Markit iboxx EUR Liquid Corporates 100 Indices Guide

Markit iBoxx EUR Liquid Corporates 100 Indices Guide

April 2010

Markit iBoxx EUR Liquid Corporates 100 Indices Guide

Contents 1

Markit iBoxx EUR Liquid Corporates 100 Indices Rules.................................................................................. 3 1.1 Structure of the Markit iBoxx EUR Liquid Corporates 100 Indices ............................................................... 3 1.2 Publication of the Markit iBoxx EUR Liquid Corporates 100 Index ............................................................... 3 1.3 Bond Selection Criteria.................................................................................................................................. 3 1.3.1 Bond Type................................................................................................................................................. 4 1.3.2 Issuer Type ............................................................................................................................................... 4 1.3.3 Time to Maturity ........................................................................................................................................ 4 1.3.4 Age ............................................................................................................................................................ 4 1.3.5 Amount Outstanding ................................................................................................................................. 4 1.3.6 Maximum Permissible Minimum Lot Size and Minimum Increment ......................................................... 4 1.3.7 Minimum run ............................................................................................................................................. 4 1.4 Index Size, Bond Ordering and Bond Selection............................................................................................ 4 1.4.1 Index Size ................................................................................................................................................. 4 1.4.2 Ranking Criteria ........................................................................................................................................ 4 1.4.3 Limit on Number of Bonds from Any Issuer in an index............................................................................ 5 2 Markit iBoxx EUR Liquid Corporates 100 Indices Rebalancing and Calculations........................................ 6 2.1 Index Re-balancing ....................................................................................................................................... 6 2.1.1 Re-balancing Procedure ........................................................................................................................... 6 2.1.2 Index Adjustments between Scheduled Re-balancings............................................................................ 6 2.1.3 Monthly Bond Substitution between Scheduled Re-balancings ............................................................... 6 2.1.3.1 Substitution List .................................................................................................................................... 6 2.1.3.2 Bond Substitution.................................................................................................................................. 6 2.1.4 Monthly Cash Re-investment between Scheduled Re-balancing Dates .................................................. 7 2.1.5 Timeline for the Semi-Annual Re-balancing Procedure............................................................................ 7 2.2 Index Calculation ........................................................................................................................................... 7 3 Further Information.............................................................................................................................................. 8

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Markit iBoxx EUR Liquid Corporates 100 Indices Guide

1 Markit iBoxx EUR Liquid Corporates 100 Indices Rules 1

The Markit iBoxx EUR Liquid Corporates 100 indices are published by International Index Company Limited (IIC) and consist of a subset of the bonds in the Markit iBoxx EUR index family of benchmark indices. The liquid indices have been designed to provide a suitable basis for OTC, exchange-traded derivatives and Exchange Traded Funds (ETFs). Benchmark indices generally consist of a large number of bonds. Portfolio managers tracking an index from the broad benchmark Markit iBoxx EUR index family will therefore incur substantial costs in attempting to replicate or hedge the individual bonds in the portfolio. Furthermore, bonds with special features or smaller amounts outstanding usually suffer from illiquid trading; resulting in relatively large bid-offer spreads. The Markit iBoxx EUR Liquid indices are intended to address these deficiencies by limiting the number of bonds per index and excluding special bond types, thus reducing tracking and hedging costs.

1.1 Structure of the Markit iBoxx EUR Liquid Corporates 100 Indices Three indices are published as part of the Markit iBoxx EUR Liquid Corporates 100 indices. These consist of an overall index of up to 100 corporate bonds and two sub-indices, one containing all financial bonds included in the overall index, and one containing all the non-financial bonds:
Markit iBoxx EUR Liquid Corporates 100 index
Markit iBoxx EUR Liquid Corporates 100 Financials Subindex
Markit iBoxx EUR Liquid Corporates 100 Non-financials Subindex

1.2 Publication of the Markit iBoxx EUR Liquid Corporates 100 Index The Markit iBoxx EUR Liquid Corporates 100 index is computed and disseminated once per minute between 9.00 a.m. and 5.15 p.m. CET. End-of-day closing values are calculated and disseminated for all indices after 5.15 p.m. CET. Bond and index analytical values are calculated each trading day using the daily closing prices. Closing index values and key statistics are published at the end of each business day by IIC on www.indexco.com, which also has information and news about the Markit iBoxx indices. In addition, midday fixing levels for bond prices and indices are published. Real time indices and bond prices are published by Deutsche Börse. Index calculation is based on the Xetra trading calendar. In addition, the indices are calculated with the previous trading day’s closes on the last calendar day of each month if that day is not a trading day. IIC publishes an index calculation calendar on www.indexco.com. The base date of the indices is 31 October 2005. Index data and bond price information is also available from the main information vendors.

