Free Float Market Consultation
Global index provider FTSE Group (“FTSE”) plans to consult users of its equity indices on potential changes to the free float banding system which is currently used to determine the investability weight of index constituents.
In 2001, FTSE was the first global index provider to adjust the weight of its index constituents in line with free float principles. The free float methodology which was adopted at that time was determined following a consultation with market users, and remains in place today.
To ensure that its index products continue to be as representative as possible, FTSE will again consult its users on whether and how this methodology should be enhanced.
It is expected that the consultation will commence in the first quarter of 2009. In keeping with other market consultation exercises, index users will be given ample advance notice of the implementation of any changes which might arise.
Interim Arrangements to Meet Current Market Conditions
Current market conditions show that there is likelihood, in the coming months, that large investability changes will take place in some stocks. These are most likely to arise from new equity holdings acquired by governments. FTSE acknowledges that if large scale investability weightings take place during the period of consultation, its index users may experience unnecessary and disruptive turnover in investment portfolios. It has therefore decided to minimise any disruption by adopting the following interim measure in order to better manage any free float changes during this period:
If the free float banding of a stock is due to change as the result of a government acquiring shares in it, then the precise free float, rather than current bands, will be used within FTSE indices to represent that stock’s investability weighting. The precise free float figure will be used until such time that either revisions to the current free float mechanism are implemented, or it is confirmed that no changes to the current mechanism are required.
Any further changes to the free float of a constituent handled in this way will be processed according to the FTSE Ground Rules used to implement a change in shares in issue. Please see below for more details of this process.
This interim measure is intended to serve as a pragmatic interim solution to support investors, while the period of consultation is underway. Using precise free float will cause the lowest level of turnover in FTSE indices, regardless of the outcome of the consultation. An example of how this will work is also shown below.
The interim free float arrangement will be introduced on January 01 2009 and will apply to all of FTSE’s free float weighted equity index series.
Notes:
Shares in issue changes
Other than for changes as a direct result of a corporate action, the number of shares in issue for each company is amended when the accumulated change is greater than 1% of the total used in the index. Changes will be made quarterly after the close of business on the third Friday of March, June, September and December.
If accumulated changes in the number of shares in issue add up to 10% or more or when an accumulated share change represents USD 2bn of a company’s total market capitalisation, the change is implemented between quarters.
Free Float changes - example of interim measure
By way of example, if an existing constituent with 100 shares and 100% free float issues 50 new shares, all of which are subscribed to by a government, the index share number will increase to 150 and at the same time the index free float will decrease to 67%, thereby resulting in no overall index weighting change.
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