Methodology Change | Solactive Australian Investment Grade Corporate Bond Select TR Index | Effective Date May 16th, 2022

Today (May 9th, 2022) Solactive announces the following changes to the methodology of the Affected Index:

Rationale for Methodology Change

Solactive has determined that in recent rebalances of this index, bonds have been included or excluded due to slight changes in Option-Adjusted Spread (OAS) values. A key facet of this index is that the bonds are selected based on an OAS ranking system. As a result, there has been more turnover within the index, which will lead to more trading costs for clients. Therefore, a minimum holding period and OAS buffer will be added in the selection process of the Index. These two conditions will lead to less turnover and in turn, less unnecessary trading costs for clients.

Changes to the Index Guideline

The following Methodology changes will be implemented in the following points of the Index Guideline (ordered in accordance with the numbering of the affected sections):

2.1. SELECTION OF THE INDEX COMPONENTS

From (old version):

The initial composition of each INDEX, as well as any selection for a rebalance (as specified in Section 3) is determined using the following rules:

1. For each bond, the issuer and the parent company are identified. In case of a Company Group the parent company is deemed to be the issuer of the bond for the purpose of the selection of the Preliminary Pool under this section. The selection pool is separated into two Bands. 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. For each issuer that has 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.
2. 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.

To (new version):

The initial composition of each INDEX, as well as any selection for a rebalance (as specified in Section 3) is determined using the following rules:

1. For each bond, the issuer and the parent company are identified. In case of a Company Group the parent company is deemed to be the issuer of the bond for the purpose of the selection of the Preliminary Pool under this section. The selection pool is separated into two Bands. A Band 1 bond is a bond with a credit rating that is higher than, or equal to, “BBB+”. A Band 2 bond is a bond with a credit rating that is equal to “BBB” or “BBB-“. Credit ratings for a bond are determined based on the average rating of Standard & Poor’s and Moody’s. For each issuer in the Preliminary Pool, bonds are ranked for inclusion based on the following priority rules:
   • Band 1 bonds rank ahead of lower rated bonds
   • Within Band 1, bonds are ranked from highest to lowest, by option-adjusted spread (OAS). A maximum of two bonds from such as issuer will be added to the Preliminary Pool.
   • Within Band 2, bonds are ranked from highest to lowest, by OAS. Only one bond from such an issuer will be added to the Preliminary Pool.
2. A bond must remain in the index for 6 months from the date of inclusion to be eligible for deletion in subsequent rebalances. The caveat to this condition is that if a bond violates any of the conditions outlined in the “Selection Pool” section (i.e. bond rating is downgraded below the rating threshold), the minimum holding period condition will be ignored.
3. There will be an OAS buffer of 5bps applied during the selection process. If, due to a change in OAS ranking, a bond is set to replace a bond of the same issuer that is currently in the index; if the difference between the OAS of each bond is less than 5bps, the bond that is currently in the index will remain.

Defined terms used in this announcement, but not defined herein, have the meaning assigned to them in the respective index guideline of the Affected Indices. Subject to feedback received on this Market Consultation, the changes mentioned above are intended to become effective on May 16th, 2022. The amended version of the index guideline will be available on the effective date.