Guide Sterling Benchmark Indices
31 pages
English

Guide Sterling Benchmark Indices

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Description











iBoxx GBP Benchmark Index Family


Index guide
















July 2006
Contents
1. iBoxx GBP Indices............................................................................................................................. 5
1.1. Structure of the iBoxx GBP Benchmark Indices ........................................................................... 5
1.2. Publication of the iBoxx GBP Benchmark Indices ........................................................................ 6
2. iBoxx GBP Index Rules..................................................................................................................... 7
2.1. Criteria for iBoxx GBP Bonds ....................................................................................................... 7
2.1.1. Bond Type...............................................................................................................................7
2.1.2. Bond classification ..................................................................................................................8
2.1.3. Rating......................................................................................................................................9
2.1.4. Time to Maturity ....................................................................................................................10
2.1.5. Amount Outstanding ................................................................... ...

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Contents
 
1. iBoxx GBP Indices............................................................................................................................. 5 1.1. Structure of the iBoxx GBP Benchmark Indices ........................................................................... 5 1.2. Publication of the iBoxx GBP Benchmark Indices ........................................................................ 6 2. iBoxx GBP Index Rules..................................................................................................................... 7 2.1. Criteria for iBoxx GBP Bonds ....................................................................................................... 7 2.1.1. Bond Type...............................................................................................................................7 2.1.2. Bond classification ..................................................................................................................8 2.1.3. Rating......................................................................................................................................9 2.1.4. Time to Maturity ....................................................................................................................10 2.1.5. Amount Outstanding .............................................................................................................10 2.1.6. Monthly Rebalancing of the Indices ......................................................................................10 2.2. Consolidation of Contributed Quotes.......................................................................................... 12 2.3. Index Calculation ........................................................................................................................ 13 2.3.1. Calculating the Indices ..........................................................................................................13 2.3.2. Minimum Number of Bonds...................................................................................................13 2.3.3. Maturity Buckets....................................................................................................................13 2.3.4. Accrued Interest ....................................................................................................................13 2.3.5. Reinvestment of Cash...........................................................................................................13 2.3.6. Settlement Conventions ........................................................................................................14 2.4. Determination of Benchmarks .................................................................................................... 14 3. Index Formulae ................................................................................................................................ 15 3.1. Index Weighting .......................................................................................................................... 15 3.1.1. Calculation of the notional – Adjusted AmountOutstanding.................................................16 3.1.2. Unplanned Repurchases.......................................................................................................16 3.2. Price Index .................................................................................................................................. 17 3.3. Total Return Index ...................................................................................................................... 17 4. Analytics........................................................................................................................................... 18 4.1. Bond Analytics ............................................................................................................................ 18 4.1.1. Yield......................................................................................................................................18 4.1.2. Duration.................................................................................................................................18 4.1.3. Modified Duration ..................................................................................................................19 4.1.4. Convexity...............................................................................................................................19 4.1.5. Average Life ..........................................................................................................................19 4.1.6. Benchmark Spread ...............................................................................................................19 4.1.7. Daily and Month-to-Date Bond Returns ................................................................................20 4.2 Index Analytics.............................................................................................................................20 4.2.1. Gross Price Index..................................................................................................................20 4.2.2. Income Indices ......................................................................................................................20 4.2.3. Average Gross Redemption Yield.........................................................................................21 4.2.4. Average Duration ..................................................................................................................22 4.2.5. Average Modified Duration....................................................................................................22 4.2.6. Average Convexity ................................................................................................................23 4.2.7. Average Coupon ...................................................................................................................24 4.2.8. Average Time to Maturity ......................................................................................................24 4.2.9. Nominal Value .......................................................................................................................24 4.2.10. Market Value .......................................................................................................................24 4.2.11. Base Market Value..............................................................................................................25 4.2.12. Cash Payment.....................................................................................................................25 4.2.13. Index Benchmark Spread....................................................................................................25 4.2.14. Daily and Month-to-Date Index Returns..............................................................................25 
 
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5. Appendix .......................................................................................................................................... 26 5.1. Overview: iBoxx Corporates Sectors .......................................................................................... 26 5.2. Annotations ................................................................................................................................. 27 6. Further information ......................................................................................................................... 31  
 
