The S&P/TSX composite index has just 215 members and that number is expected to fall further later this month, but Standard & Poor's does not appear to have any intention to change its inclusion requirements to boost the size of the index. While takeovers helped to lower the number of companies in Canada's benchmark index in recent years, falling market values are the primary culprit these days.

"Everything is relative to the overall size of the market and of course, the overall size has gone down substantially," said Yin Luo, managing director of quantitative research at Macquarie Capital. "A couple of years ago, the commodity boom and all the takeover transactions pushed stock prices to a fairly high level, now it's going in the other direction."

Additions and deletions for the next quarterly rebalancing of the S&P/TSX composite index are expected on or before Friday, March 13 and will become effective after the close on the 20th.

Despite pressure that may come from those who think the index is getting too small or companies who don't want to be deleted, Mr. Luo doesn't expect S&P will make any policy adjustments to its inclusion requirements, nor does he think it should."

Especially the companies at the margin, they may want to put some pressure on the index committee to keep their own stock in the index," he said.

Changes to the index are based on factors such as trading volume, float turnover, number of transactions, price and weighting in the index. The only exception S&P has made in the past few years was the inclusion of Tim Hortons Inc. It is a U.S.-domiciled company but was founded in Hamilton, Ontario and has a major presence in Canada."

The measures for liquidity and capitalization are all relative," said Tony North, director, Standard & Poor's Canadian Index Services. "You could have a situation where within the quarter the composite could go down 50%, but if everybody goes down the same amount, nobody comes out and nobody goes in."

If the index had fixed market cap thresholds, a lot of companies would need to be deleted when stocks are falling -- and vice-versa in a strong market. The rules were changed and the TSE 300 was renamed in May 2002, partially as a way to eliminate illiquid names in the index.

On December 22, 2008, S&P officially removed 22 companies from the composite index. These included names like ACE Aviations Holdings Inc., Denison Mines Corp. and Timminco Ltd. It added just one: Ritchie Bros. Auctioneers Inc. Before income trusts were added to the index in December 2005, bringing the number of members up to nearly 300, that figure fell as low as 208.

Mr. Luo said six companies currently meet the addition criteria, including Osisko Mining Corp. and Franco-Nevada Corp. Meanwhile, 10 are poised for deletion, such as Kingsway Financial Services Inc., Connacher Oil & Gas Ltd. and Harry Winston Diamond Corp.

UBS strategist Garry Cooper told clients that six companies have a higher probability of addition to the index. They include many of the same names as Mr. Luo, but also Minefinders Corp. Ltd. Mr. Cooper also listed 11 companies that are likely to be cut, such as Cascades Inc., Kingsway Financial Services Inc. and Calfrac Well Services Ltd.

Given the magnitude of the recent market turmoil, Mr. Luo suggested that S&P may also consider rebalancing the blue chip TSX 60 index. He noted that utilities and industrials are the two most underweighted sectors relative to the TSX composite.

MDS Inc. may be a candidate for deletion from the TSX 60 as its market cap has fallen well below $1-billion, making it the smallest company in the index. Canadian Utilities Ltd., Emera Inc. and Ritchie Bros. Auctioneers Inc. are potential replacement candidates since they represent the largest companies in those underweight sectors, Mr. Luo added.Financial Postjratner@nationalpost.com