PrefBlog

Standard & Poor’s has announced:

the following modifications to the methodology of the S&P/TSX Preferred Share Index, which will become effective after the close of trading on Friday, July 16, 2010, with the second semi-annual review of the index in 2010:

• There will be no limit to the number of preferred share issues from any given issuer. Previously, the number of issues per issuer was limited to a maximum of three.
• There will be a maximum relative weight of 10% set per issuer. All eligible lines for an issuer will be included in the index and capped on a pro-rata basis to a maximum of 10% of the total index market capitalization.
• Preferred shares that have a mandatory conversion or a scheduled maturity or redemption within 12 months of the review period will not be added to the index. Existing index constituents which have a redemption or conversion will be removed on the redemption or conversion date.
• A buffer rule for existing index constituents will be applied for the dollar value traded liquidity requirement. Existing constituents must have a minimum average dollar value traded in the 3 months prior to the review date of C$100,000.
• The liquidity requirement to get included in the index will increase from C$100,000 to C$200,000.
• Effective January 2011 the rebalance scheduled will change from semi-annually to quarterly. Rebalancing will occur after the close on the third Friday of January, April, July and October.

In order to lessen the impact of these changes, the new methodology will be phased in beginning with the July 2010 rebalance. The index will rebalance 25% each month from July to October, effective after the close on the third Friday, where S&P will apply a weight factor to each issue in order to gradually bring each in to the index.

It will take me a little time to digest the effect of all these changes. Clearly, they are attempting to make life easier for CPD so that mechanical application of trading rules to a change in relatively small issue doesn’t burn them as badly as POW.PR.C, inter alia, burned them last time.

I find the liquidity requirement to be fascinating. Assiduous Readers will remember that HIMIPref™ has a relatively complex methodology for determining averageTradingValue. This is because preferred share volumes are lumpy: a few block trades can distort a simple mean average considerably. We may well see some issues added that don’t really meet a sensible trading criteria.

This entry was posted on Saturday, July 10th, 2010 at 12:55 am and is filed under Indices and ETFs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.