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ƒ Introduction of new maturity buckets (5+ years) ƒ of iBoxx GBP Sub-Sovereigns-indices Reorganization  Introduction of iBoxx GBP Corporates Insurance-Wrapped indices and ƒ iBoxx GBP Securitized Wrapped / Non-Wrapped indices ƒ
Implementationof Annual Index Review 2004
01.07.2004
ƒ Introduction of additional iBoxx GBP indices ƒ Introduction of gross price and income index analytics ƒ
Implementationof Annual Index Review 2005
01.07.2005
of PIBS) ƒ
ƒUnification of rules for subordinated debt (inclusion of non-financial subordinated debt, eligibility  
01.01.2006Subordinated debtreorganization 
Calculationof iBoxx Benchmark spreads
01.01.2004
Modificationof iBoxx re-balancing procedure
01.12.2003
Expansionof iBoxx GBP key data for cash payment
01.10.2003
Revisionof the calculation method of portfolio analytics
Inclusionof Soft Bullet Bonds
01.08.2003
01.09.2003
01.07.2003
Separate Publicationof iBoxx index ISINs
ƒ Introduction of new maturity buckets (1-5, 5-10, 5-15 years) ƒ of iBoxx GBP Collateralized indices Reorganization ƒ
Implementationof Annual Index Review 2003
Correctionof formula 29
25.04.2003
06.05.2003
23.10.2002
Clarificationof inclusion of new bonds into the index in chapter 2.3.1.
19.08.2002
Renamingto “iBoxx GBP Benchmark Indices”
22.05.2002
22.03.2002Introductionof iBoxx GBP Non-Gilts indices and addition of 10-15 years maturity bucket to iBoxx GBP Gilts indices
Expansionkey data for annualized and semi-annualized portfolio analyticsof iBoxx GBP
Introductionof iBoxx GBP Collateralized sub-indices
 
01.07.2006Implementationof Annual Index Review 2006
from 01.10.2001Reduction forof minimum amount outstanding bonds to qualify for the iBoxx GBP Gilts index from GBP 3.0 billion to GBP 2.0 billion
13.06.2001Introductionof iBoxx GBP Gilts indices
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Changes to the Rules and Additions to the iBoxx GBP Index Family:  
 
 
1. iBoxx GBP Indices The iBoxx GBP index family1is published by International Index Company (IIC) and represents the investment grade fixed-income market for Sterling-denominated bonds. Prices for all bonds used in the index calculation are provided by ten major financial institutions: ABN AMRO, Barclays Capital, BNP Paribas, Deutsche Bank, Dresdner Kleinwort, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Royal Bank of Scotland and UBS Investment Bank. Deutsche Börse calculates and disseminates the indices.
Table 1: iBoxx GBP Benchmark Indices
iBoxx £ Index Family overall and maturity indices (1-3, 3-5, 5-7, 7-10 and 1-5, 5-10, 5-15, 10-15 and 5+, 10+ 15+ years) , iBoxx £ Overall overall and maturity indices iBoxx £ Gilts iBoxx £ Non-Gilts overall and maturity indicesiBoxx £ Non-Gilts Rating Indices each with overall and maturity indices
no sub-indices
iBoxx £ Sovereigns & iBoxx £ Collateralized iBoxx £ Corporates Sub-Sovereigns overall and maturity indices overall and maturity indices overall and maturity indices iBoxx £ Sovereigns & iBoxx £ Collateralized iBoxx £ Corporates Sub-Sovereigns Rating Rating Indices Rating Indices each with overall and maturity ratesiBoxx £ Cor IinBdoixcxes£ SovereignsindicesciseSpondrItoec iBoxx £ Sub-Sovereigns iBoxx £ Securitizedeach with overall and maturity iBoxx £ Supranationalseach with overall indices indices ienadcicheswithoveralland maturityS cexBoi£x£xxBioniF ciansSal-Iubicndseedizitur Sub-Indices each with overall, several with each with overall indices iBoxx £ Agenciesmaturity indicesiBoxx £ Corporates iiBBooxxxx££  RPeugbiliocn sBanksiBoxx£ OthereEaccohnwoithmiocveSraellcatnodr Imnadtuirciteys Collateralizedindices iBoxx £ Other Sub-each with overall and maturity SovereignsindicesiBoxx £ Corporates Market Sector Indices each with overall indices each with overall indices
1.1. Structure of the iBoxx GBP Benchmark Indices
 
