Methodology change | Solactive Emerging Markets Bond Index Series | Effective date 20th May 2020

On the 14^th May 2020, Solactive announces the following changes to the methodology of the following Indices (the ‘Affected Indices’):

Rationale for methodology change

The Affected Indices are rules-based indices engineered to measure the performance of emerging market government bonds issued in local and hard currency. The Affected Indices are part of Solactive Emerging Markets Bond Index Series designed to provide a broad coverage of the investible universe of emerging market bonds therefore a reference to Solactive Bond Market Classification Framework in the Index Guideline would be more appropriate. Moreover, country level checks would be performed to substitute  the low reliability of the publicly available data on an issue/issuer level regarding ratings and clearing.

Changes to the Index Guideline

1) The words “The issuer” and “The bond” will be substituted by the words “The country” in the following sentences of the section 2.1. “Selection of the Index Components” of the Guideline:

Old version:

2.1. SELECTION OF THE INDEX COMPONENTS

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:

Hard Currency (EUR & USD) Series

 [..]

• The bond must be able to settle on Euroclear, Clearstream or DTCC.

 […]

Local Currency Series

[…]

• The issuer must have a local currency rating by either S&P or Moody’s.

[…]

• The bond must be able to settle on Euroclear or Clearstream.

[…]

New version:

2.1. SELECTION OF THE INDEX COMPONENTS

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:

Hard Currency (EUR & USD) Series

 [..]

• The country must be able to settle on Euroclear, Clearstream or DTCC.

 […]

Local Currency Series

[…]

• The country must have a local currency rating by either S&P or Moody’s.

[…]

• The country must be able to settle on Euroclear or Clearstream.

[…]

2) The following phrase will be added to the section 2.1. “Selection of Index Components” of the guideline: “This list may evolve due to the addition or deletion of countries in the Solactive Bond Market Country Classification Framework https://www.solactive.com/documents/bond-market-classification-framework/ The minimum amount outstanding may change due to technical currency conversion (i.e. currency reform) and will be converted with the corresponding exchange rate.”

Old version:

2.1. SELECTION OF THE INDEX COMPONENTS

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:

Hard Currency (EUR & USD) Series

 [..]

Local Currency Series

[…]

• The bonds must meet the minimum amount outstanding as shown in the following table for eligible countries as of September 2018.

New version:

2.1. SELECTION OF THE INDEX COMPONENTS

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:

Hard Currency (EUR & USD) Series

 [..]

Local Currency Series

[…]

• The bonds must meet the minimum amount outstanding as shown in the following table for eligible countries as of September 2018. This list may evolve due to the addition or deletion of countries in the Solactive Bond Market Country Classification Framework https://www.solactive.com/documents/bond-market-classification-framework/ The minimum amount outstanding may change due to technical currency conversion (i.e. currency reform) and will be converted with the corresponding exchange rate.

3) The section 2.1.1. “Eligible countries” of the guideline will be reformatted to link it to the new Bond Market Classification Framework, as follows:

Old version:

2.1.1 Eligible Countries

The list of eligible emerging markets is reviewed once a year for the June selection in May and takes into account the following factors:

• The classification under the Solactive Country Classification Framework. Countries which are classified as Developed will not normally be classified as an Emerging Market.
• Whether the country is a member of the Eurozone or the G10 group of currencies (USD, EUR, JPY, GBP, CAD, AUD, SEK, NOK, DKK, NZD).
• The existence of credit ratings by internationally recognized credit rating agencies.
• The trading in the bonds of a country or a specific issuer within that country must not be subject to UN, US or EU sanctions.
• The bond market size and liquidity. Accessibility for foreign investors, including the presence of capital controls, currency convertibility, availability and transparency of market data, registration restrictions, limits on foreign ownership and taxation policies.

New version:

2.1.1 Eligible Countries

The list of eligible emerging markets is reviewed once a year for the June selection in May and takes into account the following factors:

• The classification under the Solactive Bond Market Country Classification Framework. Countries which are classified as Developed will not normally be classified as an Emerging Market.

• The trading in the bonds of a country or a specific issuer within that country must not be subject to UN, US or EU sanctions.
• Accessibility for foreign investors, including the presence of capital controls, currency convertibility, availability and transparency of market data, registration restrictions, limits on foreign ownership and taxation policies.

4) The section 1.1. “Scope of the Index” of the guideline will be reformatted to link it to the new Bond Market Classification Framework as follows:

Old version:

1.1. SCOPE OF THE INDEX

 […]

The classification of a country as Emerging is dependent on the Solactive Country Classification Framework, supplemented in the local currency series by an assessment of the tradability of each market for foreign investors.

[…]

New version:

1.1. SCOPE OF THE INDEX

[…]

The classification of a country as Emerging is dependent on the Solactive Bond Market Country Classification Framework, supplemented in the local currency series by an assessment of the tradability of each market for foreign investors

[…]

5) The definition of emerging countries in the section 2.3. “Definitions in respect of section 2” of the guideline will be modified to link it to the new Bond Market Country Classification Framework:

Old version:

2.3. DEFINITIONS IN RESPECT OF SECTION 2

[…]

“Emerging Countries” refers to the countries in the list of emerging countries as determined by Solactive in accordance with the Solactive Country Classification Framework. The framework and the country list is available at https://www.solactive.com/documents/solactive-country-cassification/

[…]

New version:

2.3. DEFINITIONS IN RESPECT OF SECTION 2

[…]

“Emerging Countries” refers to the countries in the list of emerging countries as determined by Solactive in accordance with the Solactive Bond Market Country Classification Framework. The framework and the country list are available at https://www.solactive.com/documents/bond-market-classification-framework/

[…]

6) The phrase “or local Central Bank” will be added to the section 2.1. “Selection of Index Components” of the guideline:

Old version:

2.1. SELECTION OF THE INDEX COMPONENTS

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:

Hard Currency (EUR & USD) Series

 [..]

Local Currency Series

• Bonds must be issued by a sovereign in its domestic currency and the bond coupon and principal must be denominated in the same currency.

[..]

New version:

2.1. SELECTION OF THE INDEX COMPONENTS

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:

Hard Currency (EUR & USD) Series

 [..]

Local Currency Series

• Bonds must be issued by a sovereign or local Central Bank in its domestic currency and the bond coupon and principal must be denominated in the same currency.

[..]

7) The phrase “or local Central Banks” will be added to the section 1.1. “Scope of the index” of the guideline:

Old version:

1.1. SCOPE OF THE INDEX

[…]

The series is sub-divided by currency type: local and hard currency. The hard currency series covers emerging market government and government-related bonds denominated in hard currencies such as United States Dollars (USD) and Euros (EUR). The local currency series covers bonds issued by central governments in their own domestic currency that is not a hard currency.

[…]

New version:

1.1. SCOPE OF THE INDEX

[…]

The series is sub-divided by currency type: local and hard currency. The hard currency series covers emerging market government and government-related bonds denominated in hard currencies such as United States Dollars (USD) and Euros (EUR). The local currency series covers bonds issued by central governments or local Central Banks in their own domestic currency that is not a hard currency.

[…]

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. The amended version of the index guideline will be available on the effective date.