Markit iTraxx Europe Series 18 Rulebook

Markit iTraxx Europe Index RulesJune 2012 ..............................................................markit........................................................................................................................................... 5 Liquidity List ................................................................ 7 Reference Obligation Selection Criteria ........................................................................................................................................... All rights reserved.................................................................................................................... 6 Membership determination ...................................... 9 Appendix ................................................................. www.............................................................................................................................................. 10 Copyright © 2012...................................... 8 Changes to Reference Entity Names ............................................ 6 Liquidity List ............ 8 Successor Entities ............. 8 Changes to the Indices between Roll Dates .......... 6 Supplementary List ...................................................................................................................................com 2 ........................................................................................................................................................................ 5 Membership determination .............. 5 iTraxx® Crossover ............................................................................................................................................. 9 Further information ......................................................................................................................... 8 Changes to the Reference Obligations .................................................................................................. Markit Group Limited.......................................................................................................... 3 iTraxx® Europe ..............................................................................Markit iTraxx Europe Index Rules Contents General Rules ............. 5 Coupon Levels and Recovery Rates .......................................... 6 Coupon Level and Recovery Rate ........................................................................................................................................................................................................ Markit iTraxx Europe Index Rules General Rules I. the bond is considered to be Senior Unsecured.  If the above test is inconclusive. 5. III. The new indices start on the Roll Date or the following London Business Day if the Roll Date is not a London Business Day. for Senior and Subordinated Financials. Senior Unsecured Debt Rating. ®  On the fourth London Business Day preceding the Roll Date. ® ® ® ® th th Copyright © 2012. ® indices are owned. the Markit RED classification is used.The Roll Date for each index is March 20 and September 20 . The maturity date is always June 20 for the roll in March and December 20 for the roll in September. VII. and published by Markit Group Limited II.‘Entity Rating’ is defined as the lowest of:  Lowest of Issuer Rating. V. If the number of index constituents cannot be divided equally to two decimal places. weighting adjustments (+/. and Corporate Family Ratings for Moody’s.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. 7 and 10-year maturities are traded. IV.The iTraxx (Markit). managed.Publication dates:  On the seventh London Business Day preceding the Roll Date. www. then the bond will be considered Senior Secured if the criteria with respect to that rating agency above is satisfied. Markit Group Limited.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. 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. and Non-Financials 5 and 10-year maturities are th th traded. If the bond is classified as Senior Unsecured by Markit RED. then the Markit RED Tier classification (if available) is used VIII.com 3 . and  Lower of Issuer Default Ratings and Senior Unsecured Debt Rating for Fitch.0. the provisional lists for the iTraxx indices are published on Markit’s website.  If Markit RED classifies the bond as Senior Secured or the bond is not classified by Markit RED. iTraxx Crossover. All rights reserved.For iTraxx Europe main. and iTraxx HiVol 3.01%) are made in alphabetical order. compiled.  Lower of Long-term Issuer Credit Rating and Senior Unsecured Debt Rating for S&P. the membership lists for the iTraxx indices are published on Markit’s website at 8:00 pm London time.markit. 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.Entities are weighted equally in all indices. VI. then the next highest ranked name from the liquidity list is included. X.  Each market maker has the right to participate in the conference calls. and recovery rates.All data and information submitted by market makers to Markit are treated in strict confidence.com 4 .Markit iTraxx Europe Index Rules  If a default occurs on an entity in the membership list up to and including one London Business Day prior to the roll.markit.  To be quorate a conference call must be attended by at least 10 licensed market makers. Decisions made in a conference call are binding.Index Roll Conference Calls:  Conference calls are organized by Markit for the market makers to agree on index composition. coupon levels. All rights reserved. IX. www.  Voting is by simple majority of those present or having previously submitted an opinion by email to Markit. Reference Obligations. A licensed market maker may submit opinions to Markit on matters to be voted upon by email if they cannot attend a call. Markit Group Limited.'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.  Each market maker has one vote. XI. England. Copyright © 2012. i. the entity with the highest trading volume is ranked #1. ® Liquidity List Markit forms a Liquidity List based on the average weekly trading activity as measured in the 6 Month Analysis Top 1.  Volumes for entities that fall under the same ticker. www. The list is ranked according to trading volumes. Coupon Levels and Recovery Rates On the fourth London Business Day preceding the Roll Date.  Entities must be incorporated in Europe. ®  Each entity is assigned to its appropriate iTraxx sector and is ranked within its sector. Copyright © 2012. are summed to arrive at an overall volume for each ticker. Markit Group Limited.e. Entities with an Entity Rating of BBB-/Baa3/BBB. All entities must satisfy the membership determination criteria.000 Single Names report. the entity with the highest liquidity is ranked #1.com 5 .  If a company is guaranteed by or guarantees another one only the most liquid is eligible.Markit iTraxx Europe Index Rules iTraxx® Europe The iTraxx Europe index comprises 125 investment grade rated European entities selected from the Liquidity List. The most liquid entity under the ticker qualifies for index membership.000 Single Names report published by DTCC. then the most liquid entity qualifies for index membership. published by Markit. 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. a telephone poll is initiated by Markit to determine the Coupons and Recovery Rates for each index. where ‘Europe’ means EU and EFTA member countries. calculated over the last 10 London Business Days of the month prior to Roll Date determine eligibility. Coupon levels and Recovery Rates are set equal to one of the Standard Coupons and Recovery Rates respectively. The average of 5-year mid-spreads. All rights reserved. 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.  