The Canadian Derivatives Clearing Corporation (CDCC) has proposed amendments to its Rules, Operations Manual, Risk Manual and Default Manual to introduce the Gross Client Margin Model (GCM). The changes being proposed by the CDCC are intended to align with international standards on segregation and portability for futures accounts, namely Principle 14 of the Principles for Financial Market Infrastructures. Portability of client positions and collateral is the alternative to closing out the positions upon the insolvency of a clearing participant. The GCM model is a method of calculating the margin a clearing participant must post where the amount is the sum of the margin requirements for each client (i.e., its not a net calculation).Each clearing member would need to report client positions on a daily basis to determine the initial margin requirement. The purpose of the amendments is to allow each client equal protection from the CCDC, regardless of the credit quality of the respective clearing members. The GCM model is to be undertaken in phases and implemented in the second quarter of 2022.CDCC does not initially expect a large impact on stakeholders, as the GCM model is already used for the U.S. market.
The Investment Industry Regulatory Organization of Canada (IIROC) has proposed changes to its own rules and Form 1 relating to the futures segregation and portability protection regime, relating to the CDCC proposal. IIROC’s changes are also intended to make it easier to port client positions and the value of posted collateral in the event of a default of a clearing participant. The changes to IIROC’s rules are required because the CDCC model is separate from the existing IIROC-CIPF model, and the purpose of the amendments is to reduce “funding drain” on dealers and reduce linkages between a dealer’s futures business and securities business – i.e., the possibility that dealers would have to utilize margin from other accounts in order to post the higher requirements for futures that will be required under the CDCC model. The rules include additional client disclosure and daily reporting to IIROC to identify gross customer margin futures positions. The CGM model allows CDCC to port positions more quickly, but may result in higher margin requirements and restrictions on cross-product hedges involving futures for some institutional participants. To mitigate this impact, the proposals allow one business day grace period to collect margin calls. Comments on the CDCC proposal are due by September 3, and IIROC is accepting comments until shortly thereafter on September 7.
August 31, 2021