Methodology Change | Solactive Australian Investment Grade Corporate Bond Select TR Index | 16th August 2018
Today, on 13 August 2018, Solactive announces the following change to the methodology of the Solactive Australian Investment Grade Corporate Bond Select TR Index (DE000SLA5SL1 ):
Currently, the selection is partly done on basis of the issuer, and the weighting is capped on the issuer level. After implementation of the change the relevant part of the selection will be done on the issuer’s company group basis, and the weighting will be capped on the issuer level or on the issuer’s company group basis, as applicable.
The new wording of the relevant passages in the guideline will be as follows:
“2.1 Selection of the Index Components
The index constituents will be selected on the quarterly Selection Day, based on the Selection Pool as defined in 4.1. Additionally, on the quarterly Selection Day, the Index Committee evaluates whether all current Index Components still meet the requirements of the Selection Pool and – if necessary – any Index Components which do not pass this screen are removed from the Selection Pool.
From the Selection Pool, a smaller group of securities (the Preliminary Pool) is assembled, based on the following conditions:
- For each bond the issuer and, if the case may be, the Company Group to which it belongs are identified. In case a Company Group exists, the Company Group is deemed to be the issuer of the bond for the purpose of the selection of the Preliminary Pool under this section 2.1. Taking this into account, for each issuer that has any Band 1 bonds in the Selection Pool, all of the issuer’s bonds are ranked for inclusion in the Preliminary Pool based on the following priority rule: (a) Band 1 bonds rank ahead of lower rated bonds; (b) within Band 1, bonds are ranked, from highest to lowest, by option-adjusted spread; and (c) outside Band 1, bonds are ranked, from highest to lowest, by option-adjusted spread. A maximum of two bonds from such an issuer will be added to the Preliminary Pool.
- For each issuer that has no Band 1 bonds in the Selection Pool, only one of the issuer’s bonds is added to the Preliminary Pool, being the bond with the highest option-adjusted spread.
A Band 1 bond is a bond with a credit rating that is higher than, or equal to, “BBB+”.
Credit ratings for a bond are determined based on the average rating of Standard & Poor’s and Moody’s.
If there are 28 or fewer bonds in the Preliminary Pool, the Preliminary Pool is supplemented by drawing bonds from the Extended Selection Pool. Any such additional bonds are determined based on the same conditions as set out in paragraphs (a) and (b) above.
All bonds in the Preliminary Pool are then ranked by option adjusted spread, from highest to lowest. Securities are added to the Index, in rank order, up to a maximum of 35 securities (the Index Components).
If the option-adjusted spread is unavailable or equal for particular securities, then amount outstanding is used, and the bond with the larger amount outstanding is selected. If the amount outstanding is unavailable or equal for particular securities, bonds are ranked by time to maturity and the bond with the shorter time to maturity is selected.
2.2 Weighting
The following weighting constraints are applied:
Each security is assigned an equal weight, with a maximum allowable weight per Issuer or, if the case may be, per Company Group of 7%. If the weight of an Issuer or, if the case may be, a Company Group would otherwise exceed 7%, the weight of that Issuer or Company Group will be capped at 7% and the excess weight will be distributed proportionally across all the other securities.
The weighting methodology may be amended by the Committee if required due to legal framework.
Extraordinary adjustments are possible as described under 2.4.”
The index guideline will be modified accordingly.
Solactive AG’s Oversight Committee is of the opinion that the suggested methodology changes do not compromise the index’ integrity and comparability. Rather, the changes facilitates a higher diversification in relation to the issuers of the bonds. The changes were deemed non-material by Solactive’s Oversight Committee.
These changes will be effective on 16 August 2018. The new index guideline will be available on this date.