member account or a client account holds options issued by different recognized option clearing corporations, with the same underlying interest, they may be treated as being equivalent when calculating margin for the account.

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5725. Hedged option positions

1. No margin is required for the following exchange-traded option and collateral position combinations held in equivalent quantities in a Dealer Member inventory or client account:
    

   	Exchange-traded option position		Acceptable collateral
   (i)	Short call option with an equity, index, index participation unit, debt or currency underlying interest	and	escrow receipt evidencing the deposit of the underlying security
   (ii)	Short put option with an equity, index, index participation unit, debt or currency underlying interest	and	escrow receipt evidencing the deposit of government securities
   (iii)	Short put option with an equity, index, index participation unit, debt or currency underlying interest	and	letter of guarantee

   provided the conditions in subsections 5725(2) and 5725(3) are met.

2. For an escrow receipt to be acceptable collateral in subsection 5725(1):
   1. the issuer of the escrow receipt must be a financial institution approved by the recognized option clearing corporation,
      and
   2. all recognized option clearing corporation agreements must be signed and delivered to the recognized option clearing corporation and available for inspection by IIROC on request,
      and
   3. in the case of an escrow receipt evidencing the deposit of government securities, the securities must:
      1. be acceptable forms of recognized option clearing corporation margin,
      2. mature within one year of their deposit, and
      3. have a market value of greater than 110% of the aggregate exercise value of the short put option.
3. For a letter of guarantee to be acceptable collateral in subsection 5725(1):
   1. the issuer must be:
      1. a financial institution approved by the recognized option clearing corporation to issue escrow receipts,
         and
      2. a chartered bank, a Québec savings bank or a trust company licensed to do business in Canada, with a minimum paid-up capital and surplus of $5,000,000,
   2. the letter must certify that the bank or trust company:
      1. holds on deposit for the client’s account cash equal to the full aggregate exercise value of the put option and that amount will be paid to the recognized option clearing corporation against delivery of the underlying interest hedged by the put option,
         or
      2. unconditionally and irrevocably guarantees to pay the recognized option clearing corporation the full amount of the aggregate exercise value of the put option against delivery of the underlying interest hedged by the put option,
         and
   3. the Dealer Member must deliver it to the recognized option clearing corporation and the recognized option clearing corporation must accept it as margin.

Amendment #8 - IIROC Rule sections 5760 through 5765 are amended to add an additional subsection to restrict client account offsets as follows:

EXCHANGE-TRADED OPTIONS - FUTURES AND OPTIONS COMBINATIONS AND CONVERSIONS

5760. Long index futures contract - short call option combination

1. Where a Dealer Member inventory or client account contains one of the following exchange traded futures contract and exchange-traded option contract combinations:
    

   	Long futures position		Short option position
   (i)	index futures contracts	and	index call option based on the same index
   (ii)	index futures contracts	and	index participation unit call option based on the same index

   and equivalent quantities of each position in the combination are held and the options and futures contracts have the same settlement date or can be settled in either of the two nearest contract months, the minimum margin required for the combination is calculated in accordance with subsection 5760(2).

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2. For a client account offset as set out in subsection 5760(1) the index futures contracts must be excluded from the domestic gross customer margin model.

5761. Long futures contracts - long put option combination

1. Where a Dealer Member inventory or client account contains one of the following exchange traded futures contract and exchange-traded option contract combinations:
    

   	Long futures position		Long option position
   (i)	index futures contracts	and	index put option based on the same index
   (ii)	index futures contracts	and	index participation unit put option based on the same index

   and equivalent quantities of each position in the combination are held and the options and futures contracts have the same settlement date or can be settled in either of the two nearest contract months, the minimum margin required for the combination is calculated in accordance with subsections 5761(2) and 5761(3).

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2. For a client account offset as set out in subsection 5761(1) the index futures contracts must be excluded from the domestic gross customer margin model.

5762. Short futures contracts - long call option combination

1. Where a Dealer Member inventory or client account contains one of the following exchange traded futures contract and exchange-traded option contract combinations:
    

   	Short futures position		Long option position
   (i)	index futures contracts	and	index call option based on the same index
   (ii)	index futures contracts	and	index participation unit call option based on the same index

   and equivalent quantities of each position in the combination are held and the options and futures contracts have the same settlement date or can be settled in either of the two nearest contract months, the minimum margin required for the combination is calculated in accordance with subsections 5762(2) and 5762(3).

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2. For a client account offset as set out in subsection 5762(1), the index futures contracts must be excluded from the domestic gross customer margin model.

5763. Short futures contracts - short put option combination

1. Where a Dealer Member inventory or client account contains one of the following exchange traded futures contract and exchange-traded option contract combinations:
    

   	Short futures position		Short option position
   (i)	index futures contracts	and	index put option based on the same index
   (ii)	index futures contracts	and	index participation unit put option based on the same index

   and equivalent quantities of each position in the combination are held and the options and futures contracts have the same settlement date or can be settled in either of the two nearest contract months, the minimum margin required for the combination is calculated in accordance with subsection 5763(2).

