The Equity Margin Project: IIROC Withdraws Phase II of the Main Proposal for the New Methodology for Margining Equity Securities

August 11, 2017

 On July 13, 2017, the Investment Industry Regulatory Organization of Canada published IIROC Notice 17-0144 Withdrawal of the New Methodology for Margining Equity Securities-Dealer Member Rule 100 and Form 1 withdrawing Phase II of IIROC’s proposed amendments to Dealer Member Rule 100.2 and Form 1, originally published for comment on January 13, 2006 (the Methodology Amendments). The Methodology Amendments were intended to be implemented in two phases, with Phase I amendments became effective as of September 17, 2007 granting, among other things, margin eligibility to a larger group of securities listed on foreign exchanges outside of Canada and the United States. The remainder of the Methodology Amendments (the Phase II Amendments) were to be implemented at a later date but, as described in Notice 17-0144, have now been withdrawn.

In addition, IIROC has also published IIROC Notice 17-0145 Withdrawal of Proposed Amendments to Simply the Equity Margin Project, withdrawing IIROC Notice 09-0125 Proposed Amendments to Simply the Equity Margin Project regarding proposed amendments to Dealer Rule 100.2(f) which were originally published for comment on May 1, 2009 (the Simplification Amendments).

Reasons for Withdrawal

IIROC decided to withdraw the Methodology Amendments and the Simplification Amendments (together, the Proposed Amendments) based on concern expressed by commentators regarding potential industry impact, the passage of time, changes to the investment industry and other IIROC regulatory priorities. IIROC believes that there is no material impact on Dealer Members as a result of the withdrawal of the Simplification Amendments and, given the relative immaterial systems development costs incurred by Dealer Members in respect of the Phase II Amendments, there is no material impact on Dealer Members as a result of the withdrawal thereof.

Background

As originally published, the Methodology Amendments were designed to:

  • Replace the existing methodology for determining a listed equity security’s margin rate which is based on market price per share with a methodology for determining a customized margin rate for each listed equity security that more accurately reflects the listed equity security’s market risk (the Equity Margin Project’s new margin methodology).
  • Accommodate the elimination of both the market price per share methodology and the list of securities eligible for reduced margin.
  • Make the margin requirements for convertible debentures and convertible preferred shares more consistent with those for related debt and equity securities of the same issuer.

The Simplification Amendments were aimed at simplifying the process for IIROC Staff and Member Dealers regarding the implementation and ongoing support of the Equity Margin Project’s new margin methodology with amendments that would reduce the processing complexity such as, the removal of certain margin rate categories, allowing the market price per share based margin rate to be used in certain specified cases, harmonizing margin rate categories and correcting rule references.

As a result of Notice 17-0144 and Notice 17-0145, IIROC will no longer proceed with the Phase II Amendments or the Simplification Amendments.

Going Forward

Although IIROC has signaled that it no longer has any immediate plans to implement the Proposed Amendments, the Equity Margin Project continues to exist in theory and has the potential to be revisited at some time in the future either in its current form, or in some other form based on technological advances and evolving policy issues which could indicate another avenue for methodologies for margining equity securities. 

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