UBS updates guidelines for the Global Convertible Index

By Evan Weinberger

New York, Oct. 4 - UBS Investment Bank has modified the guidelines it uses for creating the Global Convertible Bond Index. The modifications, according to a note sent out by UBS, are part of the evolution of the index, which was first introduced in September 1998. The changes went into effect Oct. 3.

"The prior guidelines had evolved over almost ten years," Martin Haycock, executive director and head of convertibles marketing at UBS, wrote in a note to clients. "It was felt to be appropriate to review all guidelines, in order to restate with greater clarity many existing processes, and to introduce some changes to reflect changing markets."

The daily index measures the performance of convertibles traded globally, and more specifically in the United States and European markets. The U.S. index measures the whole universe, then also measures vanilla, mandatory, investment grade and high yield and non-rated convertibles.

Among the changes, UBS will have greater flexibility in removing issues from the index. The example UBS provided is the removal of an issue prior to a put if the convertibles are trading unnaturally high.

UBS will also represent changes in volume more accurately. Haycock pointed out that a large percentage of convertibles are not taken out of circulation all at once, but in amounts of varying size. These could be from partial puts or calls or from conversion over time.

Many of the changes were instituted in the Focus indexes. The rules for entry into the Focus indexes have been simplified, Haycock wrote. There will no longer be a fixed size to the indexes, and issues will only be dropped if they are no longer balanced or based on a market capitalization test. U.S. deals will have to be a minimum $650 million and European deals a minimum €450 million. Japanese deals face a ¥30 billion threshold and deals from other Asian countries have a $300 million hurdle.

The price test has been lowered to 140% from 150%, which eliminates high gamma issues that trade above 140%. The maturity test has been removed, and convertibles will leave the Focus indexes at the same time as they leave the Global Index. The call test has also been removed.

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