Canadian regulator excludes crypto funds from reduced margin eligibility

The Canadian Investment Regulatory Organization (CIRO) ruled that cryptocurrency funds will not be eligible for reduced margin rates, citing concerns over volatility, liquidity risks and regulatory uncertainty.

On Feb. 5, CIRO released a new List of Securities Eligible for Reduced Margin (LSERM). This quarterly list identifies which securities are eligible for reduced margin rates. Financial institutions eligible for reduced margin rates benefit from improved capital efficiency and lower trading costs. 

In the announcement, CIRO said that cryptocurrency funds are not eligible for reduced margins “until further notice.” As a result, investors trading cryptocurrency funds will need to maintain higher collateral, making it more expensive to leverage crypto positions compared with stocks or exchange-traded funds (ETFs).

Funds subject to higher margin requirements are more likely to undergo forced liquidations during market downturns, as reduced margin rates provide some breathing room before liquidations occur. 

Related: How the SEC’s proposed token relief might impact crypto firms

Requirements for securities to be eligible for reduced margin

According to CIRO, highly liquid securities with substantial market capitalization and lower volatility are more likely to be eligible for reduced margin. 

In its general inclusion requirements, CIRO said that to be eligible, securities must have price volatility measures, including a calculated price volatility margin interval of 25% or less. This measure assesses the security’s price fluctuations over a specified period to determine its volatility.

In addition, The security should have a market value of at least 2 CA$ per share. This requirement ensures the security maintains a minimum price level, often associated with reduced volatility.

Apart from price volatility, securities must meet liquidity measure requirements to qualify for reduced margin. This includes a public float value exceeding 100 million CA$ and an average daily trading volume of at least 25,000 daily shares during each month in the preceding quarter. Higher-priced securities need at least 1 million CA$ daily traded value each month. 

Lastly, securities must be listed on a Canadian exchange and eligible for margin for six months. For those listed under six months, the security must have a market value greater than 5 CA$ per share, a dollar value of public float greater than 500 million CA$, and be in an industry sector known for low price volatility.