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Deutsche Börse To Adjust Rules For Companies Entering DAX Index - Market Capitalization And Trading Volume To Become Sole Criteria - Rules To Come Into Effect From September 2004 - DAX To Become More Appealing To Investors

Date 22/03/2004

According to a statement by Deutsche Börse on Monday, the index provider plans to limit the rules governing the selection of companies in the DAX equity index to quantitative criteria. In future, stocks may only be replaced using two criteria: trading volume and market capitalization, thereby removing any discretionary judgment when altering the composition of the DAX. Changes in the DAX index can then be derived directly from the relevant ranking list and will be performed automatically. The new rules will apply exclusively to the DAX index and not to the MDAX, SDAX, TecDAX and NEMAX50. They will come into effect on the rebalancing date in September.

The adjustment was feasible because only shares held in free float are now included in a company's market capitalization. The correlation between trading volume and market capitalization has since become so tight that discretionary judgment is no longer needed when altering the composition of the DAX.

"This adjustment will allow Deutsche Börse to further develop its rules and strengthen the appeal of its indices for investors launching their products on the DAX or using it as a benchmark for their investment decisions", said Christoph Lammersdorf, Managing Director of Deutsche Börse. Investors will be able to react earlier to pending changes in the index. Converting the way DAX stocks are selected to a method based on purely quantitative factors brings Deutsche Börse further in line with the approach adopted by the European index provider STOXX Ltd., one third of whose shares are held by Deutsche Börse.

The new rules do not apply to Deutsche Börse's mid and small-cap indices. Despite the free-float weighting, the correlation between trading volume and market capitalization is not strong enough here to warrant an index composition based purely on quantitative criteria.

Overview of the new rules governing the selection of companies in the DAX:

As part of the annual assessment of the index, the replacement of stocks in the DAX will be based on four steps:

  1. Fast Exit (45/45): index stocks ranking below 45 in either of the two criteria, trading volume or market capitalization, are replaced, provided there is a candidate for inclusion with a ranking of at least 35 or above in both criteria.
  2. Fast Entry (25/25): non-index stocks ranking 25 or above in both criteria are included. Conversely, index stocks ranking below 35 in one criterion and with the lowest market capitalization are excluded. If no such stock exists, the stock with the lowest market capitalization is removed from the index.
  3. Regular Exit (40/40): index stocks ranking below 40 in either of the two criteria, trading volume or market capitalization, are replaced - provided there is a candidate for inclusion with a ranking of at least 35 or above in both criteria.
  4. Regular Entry (30/30): non-index stocks with a ranking of 30 or above in both criteria are included, provided there is an index stock ranking below 35 in one of the criteria.
In addition to the annual assessment, which takes place on the September rebalancing date, assessments are also carried out on a quarterly basis - the only time when the rules for Fast Entry or Fast Exit can be applied.

If there are several inclusion or exclusion candidates when the rules are applied, the criterion of market capitalization is decisive. Following the conversion, market capitalization will no longer be determined on the basis of the closing price on last trading day of the month, but on the basis of the volume-weighted average price for the last 20 trading days.