The Canadian regulator Investment Industry Regulatory Organization of Canada (IIROC), has published circular requesting comments from traders, investors, and other interested parties in the derivatives market. A document entitled “Proposed Derivatives Rule Modernization, Stage 1” sets out the regulatory framework for operations with derivatives, including Forex and CFD markets.
IIROC publishes the proposed rules in two steps. At the first stage, all amendments are explained with the exception of those related to margin requirements. Phase 2 will include proposed amendments to existing leverage rules and margin requirements. It will be published for public comment later.
It should be noted that IIROC has a unique structure since it regularly updates the requirements for margin trading depending on the volatility in the Forex currency market.
To begin with, the regulator updated its definitions related to derivatives, which will no longer be limited to futures and options contracts. Instead, IIROC plans to take a broader approach by offering a general description of the derivative instead of defining the characteristics of its particular types.
The regulator also revised the definition of “institutional client”. The new approach aims to avoid the disadvantages of the existing classification methodology, when all private customers are considered retail, regardless of their knowledge or assets in management.
A wealthy person or an individual entrepreneur may turn out to be a retail client, while they often have deep knowledge and are less likely to make unreasonable decisions. Thus, the prevailing difference between retail and institutional clients will be their financial assets, while individuals and legal entities may be eligible to reclassify themselves as professional clients if their capital exceeds $ 5 million and $ 25 million, respectively.
IIROC Duplicates ESMA Rules
IIROC also published a special offer for CFDs, Forex and cryptocurrencies. The first part of the proposed updates copies the requirements that are currently being applied by the Ontario Securities Commission. In particular, all high-leverage products offered to retail customers must be pre-approved by IIROC. Brokers must obtain prior approval of their margin products when new instruments are released, or when any changes are made to current offers.
The regulator also said that the updated rules will be “agreed upon” by the requirements introduced in Europe, which prohibited the offering of binary options and limited leverage on CFDs.
The document states that most likely, IIROC will rarely use these powers, it is important that IIROC has this opportunity to intervene, especially in situations where no other local regulatory authority has such a right.
Service providers will need to clearly state the degree of risk to which CFD traders are exposed. Risk Disclosure must also be approved by IIROC.