The Investment Dealers Association of Canada’s board of directors has approved the first phase of planned amendments to its rules regarding the margining of equity and related securities.

The existing methodology for determining a listed equity security’s margin rate is based on its share price. The IDA says that studies by its staff indicate that share price is not an accurate indicator of a listed equity’s market risk.

“While determining margin rates on this basis may be operationally easy to apply, its use has resulted in margin deposits and ‘strategy-based’ margin rules that do not reflect the true economic risk of positions in and offsets involving equity securities,” it says.

To address these issues, the IDA is adopting a new approach to determining these margin rates. This new approach, referred to as the “basic margin rate” methodology, is essentially a methodology for determining a customized margin rate for each listed equity, it explains. “The objective of this methodology is to determine an overall margin rate for each equity security that will more accurately address its market risk,” it notes.

In order to adopt this new methodology, the relevant rule amendments are being implemented in two phases. In the first phase, all the amendments other than the ones required to implement the new methodology are being adopted. The most significant of these amendments will grant margin eligibility to a larger group of securities listed on foreign exchanges outside of Canada and the U.S.

These amendments are effective Sept. 17.

Richard Corner, vice president regulatory policy at the IDA, says that the timing for completing the methodology change is uncertain. “The success of the second phase implementation is IT systems dependent both on our end and at the dealer end, so we want to be sure all systems are working properly before implementation,” he explains.

“This second phase of the project is not one we can rush to implement since we need to ensure that clients, the markets and the dealers themselves are not inappropriately affected when the new rate methodology that is part of phase 2 is implemented,” he adds.