Methodology Change | Solactive Emerging Markets Bond Index Series | Effective Date 21/07/2021

Today, on the 15/07/2021, Solactive announces the following changes to the methodology of the following Indices (the ‘Affected Indices’):

Rationale for Methodology Change

Solactive has determined that a methodology change is warranted.  The Affected Indices are a set of benchmarks which measure the performance of emerging market government bonds issues in local and hard currency (EUR / USD).  At the time the Affected Indices were launched in 2019, they were designed to provide a broad coverage of the investible universe of emerging markets bonds.  Given that the pace of change in emerging markets is high, Solactive has performed a review of the methodology and implemented a number of improvements to the Affected Indices, adding clarifications to the Guidelines and providing more consistency with the Bond Market Classification Framework.

Changes to the Index Guideline

The following Methodology changes will be implemented in the following points of the Index Guideline:

1. Removal of the minimum country weight capping of 1% for the Solactive EM USD Govt & Govt Related Bond Select CAD NTR Index (SOLEHUC) and Solactive EM USD Govt & Govt Related Bond Select CAD Hedged NTR Index (SOLEHUS).  Removal of the minimum country weight capping of 2% for the Solactive EM Local Currency Government Bond Select NTR Index (SOLEBLS). 

The application of the minimum country weight cap no longer allows for an effective replication of the Indices:

• A number of sovereigns have been undergoing restructuring or are in default and bond prices have been falling rapidly and demonstrating high volatility
• The minimum cap ensures that at rebalance, successive additions of these bonds are being made to bring the country weights up to the minimum cap
• When the bonds rally, the bonds are then deleted from the index
• These bonds are traded as distressed issues and very expensive to trade.

Removal of the minimum country weight cap will therefore enable a more cost-efficient replication of the Indices.

• Removal of the review of eligible emerging markets once a year for the June selection in May, and replacement with the annual Bond Market Classification Framework review.  This will be performed in September each year and applicable to the rebalance effective from May the following year.
• Removal of the selection rules that the country must be able to settle on Euroclear, Clearstream or DTCC as these are integral criteria of the annual Bond Market Classification Framework review and therefore superfluous for monthly selection criteria.
• Addition of China as an eligible country to the Solactive EM Local Currency Government Bond Select NTR Index (SOLEBLS) with a minimum CNY 5 billion bond amount outstanding.  This reflects the government’s ongoing market reforms to make its market accessible to global investors, and provides better alignment to the Bond Market Classification Framework.
• Clarification that Chinese government bonds are not considered for inclusion in the Solactive LCY EM Government TR Index (SOLBLB).  This is an ‘uncapped’ index and inclusion of Chinese government bonds would cause significant concentration of Chinese LCY bonds in this existing index.
• Creation of a new index version – the Solactive LCY EM (incl China) Government TR Index.  This is identical in all respects to the Solactive LCY EM Government TR Index (SOLBLB), but includes Chinese government local currency bonds.  This extends the index range to offer comprehensive coverage – local currency EM versions both excluding and including China issuers, and a capped (Select) version also including China issuers.
• Update of the table of countries and respective minimum bond sizes to include all markets having been added to the Bond Market Classification Framework since the launch of the index and considered for inclusion in the local currency index versions.
• Change of the index calculation from Direct Reinvestment approach to the Periodic Reinvestment approach for the following Indices:

• Solactive EM USD Govt & Govt Related Bond Select CAD NTR Index (.SOLEHUC)
• Solactive EM USD Govt & Govt Related Bond Select CAD Hedged NTR Index (.SOLEHUS)
• Solactive EM Local Currency Government Bond Select NTR Index (.SOLEBLS)

For Emerging Markets, which are typically more expensive to trade, it become impractical to fully replicate the direct investment.  This change will also bring the above mentioned Indices in line with the other indices in this series, which all follow the Periodic Reinvestment approach.

The Methodology changes described above are proposed in the following points of the Index Guideline (ordered in accordance with the numbering of the affected sections):

Section 1.1        Scope of the Index

From (old version):

[…]

• The Index Series is rebalanced monthly, and the list of eligible emerging of emerging markets is reviewed annually.

[…]

To (new version):

[…]

• The Index Series is rebalanced monthly, and the list of eligible emerging of emerging markets is reviewed annually in line with the Bond Market Classification Framework.

[…]

Section 1.2       Identifiers and Publication

The following new version of index will be added to the existing table:

Section 2.1       Selection of the Index Components

From (old version):

Hard Currency (EUR & USD) Series

[…]

• Global Depositary Notes (‘GDN’) are not eligible to be part of the selection.
• The country must be able to settle on Euroclear, Clearstream or DTCC.
• Instruments must be issued prior to Rebalance Day.

[…]

To (new version):

[…]

• Global Depositary Notes (‘GDN’) are not eligible to be part of the selection.
• Instruments must be issued prior to Rebalance Day.

[…]

Local Currency Series

From (old version):

[…]

• Fixed Coupon Bonds or Zero Coupon Bonds are eligible.
• The country must be able to settle on Euroclear or Clearstream.
• Instruments must be issued prior to Rebalance Day.

[…]

To (new version):

[…]

• Fixed Coupon Bonds or Zero-Coupon Bonds are eligible.
• Instruments must be issued prior to Rebalance Day.

[…]

The existing table of minimum outstanding amount table will be replaced by the following:

New version:

Sub-indices table

The existing table of sub-indices will be replaced by the following:

New version:

Section 2.1.1     Eligible Countries

From (old version):

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.

To (new version):

The list of eligible emerging markets is reviewed once a year under the  Bond Market  Classification Framework. This review is performed in September each year and the results are applicable to the Selection made in April and effective from the first business day in May the following year.

Section 4.1       Index Formula

To (new version):

[…]

The Solactive Emerging Markets Index Series are Total Return (TR) indices or Net Total Return (NTR) indices and follow the Periodic Reinvestment approach. A total return index seeks to replicate the overall return from holding an index portfolio, thus considering both coupon payments and Corporate Action proceeds in addition to the price changes adjusted for any accrued interest. Cash payments will be accumulated and reinvested with each rebalancing. A net total return index seeks to replicate the overall after-tax return from holding an index portfolio, thus considering both coupon payments and Corporate Action proceeds in addition to the price changes adjusted for any accrued interest and for taxes. The tax rates to be used are the rates corresponding to the country of issuance of the securities.

[…]

Section 6.        Definitions

“Fixing Time”

New version includes the following additional row:

“Live Date and Start Date”

New version includes the following additional row:

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.