A lowering of the size requirement for covered bond benchmarks to qualify for key iBoxx indices is being considered. Market participants said that any such change would result in a more accurate reflection of issuance, with cédulas hipotecarias and Hypothekenpfandbriefe set to make the biggest gains in weighting.

Richard Kemmish, head of covered bond origination at Credit Suisse, told a plenary meeting of the European Covered Bond Council last month that the market related issues working group he chairs had discussed a potential change from Eu1bn to Eu500m with the iBoxx indices’ administrators.

“The growth of the sub-jumbo market is something that is inevitable – there are various reasons for it – and the idea that you must be Eu1bn is declining,” he said. “When you look at the reasons for the whole jumbo definition in the first place, most of them have fallen away, really.

“Perhaps the only outstanding point which is still relevant is that jumbo trades qualify for the various indices, in particular the iBoxx index, which is the most important one of them. Now, iBoxx have a cut-off of Eu500m for senior unsecured and ABS, so we are an anomaly already.”

Kemmish said that several members of the market related issues working group felt that this should be addressed.

“On the back of that, we had a meeting with the people who administer iBoxx,” he said. “They have gone to their technical committee and are now out consulting with a view to, at some stage, change the cut-off to Eu500m.”

Market participants agreed that such a change would reflect the development of the market.

“We already see Eu500m deals on a regular basis,” said Ralf Grossmann, head of covered bond origination at Société Générale. “It’s much more common than it used to be even 12 months ago.

“iBoxx is following the market.”

LBBW senior credit analyst Jan King said the move would be a positive step.

“I think it’s a good idea because over the last year we’ve seen a high volume of the Eu500m bonds,” he said. “In general, if you want to have a picture of the market, you should include these deals as well.

“As a result, the index would get bigger and provide a better picture of the market.”

To judge the impact of a lowering of the threshold from Eu1bn, King has created a hypothetical new index composition including Eu500m deals as well. He found that the weighting in such an index of Hypothekenpfandbriefe would increase by 0.8 percentage points and of cédulas hipotécarias 1.1, while Austrian covered bonds’ weighting would rise by 0.5. By contrast, France’s weighting would fall by 1.5 percentage points through its current covered legal category and 0.5 in its covered structured.

In spite of the removal of one bar between Eu1bn and Eu500m, some market participants said that the larger sizes could still carry advantages.

“In general the market will still prefer the Eu1bn deals because they tend to be more liquid than Eu500m trades,” said RBS senior analyst Frank Will.

Change in weighting of individual segments in iBoxx Euro Covered following inclusion of outstanding benchmarks < Eu1bn.

Sources: LBBW Credit Research, Bloomberg, Markit, Dealogic