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The Tel-Aviv Stock Exchange (TASE: TASE) published today a draft for public comments the principles of an All New bond Indices Methodology.
As part of the All New Index Methodology, the calculation of the bond indices will be automated and updated once a month, which will facilitate a significant upgrading of the management of the indices, the introduction of elements such as a weight cap factor per bond series and per issuer, the addition of new series to the indices on a monthly basis, the gradual reduction of the weight of a series as it approximates maturity, and the development of new and more complex bond indices. Government bond indices will be renamed under “Tel-Gov" trademark.
The bond indices are traded on TASE as part of the real time trading, similarly to equities, whereas on international exchanges the bond indices are traded off-exchange, in OTC format. The trading method applied at TASE offers a significant advantage, as it enables the public transparent and real time trading of bond indices in Israel. TASE's bond indices comprise of 45 indices with a record volume of managed assets of NIS 50 billion.
As aforesaid, TASE will work to align the unique characteristics of bonds in Israel with international standards, including the monthly rebalancing of the bond indices in place of the current semi-annual update, for optimal management of the bonds, even in cases of refinancing.
Presented below are the principal anticipated changes under the bond indices reform:
The rebalancing schedule of the bond indices under the new methodology:
| Record date | 10th of every month |
| Publication date | The trading day preceding the rebalancing date by 5 trading days |
| Update date | The trading day preceding the final trading day of the month |
| Effective date | The trading day following the rebalancing date |
Fixed parameters for calculation of weight
Today, any change in the capital of a bonds series is reflected in the weight of the bond series on the day immediately following the change and the weight cap is adjusted daily. These frequent changes require those tracking the indices to inform their clients accordingly, making tracking cumbersome.
As part of the All New Index Methodology, the parameters for calculating the weight of a bond series will be fixed once a month and used to calculate the index throughout the month, similarly to common practice for international bond indices and to the methodology applied by TASE for equity indices. The fixing of the parameters will significantly simplify the process for trackers and enable the launch of innovative indices that rely on the ability to fix the composition and manage the weight of the series in the index based on the defined theme, whether it is a qualitative theme (e.g., ESG), a quantitative theme (e.g., statistical calculations) or a financial theme (e.g., financial statements and financial ratios).
Weight cap per issuer
The Regulations pursuant to the Law for Joint Investment in Trust limit the exposure of a tracking fund and an ETF for all bond series of a single issuer to 25% that, if exceeded, entails enforcement measures by the Israel Securities Authority. Under the new methodology, an “issuer factor" will be set for each series of the issuer, such that the weight cap of the issuer would be proportionally distributed among all the series of the issuer that meet the threshold criteria of the index, eliminating the need to remove a compliant series.
Gradual removal from and addition to an index
The existence of a fixed weight cap factor within the framework of a monthly rebalancing that offers a monthly “window" for changes will enable the staggered addition of a bond series to an index over 3 consecutive update dates, in place of the current bulk addition. Also, with regard to anticipated removal, such as redemption, the weight of a series would be reduced over the 3 final monthly update dates of the series.
Monthly Rebalancing = Fast Track
The transition to a monthly rebalancing of the indices' composition is equivalent to the fast-track entrance to the equity indices. A new bond series would be added to the indices shortly after its listing without a prolonged waiting period.
