Markit iTraxx Europe Series 18 Rulebook

Markit iTraxx Europe

Index Rules

June 2012

Markit iTraxx Europe Index Rules

Copyright © 2012, Markit Group Limited. All rights reserved. www.markit.com 2

Contents General Rules ........................................................................................................................................ 3 iTraxx® Europe ...................................................................................................................................... 5

Liquidity List ........................................................................................................................................ 5 Membership determination ................................................................................................................. 5 Coupon Levels and Recovery Rates .................................................................................................. 5

iTraxx® Crossover ................................................................................................................................ 6 Liquidity List ........................................................................................................................................ 6 Supplementary List ............................................................................................................................. 6 Membership determination ................................................................................................................. 6 Coupon Level and Recovery Rate ...................................................................................................... 7

Reference Obligation Selection Criteria ............................................................................................. 8 Changes to the Indices between Roll Dates ....................................................................................... 8

Successor Entities .............................................................................................................................. 8 Changes to the Reference Obligations ............................................................................................... 8 Changes to Reference Entity Names ................................................................................................. 9

Further information ............................................................................................................................... 9 Appendix .............................................................................................................................................. 10



General Rules

I.The iTraxx® indices are owned, managed, compiled, and published by Markit Group Limited

(Markit).

II.The Roll Date for each index is March 20th and September 20

th. The new indices start on the Roll

Date or the following London Business Day if the Roll Date is not a London Business Day.

III.For iTraxx® Europe main, iTraxx

® Crossover, and iTraxx

® HiVol 3, 5, 7 and 10-year maturities are

traded; for Senior and Subordinated Financials, and Non-Financials 5 and 10-year maturities are

traded. The maturity date is always June 20th for the roll in March and December 20

th for the roll in

September.

IV.Entities are weighted equally in all indices. If the number of index constituents cannot be divided

equally to two decimal places, weighting adjustments (+/- 0.01%) are made in alphabetical order.

V.‘Entity Rating’ is defined as the lowest of:

Lowest of Issuer Rating, Senior Unsecured Debt Rating, and Corporate Family Ratings for Moody’s;

Lower of Long-term Issuer Credit Rating and Senior Unsecured Debt Rating for S&P; and

Lower of Issuer Default Ratings and Senior Unsecured Debt Rating for Fitch.

Rating changes that could affect the index membership are taken into account if Markit is notified prior to 5:00 pm London time on the last London Business Day of the month prior to the Roll Date.

VI.Exchange Rates: The exchange rates used to convert any non-EUR denominated debt amount to

EUR will be the 16:00 London rate from WM Reuters for the relevant currency as on the last

London Business Day of the month prior to the Roll Date.

VII.Debt Tier classification criterion: A two step criteria is used to establish the Debt Tier classification

of a bond for determining eligibility of the issuing entity in the iTraxx Crossover Supplementary List

First, the Markit RED classification is used. If the bond is classified as Senior Unsecured by Markit RED, the bond is considered to be Senior Unsecured.

If Markit RED classifies the bond as Senior Secured or the bond is not classified by Markit RED, then the bond is considered to be Senior Secured if at least two of the following criteria are satisfied:

– Bond Rating from Moody’s is higher than the Moody’s Senior Unsecured Debt Rating (or if Moody’s Senior Unsecured Debt Rating not available then the Moody’s Long Term Rating)

– Bond Rating from S&P is higher than the S&P Senior Unsecured Debt Rating

– Bond Rating from Fitch is higher than the Fitch Senior Unsecured Debt Rating

If entity and bond ratings are available from only one rating agency, then the bond will be considered Senior Secured if the criteria with respect to that rating agency above is satisfied.

If the above test is inconclusive, then the Markit RED Tier classification (if available) is used

VIII.Publication dates:

On the seventh London Business Day preceding the Roll Date, the provisional lists for the iTraxx®

indices are published on Markit’s website.

On the fourth London Business Day preceding the Roll Date, the membership lists for the iTraxx®

indices are published on Markit’s website at 8:00 pm London time.



If a default occurs on an entity in the membership list up to and including one London Business Day prior to the roll, then the next highest ranked name from the liquidity list is included.

