Markit is preparing to introduce a new covered bond index, the iBoxx EUR Liquid Covered Index, designed to offer tradeable exposure to the investment grade market for euro covered bonds, according to Bernd Volk, head of covered bond research at Deutsche Bank.

The existing iBoxx euro covered bond index is the industry benchmark in Europe. At the turn of the year it changed eligibility criteria to include Eu500m and larger issues rather than Eu1bn and greater deals, following lobbying from market participants.

Markit did not respond to enquiries by the time The Covered Bond Report went to press.

According to Volk, the new index’s rules will be designed to offer broad coverage of the market with an emphasis on liquidity to be suitable for OTC and exchange-traded derivatives, and for Exchange Traded Funds (ETFs).

“We argue that the new index will support secondary market liquidity of euro benchmark covered bonds,” he said, “for example also providing incentives for issuers to tap outstanding bonds. At the very least, the index will provide a good picture and track the primary market of the previous two years on a rolling basis.”

The eligibility criteria, according to Volk, are:

• Only fixed rate covered bonds

• All bonds in the Index must be rated investment grade by at least one of the following rating agencies: Fitch Ratings, Moody’s or S&P. If a bond is rated by several agencies, the average rating is attached to the bond. The average rating of Fitch, Moody’s and S&P determines the Markit iBoxx average rating.

• All bonds must have a minimum remaining time to maturity of at least three years at the rebalancing date. The minimum amount outstanding is Eu1bn. Eligible bonds must have an age of no greater than two years.

• The age is defined as the minimum of the following: a) Time since initial issuance, measured as the difference between the first settlement day and the next rebalancing date; b) Time since last tap issuance via the primary market, defined as the difference between the date of the last single notional increase of at least Eu250m and the next rebalancing date.

• The minimum size of the index is 50 bonds, but there is no maximum size.

• Bid and ask price quotes for bonds in the eligible universe are provided by the contributing price providers on an end-of-day basis. Quotes are sent for all trading days in the respective local currency bond market.

• The index will be rebalanced monthly.

The eligibility criteria could help the index address several problems Volk identified with existing indices. He said that issues with existing indices include: the inclusion of illiquid bonds with less than three years remaining to maturity; a weighting towards geographical sectors where liquidity is low; and a low free float in many bonds they include, with associated problems.