The Investment Dealers Association is proposing amendment to its rules to allow the use of complex option strategies, and to extend certain debt offsets to customers.

The IDA notes that most sections of its regulations allow both customers and firms to take advantage of reduced margin requirements. However, reduced margin offset strategies for debt is restricted to dealers’ positions. “The rationale for this restriction has been questioned as the concept of equally allowing reduced margin and capital requirements to both customers and member firms for valid market risk reduction strategies is well established throughout most margin regulations,” it says. “For example, both customers and member firms are allowed to take advantage of reduced margin and capital requirements for specific offset positions involving equities, capital shares, convertible securities, exercisable securities, futures and option contracts.”

It says that some of the debt offset regulations were created several years ago, when it was more difficult for customers to adequately monitor and manage their debt offsets. “However, given the efficiency of today’s capital markets, the sophistication of investors and the trading and monitoring infrastructure supporting them, there does not appear to be any unique reasons to continue restricting the use of the debt offset regulations to only member firm positions,” it says.

“The secondary issue is the differences between margin requirements for debt offsets between the IDA and the Bourse de Montréal, as the Bourse allows customer debt offsets involving futures contracts and debt security combinations for margin purposes. It is important that this difference be eliminated to maintain regulatory consistency across market participants in the country,” it adds.

The proposed rule changes would allow customers to benefit from the reduced margin requirements for a number of debt offsets that are already available to firms and to eliminate the differences between IDA and Bourse margin regulations regarding customer positions in debt offsets.

In a separate notice, the IDA also proposes changes to the current capital and margin rules that do not recognize certain core complex option offset strategies, such as the Long Condor Spread, the Short Iron Butterfly Spread, and the Short Iron Condor Spread.

So, it proposes amendments to expand the number of permitted reduced capital and margin option offset strategies; to expand the list of option spreads available for individual equity options by removing the current restriction limiting the Box Spread, Long Butterfly Spread, and Short Butterfly Spread to index products; and, to clarify and ensure consistency of the capital and margin requirements.

“The increasing sophistication of option strategies and investors, coupled with the recent recognition of the Long Condor Spread, Short Iron Butterfly Spread, and Short Iron Condor Spread by U.S. regulators, has created a demand for these types of offsets within the Canadian market, and highlighted the inefficiencies in applying the current capital and margin requirements from Regulation 100 to these advanced strategies,” it says.

“It is intended that the formal recognition of these offset strategies by the IDA will reduce existing inefficiencies in the current rules and allow for minimum capital and margin requirements that are reflective of the risks relating to these strategies. The minimum capital and margin requirements for these strategies reflect the potential worst case scenario loss,” the IDA explains.