IX.Index Roll Conference Calls:

Conference calls are organized by Markit for the market makers to agree on index composition, Reference Obligations, coupon levels, and recovery rates.

Each market maker has the right to participate in the conference calls.

Each market maker has one vote.

To be quorate a conference call must be attended by at least 10 licensed market makers. A licensed market maker may submit opinions to Markit on matters to be voted upon by email if they cannot attend a call.

Voting is by simple majority of those present or having previously submitted an opinion by email to Markit. Decisions made in a conference call are binding.

X.All data and information submitted by market makers to Markit are treated in strict confidence.

XI.'London Business Day' is defined as a day on which commercial banks and foreign exchange

markets settle payments and are open for general business (including dealings in foreign exchange

and foreign currency deposits) in London, England.



iTraxx® Europe

The iTraxx

® Europe index comprises 125 investment grade rated European entities selected from the

Liquidity List. All entities must satisfy the membership determination criteria.

Liquidity List

Markit forms a Liquidity List based on the average weekly trading activity as measured in the 6 Month Analysis Top 1,000 Single Names report published by DTCC. This report measures liquidity over the last six months preceding the last Friday of the month prior to the Roll Date. The list is ranked according to trading volumes, i.e. the entity with the highest trading volume is ranked #1. Entities on the Liquidity List should satisfy the following criteria:

Entities must demonstrate trading activity greater than zero during the last eight weeks preceding the last Friday of the month prior to the Roll Date as measured in the DTCC 6 Month Analysis Top 1,000 Single Names report.

Entities must be incorporated in Europe, where ‘Europe’ means EU and EFTA member countries.

Volumes for entities that fall under the same ticker, but trade separately in the CDS market, are summed to arrive at an overall volume for each ticker. The most liquid entity under the ticker qualifies for index membership.

Membership determination

All entities must be rated investment grade by Fitch, Moody’s or S&P. Entities with an Entity Rating of BBB-/Baa3/BBB- (Fitch/Moody's/S&P) with negative outlook or below are excluded.

If it is confirmed that one entity has more than 50% of the voting rights of another entity (directly or indirectly), then the most liquid entity qualifies for index membership.

If a company is guaranteed by or guarantees another one only the most liquid is eligible.

Each entity is assigned to its appropriate iTraxx® sector and is ranked within its sector, i.e. the

entity with the highest liquidity is ranked #1.

The final index comprises 125 entities and is constructed by selecting the highest ranking entities in each sector on the Liquidity List, subject to the following sector restrictions:

– 30 Autos & Industrials

– 30 Consumers

– 20 Energy

– 20 TMT

– 25 Financials (separate Senior & Subordinated indices)

iTraxx® Non-Financials comprises the 100 non-financial entities from the iTraxx

® Europe index.

iTraxx® HiVol comprises the 30 entities with the widest 5-year CDS spreads from the iTraxx

®

Europe Non-Financials index. The average of 5-year mid-spreads, published by Markit, calculated over the last 10 London Business Days of the month prior to Roll Date determine eligibility.

Coupon Levels and Recovery Rates

On the fourth London Business Day preceding the Roll Date, a telephone poll is initiated by Markit to determine the Coupons and Recovery Rates for each index. Coupon levels and Recovery Rates are set equal to one of the Standard Coupons and Recovery Rates respectively.

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iTraxx® Crossover

The iTraxx® Crossover index comprises up to 50 European entities selected from the Liquidity List

and potentially the Supplementary List; this number may be changed from time to time at an index roll upon reasonable notice if warranted by market conditions. All entities must satisfy the membership determination criteria.

Liquidity List

Markit forms a Liquidity List based on the average weekly trading activity as measured in the 6 Month Analysis Top 1,000 Single Names report published by DTCC. This report measures liquidity over the last six months preceding the last Friday of the month prior to the Roll Date. The list is ranked according to trading volumes, i.e. the entity with the highest trading volume is ranked #1. Entities on the Liquidity List should satisfy the following criteria:

Entities must demonstrate trading activity greater than zero during the last eight weeks preceding the last Friday of the month prior to the Roll Date as measured in the DTCC 6 Month Analysis Top 1,000 Single Names report.

