Canadian FX Regulator Reduces Spot Risk Margin Rates for MXN/CAD and MXN/USD

The Investment Industry Regulatory Organization of Canada (IIROC), a non-profit, national self-regulatory financial organization, has updated its FX spot risk margin rates, effective 24th August 2017. The IIROC is one of the most well respected FX regulators in the world and has a unique framework for controlling the margin requirements.

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The IIROC has reduced the rate of the Mexican peso versus the Canadian dollar (MXN/CAD) from 5.20 percent to 3 percent, and of the Mexican peso versus the US dollar (MXN/USD) from 4.50 percent to 3 percent.

The decrease in the margin risk rate can be attributed to reduced volatility in recent months, which had increased after the election of Trump as US president. He had initially threatened to renegotiate the NAFTA agreement and also build a wall on the US-Mexico border, which led to concerns over trade and the relations of the US with its neighbours. But with Trump having to grapple with other domestic issues, these risks have reduced and hence the authorities have found it logical to reduce the margins now.

An updated list of FX margin requirements is published under the following circumstances: firstly, when a currency’s spot risk margin rate, increased due to volatility, exceeds the threshold set out in the Dealer Member Rule. Secondly, when the increased rate of a currency is reduced because that currency’s volatility does not exceed the volatility threshold within the minimum 30 trading days from the point of increase of the currency’s rate.

The regulator measures currency volatility in the following terms: “The Excess volatility in a currency is measured and tracked as an “offside day”. An offside day is triggered when the percentage change in the exchange rate of the currency over five-day intervals, through a period of 60 trading days, exceeds the margin rate for the currency group. When the number of offside base days during the period reaches 4, a margin surcharge is applied.”

Every dealer member should adhere to the spot risk margin rates issued by the regulator, and this reduction should lead to these margin relaxations being passed on to dealer members’ clients.