Canadian CIRO excludes crypto funds from reduced margin eligibility

Canada’s equities regulator has excluded crypto funds from reduced margin eligibility. They did this because of risks like volatility, liquidity risks, and regulatory concerns, which make leveraged trading more expensive.

The announcement was made on February 5. CIRO gave a new List of Securities Eligible for Reduced Margin (LSERM). This quarterly list shows which stocks can have lower margin rates. The reason why it is important to have a low margin is because financial institutions that qualify for lower margin rates enjoy better use of their cash and reduced trading costs. 

In the announcement, CIRO said, “Until further notice, cryptocurrency funds are not eligible for reduced margin. This eligibility status also applies to cryptocurrency funds against which OCC options are traded. For cryptocurrency funds, margin eligibility may be otherwise determined according to the requirements set out in subsections 5310(1) and 5311(1) of the IDPC Rules.”

This means investors trading crypto funds will need to maintain higher collateral. Borrowed money is more expensive for crypto investments than for stocks or ETFs.

In addition, funds with higher margin requirements are more likely to be sold off during market drops. Lower margin rates give them a little more time before having to sell. 

What Canada’s equities regulators need to name assets eligible for reduced margin

CIRO argues that assets that are easy to buy and sell have a large market value and are not very volatile. This makes them more likely to qualify for lower margin requirements. 

CIRO explained that for stocks to qualify, they need a price volatility measure with a price volatility margin of 25% or lower. This measure looks at how much a security’s price changes over a certain time to determine its volatility. Clearly, crypto assets are very volatile.

In addition to price volatility, stocks need to meet liquidity requirements to qualify for lower margins. 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 previous quarter. Higher-priced shares need at least 1 million CA$ daily traded value each month. 

The security should also be worth at least 2 CA$ for each share. This rule ensures that the price stays at a low level. This usually means there will be less price volatility.

Another requirement is that securities need to be listed on a Canadian exchange and available for margin for six months. For stocks held for less than six months, they must have a market price of over 5 CA$ per share and a public float value of over 500 million CA$. They should also belong to an industry that usually has stable prices. 

Canada crypto progress

Canada has not been the most favorable space for crypto investors to thrive. In 2021, the Canadian Securities Administrators (CSA) and CIRO said that the Canada-based crypto trading platforms (CTPs) would work as limited traders for a short time. That was a hard time because they would provide services while also working to get fully approved CIRO status.

According to surveys, half of the financial services in Canada provide at least one crypto option for their customers. Research conducted every six months found that around 52% provide crypto trading.

However, spot Bitcoin ETFs have been offered in Canada since 2021. The growth of crypto services in Canada is due to strong demand from clients. 80% of platforms report that retail buyers want more crypto options.

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