Methodology Change | Solactive Canadian Select Universe Bond Indices | Effective Date 14/04/2021

Today, on the 14/04/2021, Solactive announces the following changes to the methodology of the following Indices (the ‘Affected Indices’):

Background

On 31/03/2021, Solactive published a market consultation on the Solactive Canadian Select Universe Bond Indices (https://www.solactive.com/market-consultation-solactive-canadian-select-universe-bond-index-march-2021/). The consultation period ended on 12/04/2021. Solactive AG received generally positive feedback.  Solactive decided to implement the proposed changes addressed in the market consultation.

Rationale for Methodology Change

The Affected Indices provide exposure to the investment grade Canadian bond market denominated in CAD, and include specific versions for corporate bonds and short-term bonds (less than 5 years time to maturity).  At the time the Affected Indices were launched in 2014, they were done so with a specific sampling and optimisation strategy to provide a representative exposure to the respective market.  Since then, the Canadian bond market has continued to evolve and grow, and the chosen sampling strategy no longer provides a full representation of the broad Canadian market.  At the same time, the sampling strategy can also drive up turnover in specific market conditions, leading to increased replication costs and tracking errors.

Therefore, Solactive deems that a simplification of the index methodology is necessary, removing much  of the sampling and optimisation strategy, and clarifying the application of a number of selection criteria.  

Changes to the Index Guideline

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

 Section 1.4         Prices and Calculation Frequency

The Affected Indices are calculated based upon Last Evaluation Mid Price, instead of Last Evaluated Ask Price of the Index Components.

From (old version):

“The Index is calculated and distributed once every Business Day based on the Last Evaluated Ask Price of the Index Components.“

To (new version):

“The Index is calculated and distributed once every Business Day based on the Last Evaluated Mid Price of the Index Components.”

Section 2.1          Selection of the Index Components

Clarification that the Affected Indices are composed of bonds where the denomination is CAD, and country of issuance is Canada, and country of issuing entity is Canada.  Increase of the Minimum Amount Outstanding for government bonds to CAD 100mio.  Addition of DBRS to the ratings agency list.

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. Denominated in CAD
2. Amount Outstanding of at least 100m CAD for corporate bonds and 50m CAD for government bonds
3. Effective time to maturity of not less than 12 months
4. Only bonds that pay a fixed rate
5. The securities must have a rating of at least BBB- or its equivalent from S&P , or Moody’s.
6. Floating rate notes, convertibles, mortgage backed securities, asset backed securities, inflation-linked securities, flat trading or defaulted securities are specifically excluded from the available universe.

[…]”

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. Denominated in CAD
2. Country of issuance and country of issuing entity are Canada
3. Amount Outstanding of at least 100m CAD for both corporate bonds and government bonds
4. Effective time to maturity of not less than 12 months
5. Only bonds that pay a fixed rate
6. The securities must have a rating of at least BBB- or its equivalent from S&P, Moody’s or DBRS.
7. Floating rate notes, convertibles, mortgage backed securities, asset backed securities, inflation-linked securities, flat trading or defaulted securities are specifically excluded from the available universe.

[…]”

Section 2.1.1        Solactive Canadian Select Corporate Bond Index

Significant simplification of the capping & bucketing of issues, reducing to the top 85% of corporate bonds (by Market Value) to be included in the Affected Indices.

Replacement of existing text in Section 2.1.1 with the following:

“All bonds that meet the criteria in the Solactive Canadian Corporate Selection Pool are selected as index components for the Corporate Universe. In the Corporate Universe, all bonds are weighted according to their respective Market Value in proportion to the aggregated Market Value of all Corporate Universe components.

As a first step the issuer weight for all issuers in the Corporate Universe will be calculated and only the issuers that make up 85% of the Corporate Universe weights are included in the index.  Issuers that are already part of the index composition are included, even if they are no longer part of the issuers that make up 85% of the Corporate Universe weights. For greater certainty, only bonds that do not meet the Index Component Requirements will be removed.  For each issuer included in the index, all bonds that meet the Index Component Requirements will be included in the index composition.”

Section 2.1.2       Solactive Canadian Select Universe Bond Index

Significant simplification of the capping & bucketing of issues, reducing to the top 99% of government bonds (by Market Value) to be included in the Affected Indices.

Replacement of existing text in Section 2.1.2 with the following:

“All bonds that meet the criteria in the Solactive Canadian Aggregate Selection Pool are selected as index components for the Aggregate Universe. The Aggregate Universe is divided into the Corporate Universe (see 2.1.1) and the Government Universe.

In the Government Universe, all bonds are weighted according to their respective Market Value in proportion to the aggregated Market Value of all Government Universe components.

All government issuers that make up 99% of the Government Universe weights are considered. Government issuers that are already part of the index composition are included, even if they are no longer part of the government issuers that make up 99% of the Government Universe weights. For greater certainty, only bonds that do not meet the Index Component Requirements as specified in section 2 will be removed.  For each government issuer included in the index, all bonds that meet the Index Component Requirements will be included in the Index.

Additionally, to the government bonds selected, the Solactive Canadian Select Universe Bond Index consists of all components of the Solactive Canadian Select Corporate Bond Index.”

Section 2.2          Weighting of the Index Components

Specification that the weighting of the Index Components is based upon their respective Market Values and no longer related to issuer’s weighting.

Replacement of existing text in Section 2.2 with the following:

“The Index Components of each Index are weighted according to their respective Market Values in proportion to the aggregated Market Value of all Index Components in the Index.”

The following section will be added to Section 3.1

Clarification that Bonds (Government or Corporate) are only removed from the Affected Indices if they no longer meet the minimum rating criteria (>BBB-), or no longer meet the Index Component Requirements.

New section 3.1:

“Section 3.1.1      Removal of Constituents

Index Constituents that are downgraded and no longer have a rating of at least BBB- will be removed from the index on the Rebalance Day following the downgrade.

Index Constituents will only be removed from the Index if they no longer meet the Index Component Requirements as specified in Section 2. For greater certainty, Index Constituents will not be removed from the index if their respective Issuer is no longer part of the issuers that make up 85% of the Corporate Universe weights or 99% of the Government Universe, as applicable.”

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.