The Investment Dealers Association of Canada has published a notice setting out how brokerage firms may use an expanded set of “offset” trading strategies.

The notice states that the number of reduced margin offset strategies available to brokerage firms and their clients involving capital shares and convertible and exercisable securities have increased. The additional offset strategies, the IDA explains, recognize that reverse offset strategies — a long position in the underlying securities offset with a short position in the capital shares or convertible securities or exercisable securities — are effective price hedges, even though the long position cannot be converted into the short position.

As a result, the notice has been prepared to provide general guidance to firms wishing to use these offset strategies. It explains the changes that were made to the previous offset strategies and the risks the regulations are designed to cover.

The IDA says that firms are reminded that the guidance set out in the notice is not a substitute for the performance of proper due diligence when determining the margin or capital requirement for any offset.

“Members have a duty to ensure that the economic substance of the offset strategy, results in either the extinguishment or minimization of market risk,” the notice states. “Normally, proper due diligence will include, but will not be limited to, consulting the relevant prospectus documents of the securities involved in the offset to determine the conversion or exchange features, the appropriate hedge ratios and any penalties associated with those features.”