Securities regulators have approved a new methodology for determining margin rates.

Regulators in Ontario, Quebec, British Columbia and Alberta have approved revisions to the Investment Dealers Association’s rules allowing the adoption of a new methodology for margining equity securities.

Current IDA rules require its members and their clients to maintain margin on securities to cover the risk of loss associated with holding the securities. The amount of margin to be maintained for a security is based on the market price per share of the security.

However, since market price is not a good indicator of the market risk of a security, the IDA proposed a new methodology, the Basic Margin Rate Methodology, to determine the margin rates for securities based on their price risk and liquidity risk. “Under the proposed methodology, the price risk of a security would be determined by its historical price volatility, and liquidity risk would be determined by its average daily traded volume and total public float,” explains a notice in the latest OSC Bulletin.

The IDA will use this Basic Margin Rate Methodology to determine margin rates for equity securities listed in Canadian and U.S. markets that impose certain minimum initial and ongoing financial listing requirements, it adds.

The proposed changes were published for comment on Jan. 13. Minor changes have been made to the proposed policy to reflect that the Nasdaq Stock Market is now a recognized exchange in the U.S. and to correct minor typographical errors.