1.3 Bond Selection Criteria The bond selection criteria follow the criteria for the Markit iBoxx EUR indices except as stated below. The following selection criteria have been amended to reduce the number of bonds for the Markit iBoxx EUR Liquid Corporates 100 index:







Bond type Issuer type Time to maturity Age Amount outstanding Maximum permissible minimum lot size/increment

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Markit iBoxx EUR Liquid Corporates 100 Indices Guide


Minimum run 1.3.1 Bond Type The Markit iBoxx EUR Liquid Corporates 100 index includes only Euro and legacy currency denominated bullet fixed coupon bonds (plain vanilla bonds). Sinking funds and amortizing bonds are excluded from the index. Rating-driven bonds and step-up coupon bonds are also eligible for the indices. Zero coupon bonds, bonds with odd last coupons and all callable debt including callable dated and undated hybrid bank/insurance debt are not eligible for the index. 1.3.2 Issuer Type Only issuers classified as corporates are eligible for the index. The issuer domicile is not relevant. 1.3.3 Time to Maturity To qualify for the Markit iBoxx EUR Liquid Corporates 100 index all eligible bonds must have a remaining time to maturity of at least 2 years measured from the respective re-balancing date to the maturity date. The bonds must have a minimum time to maturity of 3 years when they enter the index. The time to maturity for substitutes is measured from the substitution date to the maturity date of the bond. Bonds in the liquid indices with a remaining time to maturity of less than 2 years will be excluded from the indices at the next re-balancing. 1.3.4 Age There is no maximum age restriction for bonds. For exchanges of bonds from the same issuer, the age of the new bond to be includes needs to be at least 2 years less than the age of the bond already in the index. The age of a bond is measured from the first settlement date of the bond to the rebalancing date. 1.3.5 Amount Outstanding All bonds must have a specific minimum amount outstanding of EUR 750 million in order to be eligible for the indices. The amount outstanding of each bond is used to calculate its index weight. The indices are capitalization-weighted. 1.3.6 Maximum Permissible Minimum Lot Size and Minimum Increment The maximum permissible lot size is EUR 50,000. The minimum increment must be no larger than EUR 1,000. 1.3.7 Minimum run Each bond has a minimum run of one year. The minimum run rule supersedes only the age and ranking criteria.

1.4 Index Size, Bond Ordering and Bond Selection 1.4.1 Index Size To facilitate the replication of the indices, the maximum number of bonds in overall Markit iBoxx EUR Liquid Corporates 100 index is limited to 100. In the event that the number of eligible bonds is less than or equal to the maximum number, all available bonds will be included in the index. 1.4.2 Ranking Criteria Should more than the maximum number of bonds be available for an index, ordering criteria are applied in order to rank the eligible bonds. The following five criteria are applied to establish a bond hierarchy: 1. 2. 3. 4. 5.

Higher amount outstanding More recent first settlement date Longer time to maturity Higher rating Lower coupon

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Markit iBoxx EUR Liquid Corporates 100 Indices Guide

These criteria are applied to each pair of bonds in the order stated above until a difference can be established (i.e. if two bonds have identical amount outstanding and first settlement dates, but one has a longer time to maturity, then criteria 1 to 3 are applied, but 4 and 5 are not). With the help of the ranking criteria, a bond hierarchy can be defined, with the bond that has the highest amount outstanding at the top of the hierarchy. If there is still a tie after these criteria are applied, the bond with higher ISIN is ranked first In alpha-numerical order. 1.4.3 Limit on Number of Bonds from Any Issuer in an index The number of bonds from an issuer as identified by its ticker that may enter an index is limited to 2 bonds.

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Markit iBoxx EUR Liquid Corporates 100 Indices Guide

2 Markit iBoxx EUR Liquid Corporates 100 Indices Rebalancing and Calculations The calculations follow the calculations of the Markit iBoxx EUR indices, except as specified below.