The iBoxx GBP benchmark indices comprise an overall and two major index sub-groups for the gilts and non-gilts sectors. The iBoxx GBP Gilts index is made up of Sterling-denominated bonds issued by the British government. All bonds that do not qualify for the iBoxx GBP Gilts index are included in the iBoxx GBP Non-Gilts index. This index group is detailed further into sub-groups for Sovereigns & Sub-Sovereigns, Collateralized and Corporates. Rating indices are published for the non-gilts index and all its sub-groups as shown in Table 1.
The bonds in the Sovereigns & Sub-Sovereigns, Collateralized and Corporates index sub-groups are further classified according to market conventions. The Corporates index includes rating and sector sub-indices2. A further split is made into financial and non-financial sectors (including the economic and market sectors, rating and maturity indices) with senior and subordinated debt indices being calculated for Financials and Non-Financials and for each financial sub-sector. Maturity indices are published for most index sub-groups.
                                                     1a registered trademark of International Index CompanyiBoxx is
2 See Table 5 in the Appendix for an overview of the iBoxx GBP Corporates Sectors.  
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Sub-indices for financial debt according to the debt status are also calculated. The financial sub-indices are shown in Table 2.
Table 2: Financial Sub-Indices
Banks
Senior
Subordinated
Financial Services
Senior Subordinated
iBoxx Financials
InsuranceInWsruarpapnecde 
Senior Subordinated
Senior
1.2. Publication of the iBoxx GBP Benchmark Indices
Subordinated
Lower Tier 2
Upper Tier 2
Tier 1 Other Sub.  
 
All top-level indices (iBoxx GBP Overall, iBoxx GBP Gilts, iBoxx GBP Non-Gilts, iBoxx GBP Sovereigns & Sub-Sovereigns, iBoxx GBP Collateralized, iBoxx GBP Corporates), and the iBoxx GBP Financials and iBoxx GBP Non-Financials sector indices are computed and disseminated once per minute between 8:00 a.m. and 4:15 p.m. UK time, as are their respective maturity indices. For all other indices, end-of-day closing values are calculated and distributed once daily after 4:15 p.m. UK time.
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 addition, In, which also has information and news about the iBoxx indices. midday fixing levels for bond prices and indices are published. Real time indices and bond prices are published by Deutsche Börse.
The indices are calculated with live prices on each trading day of the London Stock Exchange, except 24 December. 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 onwwwi.dnxeocc.om. The base date of the indices is 31 December 1997. Index data and bond price information is also available from the main information vendors.
 
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2. iBoxx GBP Index Rules
2.1. Criteria for iBoxx GBP Bonds
The selection criteria for the inclusion of bonds in the iBoxx GBP index are:
 Bond type  Rating  to maturity Time  outstanding Amount
2.1.1. Bond Type
General inclusion criteria:Only fixed rate bonds whose cash flow can be determined in advance are eligible for the indices. The indices are comprised solely of bonds. T-Bills and other money market instruments are not eligible. The iBoxx GBP indices include only Sterling-denominated bonds. The issuer’s domicile is not relevant.
In particular, bonds with the following characteristics are included:
 Fixed coupon bonds (“plain vanilla bonds”)  coupon bonds Zero and sinking funds with a fixed sinking schedule bonds  Amortizing
   
 
 
Step-ups and step-up callable bonds
Callable/putable and extendable bonds with European options Event-driven bonds, such as rating- or tax-driven bonds, with a maximum of one coupon change per period
Dated and undated callable subordinated corporate bonds, including fixed-to-floater bonds that change to a floating rate note at or after the first call date. Undated bonds must be callable. In the index calculation, these bonds are always assumed to redeem at the first call date
Soft Bullet Bonds for the iBoxx GBP Collateralized. These are bonds with an initial fixed-coupon period and a variable or step-up coupon period thereafter that are structured so that they are expected to redeem at the end of the initial period. In the index calculation, soft bullets are always assumed to redeem at the end of the initial period
The following bond types are specifically excluded from the indices
    
Other bonds with American options and undated bonds Floating rate notes and other fixed-to-floater bonds CDOs (Collateralized Debt Obligations) and bonds collateralized by CDOs Retail bonds. Retail bonds as identified by the iBoxx Technical Committee are excluded from the indices. The list of retail bonds is published on the website www.indexco.com
 
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2.1.2. Bond classification
Each bond is classified into one of the four categories: Sovereigns, Sub-Sovereigns, Collateralized and Corporates as well as a number of category-specific subsectors.
 
 Gilts (Sovereigns ) government denominated in central– are bonds issued by the UK Sterling.
 