Entities must be incorporated in Europe, where ‘Europe’ means EU and EFTA member countries. Volumes for entities that fall under the same ticker, but trade separately in the CDS market, are

summed to arrive at an overall volume for each ticker. The most liquid entity under the ticker qualifies for index membership.

Supplementary List

Markit forms a Supplementary List comprising entities which should satisfy the following criteria

Entities must be incorporated in Europe, where ‘Europe’ means EU and EFTA member countries. Entities must have a minimum of € 500 million of ‘New Debt Issuance’ defined as the debt issued

(under the same ticker) over the last 12 months (as of the last London Business Day of the month prior to the Roll Date) in a currency which is deliverable into a European CDS contract excluding loans, guaranteed (but not issued by the entity) debt, and private placements. – All publicly traded debt including Senior and Subordinated, Secured and Unsecured, will be

considered Entities must not be part of the 6 Month Analysis Top 1,000 Single Names report published by

DTCC. Entities that have issued debt via Loan Participation Note (LPN) programs should not be

considered. If multiple entities have issued bonds under the same ticker, the entity eligible for the index would

be the one which has issued Senior Unsecured debt. If all of the entities have issued Senior Unsecured debt then the entity with the highest amount outstanding calculated over all Senior Unsecured bonds issued by the entity should be considered.

If none of the entities under the same ticker have issued Senior Unsecured debt then the entity will not be considered.

Where several entities have issued debt under the same ticker, if the entity with the largest amount of senior unsecured debt outstanding is not European, then the entity (and ticker) will not be considered.

The final list of names will comprise of entities which satisfy the above criteria and have the largest amount of ‘New Debt Issuance’.

Membership determination

Entities with an Entity Rating of BBB-/Baa3/BBB- (Fitch/Moody’s/S&P) with stable outlook or higher are excluded. Entities not rated by any of Fitch, Moody's or S&P are eligible.



Only entities that have issued or guaranteed more than €100 million publicly traded debt securities (which shall be taken to exclude loans and equities) with a maximum remaining maturity of 30 years, at close of business in London on the fifth London Business Day preceding the Roll Date in a currency that is deliverable into a European CDS contract will be included. For new issues of the relevant entities, the settlement date of the issue will be considered. Private placements will not be considered.

If it is confirmed that one entity has more than 50% of the voting rights of another entity (directly or indirectly), then the most liquid entity qualifies for index membership.

If a company is guaranteed by or guarantees another one only the most liquid is eligible.

Financial entities (per the iTraxx® sector classification) are not eligible.

An entity is eligible if it has an average spread at least twice the average spread of the constituents of the iTraxx

® Non-Financial Index, as determined for the next index roll, with a maximum of 50%

upfront plus 500 bps running spread. Average 5-year mid-spreads published by Markit for the last 10 London Business Days of the month prior to Roll Date determine eligibility (for example, if the average spread of the entities in the iTraxx

® Non-Financial Index effective 20 March was 40 bps

over the last 10 London Business Days in February, then only those entities whose average spread over the last 10 London Business Days in February was 80 bps or higher qualify).

If less than 50 entities are available from the Liquidity List for the iTraxx Crossover index that satisfy the above criteria, the Supplementary List is used to select additional names. If 50 or more entities are available from the Liquidity List, no entities are included from the Supplementary List.

For the entities from the Supplementary List, the average Z-Spread to maturity corresponding to a bond of the entity for the last 10 London Business Days of the month prior to Roll Date is considered for verification of the spread / upfront based criteria. The Z-Spread to maturity is used even if the Composite CDS Spreads are available from Markit for these entities. The Z-Spread which is based on the dirty prices of the issuer bonds is calculated over the Swap Yield Curve and is calculated by Markit Evaluated Bonds Service. The relevant bond for the entity should satisfy the following criteria:

– The maturity date of the bond should be closest to the 5-year CDS index maturity date among all bonds issued by the entity

– The bond should be Senior Unsecured

– The amount outstanding for the bond should be at least € 200 million or equivalent in a currency which is deliverable into a European CDS contract (as of the last London Business Day of the month prior to the Roll Date)

If two or more bonds are equidistant from the 5-year CDS index maturity date and satisfy all the other criteria, the bond with the highest amount outstanding in a currency which is deliverable into a European CDS contract (as of the last London Business Day of the month prior to the Roll Date) is selected.