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   .

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2. For a client account offset as set out in subsection 5763(1), the index futures contracts must be excluded from the domestic gross customer margin model.

5764. Futures conversion or long tripo combination

1. Where a Dealer Member inventory or client account contains one of the following exchange traded futures contract and exchange-traded option contract combinations:
    

   	Long futures position		Long option position		Short option position
   (i)	index futures contracts	and	index put option based on the same index	and	index call option based on the same index
   (ii)	index futures contracts	and	index participation unit put option based on the same index	and	index participation unit call option based on the same index

   and equivalent quantities of each position in the combination are held and the options contracts have the same expiry date and the options and futures contracts have the same settlement date or can be settled in either of the two nearest contract months, the minimum margin required for the combination is calculated in accordance with subsection 5764(2).

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2. For a client account offset as set out in subsection 5764(1), the index futures contracts must be excluded from the domestic gross customer margin model.

5765. Reconversion or short tripo combination

1. Where a Dealer Member inventory or client account contains one of the following exchange traded futures contract and exchange-traded option contract combinations:
    

   	Short futures position		Long option position		Short option position
   (i)	index futures contracts	and	index call option based on the same index	and	index put option based on the same index
   (ii)	index futures contracts	and	index participation unit call option based on the same index	and	index participation unit put option based on the same index

   and equivalent quantities of each position in the combination are held and the options contracts have the same expiry date and the options and futures contracts have the same settlement date or can be settled in either of the two nearest contract months, the minimum margin required for the combination is calculated in accordance with subsection 5765(2).

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2. For a client account offset as set out in subsection 5765(1), the index futures contracts must be excluded from the domestic gross customer margin model.

5766. - 5769. Reserved.

Amendment #9 - IIROC Rule section 5772 is amended to add subsection 5772(4) to restrict client account offsets as follows:

5772. Index futures contracts - qualifying baskets of index securities or index participation units

1. Where a Dealer Member inventory or client account contains the following combination:
    

   	Long (short) futures position		Short (long) position
   (i)	index futures contracts	and	qualifying basket of index securities of the same index
   (ii)	index futures contracts	and	index participation units based on the same index

   and equivalent quantities of each position in the combination are held, the minimum margin is calculated in accordance with subsection 5772(2).

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2. For a client account offset as set out in subsection 5772(1), the index futures contracts must be excluded from the domestic gross customer margin model.

Amendment #10 - IIROC Rule section 5776 is amended to insert subsection 5776(2) for the use of SPAN in client accounts as follows:

5776. Optional use of the Standard Portfolio Analysis methodology

1. For a Dealer Member inventory account constituted exclusively of positions in derivatives listed at the Bourse de Montréal, the margin required may be the one calculated by the Standard Portfolio Analysis methodology using the margin interval calculated and the assumptions used by the Canadian Derivatives Clearing Corporation.
2. For client accounts subject to the domestic gross customer margin model constituted exclusively of positions in derivatives listed at the Bourse de Montréal, the margin required may be the one calculated by the Standard Portfolio Analysis methodology using the margin interval calculated and the assumptions used by the Canadian Derivatives Clearing Corporation.
3. If the Dealer Member selects the Standard Portfolio Analysis methodology, the margin requirements calculated under this methodology will supersede the requirements stipulated in these Rules.
4. IIROC may restrict the application of this section 5776, if it considers continued use of the Standard Portfolio Analysis methodology to be inappropriate for Dealer Member or client margin requirements.

Amendment #11 - IIROC Rule subsection 5782(2) is amended to replace the term “acceptable clearing corporation” with “recognized option clearing corporation” for consistency with sections 5714 and 5725:

5782. Hedged option positions

1. No margin is required for the following over-the-counter option and collateral position combinations held in equivalent quantities in a Dealer Member inventory or client account:
    

   	Over-the-counter option position		Acceptable collateral
   (i)	Short call option with an equity, index, index participation unit, debt or currency underlying interest	and	escrow receipt evidencing the deposit of the underlying security
   (ii)	Short call option with an equity, index, index participation unit, debt or currency underlying interest	and	escrow receipt evidencing the deposit of government securities

   provided the conditions in subsection 5782(2) are met.

2. For an escrow receipt to be acceptable collateral in subsection 5782(1) the issuer of the escrow receipt must be a financial institution approved by a recognized option clearing corporation.

