Canadian Investment Regulatory Organization Excludes Crypto Funds from LSERM
The Canadian Investment Regulatory Organization (CIRO) has recently declared that cryptocurrency funds will no longer be part of its List of Securities Eligible for Reduced Margin (LSERM). This list, updated quarterly, highlights securities that qualify for lower margin rates. This decision, which took effect on February 5, arises from concerns over the “high volatility, liquidity issues, and regulatory uncertainties” associated with cryptocurrency funds.
Impact of CIRO’s New Cryptocurrency Funds Exclusion
As a consequence of CIRO’s decision, traders dealing in cryptocurrency funds will be required to maintain higher levels of collateral compared to those trading in standard stocks or exchange-traded funds (ETFs). This change could increase both the costs and risks for those leveraging positions in the crypto market.
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Criteria for Margin Reduction Eligibility
The primary aim of CIRO’s LSERM is to boost capital efficiency by cutting down trading expenses and improving liquidity for qualifying securities. For a security to be considered, it needs to meet certain criteria regarding price volatility, liquidity, and market capitalization.
Price Volatility and Market Capitalization Standards
To qualify for reduced margin, securities must adhere to strict price volatility standards, specifically maintaining a volatility margin interval of no more than 25%. Additionally, they must hold a market value of at least CA$2 per share and exhibit consistent trading activity. This includes a public float value surpassing CA$100 million and an average monthly trading volume of at least 25,000 shares over the previous quarter.
Stringent Requirements for High-Priced Securities
Securities with higher prices face even more rigorous trading value requirements, underscoring the necessity for stable and liquid markets. Cryptocurrency funds, which frequently undergo significant price fluctuations and possess lower liquidity compared to traditional stocks and ETFs, do not satisfy these criteria under CIRO’s current guidelines.
Implications for Cryptocurrency Funds in Canada
This exclusion categorizes cryptocurrency funds into a different risk bracket within Canada, necessitating higher collateral margins and exposing traders to potential forced liquidations during market downturns. Consequently, investors in Canadian crypto funds may encounter tighter trading conditions and might need to reconsider their leverage strategies.
Additional Requirements for LSERM Eligibility
The updated LSERM mandates that eligible securities must be listed on a Canadian exchange and retain margin eligibility for a minimum of six months. For securities listed for shorter durations, stricter conditions apply, including a minimum share price of CA$5 and a public float exceeding CA$500 million. These stringent measures ensure that only the most stable and liquid securities benefit from reduced margin rates.
The evolving regulatory landscape indicates a cautious approach towards cryptocurrency investments in Canada, reflecting broader concerns over volatility and market stability. As the digital currency market continues to develop, traders and investors must stay informed and adaptable to navigate these regulatory changes effectively.
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