If no Senior Unsecured bonds are available for verification of the spread / upfront based criteria for a specific entity from the Supplementary List, it is not considered for index membership

If less than 50 entities are available from the Liquidity List, the total number of entities selected from the Supplementary List will be calculated by adding 5 entities to the number of entities from the Liquidity List. Names are then removed from the list (if required) so that the total number of entities is rounded down to the nearest multiple of 5. (Please see appendix – Table 1)

The final portfolio comprises of a maximum of 50 names with the highest ranking entities from the Liquidity List and if required, the Supplementary List.

Coupon Level and Recovery Rate

On the fourth London Business Day preceding the Roll Date, a telephone poll is initiated by Markit to determine the Coupon and Recovery Rate for the index. Coupon level and Recovery Rate are set equal to one of the Standard Coupons and Recovery Rates respectively.

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Reference Obligation Selection Criteria

The Reference Obligation selected should be publically traded bonds

The Reference Obligation selected should be either issued or guaranteed by the relevant index entity whereby

directly issued obligations will be preferred

Reference Obligations selected should be preferably plain vanilla in nature and the following should be avoided

– Convertible bonds

– Callable bonds

– Bonds where the entity is the guarantor and containing clauses that allow the guarantor to be substituted or released on the occurrence of events like downgrading or corporate restructuring

Dealer suggested bonds must be suggested at least 2 London Business Days prior to the index roll conference call

– Suggestion must be accompanied by the relevant Reference Obligation documentation

For entities in the previous series of an index, if one or more of the following criteria are met then the Reference Obligation in the index will be selected for replacement in the new series of the index, provided that a suitable alternative Reference Obligation is available:

– The outstanding/issued amount ratio less than 50%

– The maturity date less than or equal to 1 year from the next Roll Date

– A corporate action occurring for an entity leading to the Reference Obligation being no longer suitable for inclusion in the index

– Markit receiving feedback from 3 or more licensed market makers that they would like a particular Reference Obligation replaced

If entities are present in a prior series then tier of Reference Obligation must be consistent between series but dependent on available debt obligations

Changes to the Indices between Roll Dates

Successor Entities

Pursuant to the operation of current ISDA successor provisions, a non-European entity may become the successor of an entity in an index. In this case, it may be replaced by a non-European entity which, however, will not be eligible for the next index series.

Changes to the Reference Obligations

In the event that Markit receives requests from three or more market makers that the Reference Obligation of an entity should be replaced, Markit will identify one new Reference Obligation for such entity, based on RED and on input from iTraxx

® market makers. A poll is then initiated by Markit in

accordance with the provisions described above. If a majority of the market makers participating in the poll agrees that such replacement should be made, a new annex will be published by Markit, which will be identical to the previous annex, save for the fact that the Reference Obligation for such entity will be as agreed in the poll.



Changes to Reference Entity Names

If a Reference Entity changes its legal name, the relevant index annexes containing this Reference Entity will be updated to the new name (without publishing a new version of the annex). The effective date of the name change (i.e. the date upon which the Reference Entity changed its name) is specified in the updated annex.

Further information

Markit Indices Ltd. Tel: 00800 6275 4800 Fax: +44 20 7260 2001 E-mail: [email protected] Internet: www.markit.com

Licenses and Data Markit owns all iTraxx, iTraxx SovX and CDX data and indices and the intellectual property rights therein. A license is required from Markit Indices Ltd. to create and/or distribute any product that uses, is based upon or refers to any iTraxx, iTraxx SovX and CDX index or iTraxx, iTraxx SovX and CDX data.

http://www.markit.com/



Appendix

Table 1

Markit iTraxx Europe Series 18 Rulebook

Documents

Transcript of Markit iTraxx Europe Series 18 Rulebook