2.1 Index Re-balancing The indices are re-balanced semi-annually at the end of October and April. The indices are re-balanced on the last calendar day of the month after the last index calculation. Re-balancing also takes place if the re-balancing falls on a non-trading day. 2.1.1 Re-balancing Procedure In a first step the selection criteria are applied to reduce the universe of EUR denominated bonds. Once the eligible bond universe has been defined, the ranking criteria are employed to determine a distinct hierarchy of bonds in the universe. Bonds enter the respective index according to their rank in the hierarchy (with the highest rank entering first) until the maximum number of bonds per index has been reached 2.1.2 Index Adjustments between Scheduled Re-balancings Coupon changes: While most index adjustments are made through the semi-annually re-balancing procedure, coupon changes are taken into account in the calculation of the indices from the exact date on which the coupon was altered. Bonds no longer in benchmark index: Bonds may drop out of a Markit iBoxx EUR Liquid Corporates 100 indices at the end of a month because they have left the benchmark indices. In this case they will be replaced by suitable substitutes. 2.1.3 Monthly Bond Substitution between Scheduled Re-balancings Bonds can exit the Markit iBoxx EUR Overall benchmark index due to reasons such as reduction in the amount outstanding below threshold level due to repurchases, etc. Bonds that leave the Markit iBoxx EUR Overall benchmark index also exit the Markit iBoxx EUR Liquid Corporates 100 indices at month-end. If this occurs between two re-balancing dates, other suitable bonds will replace those that have left. The procedures in chapters 2.1.3.1 and 2.1.3.2 are applied only if a bond has left a liquid corporates 100 index between re-balancing dates. If a bond substitution occurs, a note is published on www.indexco.com to inform the market. 2.1.3.1 Substitution List

At the end of the month, the eligible bond universe for the coming month is compiled and published in accordance with the selection and ranking criteria. These are applied to establish a hierarchy within the eligible bond universe. All bonds already in the indices are eliminated from the hierarchy, resulting in a substitution list for each index. A separate list that contains bonds dropped and the selected substitutes with their fictitious amounts outstanding is published.

2.1.3.2 Bond Substitution If the bonds are no longer in the Markit iBoxx EUR Overall benchmark index, they will also leave the Markit iBoxx EUR Liquid Corporates 100 indices. For each bond that has left, another bond will become the substitute and enter

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Markit iBoxx EUR Liquid Corporates 100 Indices Guide

the index where available. The proceeds from the sale of a dropped bond are invested in its substitute. The substitute will have a fictitious amount outstanding:

(1)

Osubstitute =

(P

)

b dropped + Adropped ⋅ Odropped a Psubstitue + Asubstitute

where: Adropped

= Accrued interest of dropped bond

Asubstitue= Odropped= Osubstitute= Pasubstitute= Pbdropped=

Accrued interest of substitute bond Amount outstanding of dropped bond Fictitious amount outstanding of substitute bond Ask price of substitute bond Bid price of dropped bond

The substitute will have a notional amount outstanding based on formula (1).

The substitute bond enters the indices at the ask price. In the event that no substitute is available, the proceeds from the sale of the dropped bond are invested as cash. 2.1.4 Monthly Cash Re-investment between Scheduled Re-balancing Dates Cash received from coupon payments and non-substituted bonds are invested at the end of each month in the money market until the end of the following month. Cash from earlier months will also be re-invested at the end of each month. The interest rate applied is one-month LIBID. Hence, YLIBID is defined as the relevant one month EURIBOR less 1/8 (12.5 basis points). At the next rebalancing cash is invested in the index. 2.1.5 Timeline for the Semi-Annual Re-balancing Procedure The semi-annual re-balancing procedure for the Markit iBoxx EUR Liquid Corporates 100 indices is analogous to the respective monthly re-balancing of the Markit iBoxx EUR Benchmark indices.

2.2 Index Calculation The index calculation follows the Markit iBoxx EUR index guide except that after each semi-annual rebalancing the rebalancing costs are incorporated in the index by the following formula:

TRtOpen = TRtClose − 0.002 * TRt

Close

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Markit iBoxx EUR Liquid Corporates 100 Indices Guide

3 Further Information
International Index Company Goetheplatz 5 60313 Frankfurt am Main Germany Phone: +49 69 299 868 100 Fax: +49 69 299 868 149 E-mail: [email protected] Internet: indices.markit.com
Licences and Data Markit iBoxx is a registered trademark of International Index Company Limited (IIC). IIC owns all Markit iBoxx data, database rights, indices and the intellectual property rights therein. A licence is required from IIC to create and/or distribute any product that uses, is based upon or refers to any Markit iBoxx index or Markit iBoxx data.
Ownership IIC is wholly-owned by Markit Group Limited. www.markit.com
Other index products IIC owns, manages, compiles and publishes the Markit iTraxx credit derivative indices and the Markit iBoxxFX Trade Weighted Indices.

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