 
 
 
 
 
Sub-sovereignslocal governments (e.g. Isle of Man) and bonds– are bonds issued by guaranteed or issued by entities guaranteed by the governments such as government agencies (e.g. Fannie Mae, KfW), public banks (e.g. German Landesbank debt issued before 31 July 2005) or supranational entities (e.g. EIB, World Bank). Bonds issued by central governments in foreign currencies are included as Other Sovereigns under Sub-sovereigns.
 
Collateralized bonds- are bonds secured against specific assets or pools of assets. Bonds with simple credit enhancements such as a first mortgage are included in the corporate indices as are bonds whose only security is a financial insurance guarantee.
Covered bonds: A covered bond is a bond that fulfils the criteria specified in UCITS 22.4 or similar directives, e.g. CAD III. In addition, other bonds with a structure affording an equivalent risk and credit profile, and considered by the market as covered bonds, will be included in the iBoxx covered bond indices. The criteria taken into account by the iBoxx Technical Committee in evaluating the status of a bond will be structure, trading patterns, issuance process, liquidity and spread-levels. Currently, the following bond types are eligible for the iBoxx GBP Covered indices:
        
Austrian Pfandbriefe French Obligations Foncières German Jumbo Pfandbriefe Irish Asset Covered Securities Luxembourg Lettres de Gage Spanish Cedulas Hipotecarias and Cedulas Territoreales UK covered bonds
Securitised bonds: Are bonds secured against specific assets or receivables (ABS), mortgages (MBS) or cash flows from a whole business segment (Whole Business Securitizations) in each case via a special purpose vehicle.
Corporate bonds– Bonds issued by public or private corporations. The bonds are further classified into Financial and Non-Financial bonds and into the sectors. The category insurance-wrapped is added under Financials for corporate bonds whose timely coupon and/or principal payments are guaranteed by a special monoline insurer such as AMBAC or MBIA.
 
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Debt is classified into senior and subordinated debt. Hybrid bank capital is further detailed into the respective tiers of subordination:
 I Tier  Tier 2 Upper  Lower Tier 2  Other. This category includes not only all remaining subordinated bank debt but also all other subordinated debt
2.1.3. Rating
All bonds in the iBoxx GBP index family must be rated investment grade by at least one of the following rating agencies: Standard & Poor’s, Moody’s or Fitch. The minimum rating to qualify a bond as investment grade is BBB- from Fitch or S&P and Baa3 from Moody’s. Issue and issuer ratings are used to determine whether a bond is rated by an agency.
Gilts do not require a rating.
 
Use of issuer ratings:Issuer ratings are only used for bonds that are not collateralised or guaranteed by an entity that is different from the issuer. The exception is financial subordinated debt, which is often issued through an SPV that holds the original preference shares of the financial organisation. Therefore, the issuer ratings are not used for bonds in the collateralized indices or for bonds with a government or company guarantee (apart from hybrid capital). Issuer ratings are not used for non-financial subordinated debt.
For German Pfandbriefe, the public or mortgage Pfandbrief rating will be used in the absence of issue ratings.
Issuer ratings are used for every agency that does not provide an issue rating for a particular bond.
Derivation of implied issue ratings:Issuer ratings are adjusted to account for the debt status, e.g. subordinated debt may carry an implied issue rating that is lower than the issuer rating. In particular, the issuer rating for hybrid bank debt is adjusted according to the tier of subordination. Table 3 shows how issuer ratings are changed to derive an implied issue rating. A change of one notch is equivalent to a change from AAA to AA+, AA+ to AA etc. for Fitch and S&P ratings. The equivalent procedure applies to Moody’s ratings. 
Table 3: Implied Issue ratings assignment Debt type Agency FITCH Moody‘s S&P Cguolalraatnetrealeidz edde/btIssuer ratings are not used in the rating process, bond considered unrated 1. Senior secured debt rating used - Senior secured debt rating Senior secured debt rating Secured debt2. Senior unsecured debt/issuer rating used Senior unsecured debt Issuer rating Long-term foreign currency Issuer rating Senior implied issuer rating issuer rating Senior unsecuredSenior unsecured issuer rating/Senior implied issuer rating Subordinated debtIssuer rating to be lowered depending on rating agency and type of subordination: Tier I notches (e.g. A+ to A-) Two notches (e.g. A1 to A3) TwoOne notch (e.g. A+ to A) Lower Tier II notch One notch OneOne notch Upper Tier II notches notch TwoOne notch One Tier IIITwo notches Two notches notches Three OtherIssuer rating
 
