Canada follows in ESMA’s footsteps, as new rules for highly-leveraged products in store

Maria Nikolova

Stage 1 of proposed rule changes will require derivatives dealers to obtain IIROC approval before offering highly-leveraged products.

The ban on the offering of binary options and the restrictions on the offering of CFDs to retail clients in Europe are shaping the regulation of the online trading industry of Canada too, as demonstrated by proposed amendments to Derivatives Rules by IIROC.

Put bluntly, the changes will see new requirements for the offering of OTC derivatives (such as CFDs and Forex), with the reforms to be implemented in two stages. The second stage will affect margins but the consultation about this is yet to be disclosed. For the time being, IIROC has unveiled the proposed amendments in the so-called Stage 1.

The proposals include a requirement that all new highly leveraged and complex product/account offerings to retail clients and changes to existing product/account offerings to retail clients (including proposed new underlying asset classes such as cryptocurrencies) must be approved in advance by IIROC.

Let’s note that this requirement is already applicable in Quebec for OTC derivatives. There have been recent prospectus reliefs granted to BBS Securities Inc.; Interactive Brokers Canada Inc.; CMC Markets Canada Inc.; Oanda (Canada) Corporation ULC; Friedberg Mercantile Group Ltd.

IIROC proposes codification of requirement to obtain IIROC approval before offering highly- leveraged products.

This new requirement, according to IIROC, is set to harmonize IIROC requirements with product approval requirements introduced in Europe that resulted in the ban of offering of binary options and the introduction of leverage restrictions on the offering of CFDs.

On the positive side, IIROC already has been granted this power by certain CSA jurisdictions for contracts for difference products offered to retail clients by its Dealer Members. The codification of this power and the broadening of its scope to include all highly-leveraged products introduces an important regulatory check that can help ensure that highly-leveraged products with little to no likelihood of profitability aren’t offered to retail clients.

While it is anticipated that IIROC will rarely use this power, IIROC argues that it is important that it has this power to intervene, particularly in situations where no other domestic regulator has the power to intervene (such as where a firm is proposing to offer a foreign-produced highly-leveraged product to retail clients).

On the downside, IIROC already has approval authority over the introduction of highly-leveraged over-the-counter derivatives to retail clients. Because the proposed amendments would extend to authority to cover all highly-leveraged listed and over-the-counter products, even though IIROC intends to use this power extremely rarely, this new requirement may on occasion delay or prevent the offering of certain highly-leveraged domestic and foreign-based investment products to retail clients.

IIROC is poised to be provided with a tool to prevent in extremely rare cases the offering of a highly-leveraged investment product that has been determined to be unsuitable for all retail clients.

Stage 2 will include proposed amendments to current margin requirements in order to adequately constrain leverage. Stage 2 will be published for public comment at a later date.

Comments on Stage 1 proposals are due by February 19, 2020.

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