Amendment #12 - IIROC Rule section 5790 is amended to insert subsection 5790(2) and clauses 5790(3)(i) and (ii)as follows:

FUTURES CONTRACTS AND FUTURES CONTRACT OPTIONS

5790. Minimum margin requirements

1. Where a Dealer Member inventory or client account contains positions and offsets in futures contracts or futures contract options, the margin required is the greatest of:
   1. the margin required by the futures exchange on which the contract is entered into,
   2. the margin required by the clearing corporation, and
   3. the margin required by the Dealer Member’s clearing broker, where applicable.
2. Where a client in subsections 5790(1) or 5776(2) is an acceptable institution, acceptable counterparty or regulated entity, the Dealer Member must include the margin deficiency in the margin on client or brokers and dealers accounts when calculating its risk adjusted capital, as of the date the deficiency occurs, where the Dealer Member:
   1. does not promptly call for margin, or
   2. has promptly made a call for margin, but has not received the required margin by the end of the next trading day after the date the deficiency occurs.
3. Where a Dealer Member or a client, owns a commodity and also has a short position in a futures contract in the same commodity, the two positions may be offset and the required margin shall be computed with respect to the net long or net short position where:
   1. ownership of the commodity is evidenced by warehouse receipts or comparable documentation, and
   2. the futures contract position is not subject to the domestic gross customer margin model.
4. Where a futures exchange or its clearing corporation prescribes margin requirements based on initial and maintenance rates, the margin required at the time the contract is entered shall be based on the prescribed initial rate. When subsequent adverse price movements in the value of the contracts reduce the margin on deposit to an amount below the maintenance level, a further amount to restore the margin on deposit to the initial rate amount shall be required. The Dealer Member may, in addition, require such further margin or deposit against liability as it may consider necessary as a result of fluctuations in market prices from time to time.
5. Where client trades are executed through an omnibus account, the Dealer Member shall require margin from each of its clients as though the trades were executed in separate fully disclosed accounts.
6. Where spread margins are permitted in a client account, the Dealer Member shall note this in the margin records for this account.
7. Where a Dealer Member’s inventory account holds inter-commodity spreads in Government of Canada bond futures contracts and U.S. treasury bond futures contracts traded on a futures exchange in Canada and the United States and equivalent quantities of each position in the spread are held, the margin required is the greater of the margin required on either the long side or the short side only. For this purpose, the foregoing spreads shall be on the basis of $1.00 Canadian for each $1.00 U.S. of the contract size of the relevant futures contracts. With respect to the United States side of the above inter-commodity spreads, such positions must be maintained on a contract market as designated pursuant to the United States Commodity Exchange Act.
8. IIROC may prescribe, in its discretion, higher or lower margin requirements for any account or person that holds positions in futures contracts or futures contract options.

5791. - 5799. Reserved.

Amendment #13 - IIROC Rule section 5820 is amended to add clauses 5820(1)(vi) and (vii) as follows:

5820. General account guarantee requirements

1. Subject to the requirements in sections 5821 and 5822, a Dealer Member may permit a client (the guarantor) to guarantee the accounts of another client provided:
   1. the Dealer Member informs the guarantor in writing of the initial contingent liability they will be assuming by signing the guarantee agreement,
   2. the Dealer Member discloses to the guarantor in writing that the suitability of transactions in the guaranteed client’s accounts will not be reviewed in relation to the guarantor,
   3. the guarantor signs an approved written guarantee agreement with the Dealer Member that:
      1. identifies the guarantor by name,
      2. identifies the guarantor accounts that are to be used to provide the guarantee,
      3. identifies the accounts of the other client that are subject to the guarantee,
      4. binds the guarantor, its successors, assigns and personal legal representatives, and
      5. contains the minimum terms set out in subsection 5825(1),
   4. the guaranteed client consents in writing to the Dealer Member providing the guarantor, at least quarterly, with the guaranteed client’s account statements,
   5. where the guarantor does not object, the guarantor is sent, at least quarterly, the guaranteed client’s account statements,
   6. the guarantor’s accounts that are not subject to a futures segregation and portability customer protection regime are not guaranteeing any accounts that are subject to a futures segregation and portability customer protection regime, and
   7. the guarantor’s accounts that are subject to a futures segregation and portability customer protection regime are not guaranteeing any accounts that are not subject to a futures segregation and portability customer protection regime.
2. Where the guaranteed client does not consent to providing account statements, the Dealer Member must notify the guarantor in writing of the guaranteed client’s refusal and that the guarantee agreement will not be accepted for margin reduction purposes.

Appendix E

Comments Received in Response to Rules Notice 22-0060 – Rules Notice – Request for Comments – IIROC Rules – Republication of proposed amendments to the IIROC Rules relating to the futures segregation and portability customer protection regime

On April 21, 2022, we issued Notice 22-0060 requesting comments on the republication of proposed amendments to the IIROC Rules relating to the futures segregation and portability customer protection regime. IIROC received one comment letter from the following commenter:

RBC Dominion Securities Inc.

A copy of this comment letter is publicly available on IIROC’s website (www.iiroc.ca). The comments we received and our responses to them are summarized in the table below.

• 1As proposed in CDCC Notice to Members 164-21