 
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The consolidated index rating
 
Implied issue ratings are considered for all agencies that do not provide specific issue ratings. If an agency provides both an issue and an implied issue rating, the specific issue rating is used. If more than one agency rates the bond then the lowest of the agencies’ ratings is attached to the bond. The different notches are consolidated to the respective rating grade (i.e. BBB+, BBB and BBB- are consolidated to BBB etc.).
2.1.4. Time to Maturity
All bonds must have a minimum remaining time to maturity of at least one year at the re-balancing date.
2.1.5. Amount Outstanding All bonds require a specific minimum amount outstanding in order to be eligible for the indices, as shown below. The figures indicate minimum issue sizes:
 GBP 2.0 Billion Gilts:  Non-Gilts: GBP 100 Million The amount outstanding of each bond is used to calculate its index weight. The indices are capitalization-weighted. 
2.1.6. Monthly Rebalancing of the Indices
Once a month the indices are reviewed and re-balanced. This includes:
1. Bond selection
The universe of bonds is reviewed monthly; those issues meeting the criteria described above at the end of the month are included in the indices. The cut-off date for meeting the amount outstanding criteria is three business days prior to month-end. The rating information includes all rating actions published three trading days before the end of the month. Intra-month rating changes are reflected at the beginning of the following month. The time to maturity is measured from the last calendar day of the current month to the final specified maturity date of the bond. The expected remaining life is measured as described below in 2.
Newly issued bonds that have not settled three trading days before the end of the month are only included in the iBoxx indices, if (a) they settle before the end of the month and (b) their rating and amount outstanding are known with certainty three trading days before the end of the month.
2. Index composition
All bonds are assigned to the indices according to their classification. The assignment of a bond to a certain maturity bucket is based on its expected remaining life. The expected remaining life is expressed in years and calculated as follows:
 For plain vanilla bonds, the expected remaining life of the bond is its time to maturity, calculated as the number of days between the last calendar day of the current month and its maturity.
 
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 callable bonds, a yield-to-worst calculation determines when the bond is expected to For redeem. This date is the expected redemption date. The expected remaining life is calculated as the number of days between the last calendar day of the month and the expected redemption date.
capital bonds with call dates, i.e. perpetuals or other callable dated hybrid capital, hybrid  For the first call date is always assumed to be the expected redemption date. The expected remaining life is calculated as the number of days between the last calendar day of the month and the expected redemption date.
 non-callable fixed-to-floater bonds, the expected remaining life is calculated as the number For of days between the last calendar day of the month and the conversion date, i.e. the date on which the bond turns into a floating rate note.
 For sinking funds and amortizing bonds, the bond is assigned to a maturity bucket according to its average life. The average life date is calculated as the sum of all future redemption dates weighted by the percentage redeemed at the respective date. The average life is calculated according to the formula in chapter 4.2.5.
 soft bullets, the expected redemption date at the end of the initial period is assumed to be For the expected redemption date.
All bonds remain in their maturity bucket for the entire month.
3. Weighting adjustments
Within an index, each bond is weighted according to its amount outstanding. Intra-month changes of the amount outstanding for each bond are reflected in the index through the rebalancing procedure at the beginning of each new month.
4. Coupon adjustments
Coupon changes are taken into account in the calculation of the indices from the exact date on which the coupon was altered.
5. Re-balancing timeframe
Six business days before the end of each month, Deutsche Börse compiles a list of all bonds that meet the inclusion criteria.
Four business days before the end of each month, a preliminary membership list is published on the websites of International Index Company and Deutsche Börse. This list contains preliminary information on rating and amount outstanding of all bonds.
Three business days before the end of each month, a membership list ("Constituents Super List") with final amount outstanding for each bond is published. This Constituents Super List contains the maximum number of constituents for the next month.
Two business days before the end of the month, the rating information for the bonds on the Constituents Super List is updated and the list is adjusted for all rating changes occurring three business days prior to month-end after first publication. The resulting list is the final membership list for the following month and is published as soon as all rating changes are confirmed [Note: bonds that are upgraded to investment grade are not included unless they had previously been on the Constituents Super List].
On the last business day of each month, International Index Company and Deutsche Börse publish the membership list with closing prices of all bonds at the close of business.
 
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