The Investment Industry Regulatory Organization of Canada (IIROC) is proposing new rules that would establish margin requirements for structured products.
The industry self-regulatory organization issued a rule proposal for public comment that seeks to set a 70% margin rate for retail structured products, such as principal-protected notes (PPNs) and principal-at-risk notes (PARs).
The proposal would also allow dealers to use an alternative margin methodology for structured products that includes an embedded guarantee, which may enable a lower rate for specific products.
“There is widespread interest from dealers requesting to allow loan value on all structured products including PARs and to set a fixed margin rate to reduce the complexity of margining the individual components,” IIROC said in a notice outlining the proposal.
According to the notice, dealers sought a margin rate of 50%, but IIROC is proposing 70% due to the differences in complexity and liquidity between structured products and more conventional securities (equities, mutual funds and ETFs) that have a 50% maximum margin rate.
The added 20% is intended to reflect any increased liquidity risk associated with structured products.
“We believe a conservative fixed margin rate is necessary to address product liquidity limitations and the uniqueness and variability of the product design,” IIROC said in its notice.
The proposal is out for comment until April 12.