Securities regulators are considering whether to embrace the concept of portfolio-based margining for certain clients, in an effort to better match funding and risks.
The Investment Industry Regulatory Organization of Canada (IIROC) Monday published a consultation paper that looks at the possibility of introducing portfolio-based margining as a possible alternative to margining based on individual positions for determining dealers’ regulatory capital requirements and margin lending limits.
The paper notes that IIROC staff commissioned the consulting firm, Risk Resources LLC, to perform a detailed feasibility study of portfolio-based margining, which was completed in February. That study recommends that IIROC should move forward with a project to adopt a portfolio-based margining methodology.
According to the paper, the study indicates that this would achieve a better match between funding, collateral and risks in the Canadian market-place; thereby reducing both the frequency and impacts of systemic risk events; keep pace with the risk control developments in the other major financial markets of the world; enable investors and custodians to make more efficient risk control decisions; and, meet the demands of market players such as banks, exchanges and their clients, who favour a move to portfolio margining.
The proposed framework for implementing portfolio margining would make it optional for firms with at least $10 million in capital; and, a portfolio-based methodology would be limited to certain classes of investment products on certain markets.
The paper also says that IIROC staff do not anticipate a large increase in the amount of leverage relative to existing margin requirements under a portfolio approach.
The paper is out for comment until Dec. 17. It says that, at the conclusion of the review, IIROC staff will assess the results and will recommend whether or to not pursue this change. Then, if it is recommended, staff will develop formal rule proposals.