If it is confirmed that one entity has more than 50% of the voting rights of another entity (directly or indirectly). This report measures liquidity over the last six months preceding the last Friday of the month prior to the Roll Date. ® ®  iTraxx HiVol comprises the 30 entities with the widest 5-year CDS spreads from the iTraxx Europe Non-Financials index.e.(Fitch/Moody's/S&P) with negative outlook or below are excluded.markit. Membership determination  All entities must be rated investment grade by Fitch. Moody’s or S&P.  The final index comprises 125 entities and is constructed by selecting the highest ranking entities in each sector on the Liquidity List. i. but trade separately in the CDS market. (Fitch/Moody’s/S&P) with stable outlook or higher are excluded. – All publicly traded debt including Senior and Subordinated. Supplementary List Markit forms a Supplementary List comprising entities which should satisfy the following criteria  Entities must be incorporated in Europe.000 Single Names report. 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.com 6 .  If none of the entities under the same ticker have issued Senior Unsecured debt then the entity will not be considered. ® Liquidity List Markit forms a Liquidity List based on the average weekly trading activity as measured in the 6 Month Analysis Top 1. Moody's or S&P are eligible.  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. this number may be changed from time to time at an index roll upon reasonable notice if warranted by market conditions. will be considered  Entities must not be part of the 6 Month Analysis Top 1. if the entity with the largest amount of senior unsecured debt outstanding is not European.markit. where ‘Europe’ means EU and EFTA member countries.  Entities that have issued debt via Loan Participation Note (LPN) programs should not be considered. Markit Group Limited.  If multiple entities have issued bonds under the same ticker.  Where several entities have issued debt under the same ticker. Secured and Unsecured. Entities not rated by any of Fitch. the entity eligible for the index would be the one which has issued Senior Unsecured debt.000 Single Names report published by DTCC. Copyright © 2012. This report measures liquidity over the last six months preceding the last Friday of the month prior to the Roll Date.  The final list of names will comprise of entities which satisfy the above criteria and have the largest amount of ‘New Debt Issuance’. All rights reserved. The list is ranked according to trading volumes. but trade separately in the CDS market. i. where ‘Europe’ means EU and EFTA member countries. Membership determination  Entities with an Entity Rating of BBB-/Baa3/BBB. and private placements.  Entities must be incorporated in Europe. are summed to arrive at an overall volume for each ticker. All entities must satisfy the membership determination criteria.000 Single Names report published by DTCC.  Volumes for entities that fall under the same ticker. then the entity (and ticker) will not be considered. The most liquid entity under the ticker qualifies for index membership. guaranteed (but not issued by the entity) debt. www. the entity with the highest trading volume is ranked #1.e.Markit iTraxx Europe Index Rules iTraxx® Crossover The iTraxx Crossover index comprises up to 50 European entities selected from the Liquidity List and potentially the Supplementary List. 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. no entities are included from the Supplementary List. www. then only those entities whose average spread over the last 10 London Business Days in February was 80 bps or higher qualify). then the most liquid entity qualifies for index membership.  For the entities from the Supplementary List. 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. ®  Financial entities (per the iTraxx sector classification) are not eligible. the settlement date of the issue will be considered. All rights reserved. it is not considered for index membership  If less than 50 entities are available from the Liquidity List. a telephone poll is initiated by Markit to determine the Coupon and Recovery Rate for the index. with a maximum of 50% upfront plus 500 bps running spread. Private placements will not be considered. as determined for the next index roll.  If it is confirmed that one entity has more than 50% of the voting rights of another entity (directly or indirectly). For new issues of the relevant entities. 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. 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 Supplementary List. 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.com 7 .markit. Copyright © 2012.  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. The Z-Spread to maturity is used even if the Composite CDS Spreads are available from Markit for these entities. 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. (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. 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. 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. Coupon Level and Recovery Rate On the fourth London Business Day preceding the Roll Date. Markit Group Limited.  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. Coupon level and Recovery Rate are set equal to one of the Standard Coupons and Recovery Rates respectively. 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. If 50 or more entities are available from the Liquidity List. 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.  If no Senior Unsecured bonds are available for verification of the spread / upfront based criteria for a specific entity from the Supplementary List.  If a company is guaranteed by or guarantees another one only the most liquid is eligible.Markit iTraxx Europe Index Rules  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. which will be identical to the previous annex. A poll is then initiated by Markit in accordance with the provisions described above. will not be eligible for the next index series. a new annex will be published by Markit. a non-European entity may become the successor of an entity in an index. 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. Copyright © 2012. www.com 8 . Markit Group Limited. however. it may be replaced by a non-European entity which. 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. Markit will identify one new Reference Obligation for such ® entity. based on RED and on input from iTraxx market makers.markit. save for the fact that the Reference Obligation for such entity will be as agreed in the poll. 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. In this case. All rights reserved.Markit iTraxx Europe Index Rules 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 a majority of the market makers participating in the poll agrees that such replacement should be made. com www. Further information  Markit Indices Ltd. The effective date of the name change (i.com 9 . www. is based upon or refers to any iTraxx.com  Licenses and Data Markit owns all iTraxx.Markit iTraxx Europe Index Rules Changes to Reference Entity Names If a Reference Entity changes its legal name.markit. Copyright © 2012. Tel: Fax: E-mail: Internet: 00800 6275 4800 +44 20 7260 2001 support@markit. to create and/or distribute any product that uses. Markit Group Limited. All rights reserved. iTraxx SovX and CDX index or iTraxx. iTraxx SovX and CDX data. the relevant index annexes containing this Reference Entity will be updated to the new name (without publishing a new version of the annex). the date upon which the Reference Entity changed its name) is specified in the updated annex. iTraxx SovX and CDX data and indices and the intellectual property rights therein.markit. A license is required from Markit Indices Ltd.e. com 10 .markit.Markit iTraxx Europe Index Rules Appendix Table 1 Copyright © 2012. All rights reserved. Markit Group Limited. www.