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Deutsche Börse changes rules for equity indices following Porsche’s short squeeze


Deutsche Börse has announced changes to the methodology of its equity indices in response to some of the issues raised by Porsche’s short squeeze on Volkswagen shares, which momentari

Deutsche Börse has announced changes to the methodology of its equity indices in response to some of the issues raised by Porsche’s short squeeze on Volkswagen shares, which momentarily made the company the world’s largest by market capitalisation.

VW shares soared in value last month after it became apparent that while as much of 14 per cent of the stock had been shorted by traders, the actual free float, excluding shares over which Porsche held options, was less than 5 per cent.

At least one hedge fund has been forced out of business after sustaining massing losses on trading in VW shares. The USD240m Trident European Fund run by JO Hambro Capital Management is to close after falling 25 per cent in October, its worst month since launch a decade ago, taking its losses so far this year to nearly 40 per cent.

VW was temporarily suspended as a constituent of Germany’s Dax equity index following the price surge. In consultation with its working committee
equity indices, the executive board of Deutsche Börse has now announced changes to its index rules including taking options positions into consideration when calculating a company’s free float and increasing its minimum size.

The changes will take effect from December 22, the next regular
adjustment date for the composition of the index constituents, following a review to be carried out on December 3. The minimum free float, the number of shares in a company available for trading and owned by shareholders
than the major shareholders, is to be increased from 5 to 10 per cent for
that are part of the Dax, MDax, SDax and TecDax indices.

more than 90 percent of their shares held by major shareholders will be
from the index two trading days after the first public notification of a
float of less than 10 percent.

Deutsche Börse says the increase in the threshold is a step toward
liquidity in the indices. The higher a company’s free float, the higher the tradability of the share in most cases.

For determining the free float of an index constituent that is in the process of being acquired, all legally notifiable shares over which the acquiring company has secured options will in future be taken into account.

The rules governing free float adjustments for Dax, MDax, SDax and TecDax index constituents will be changed to allow more rapid reaction to events such as corporate actions, mergers or acquisitions and any resulting potential shortages of shares available for trading on the market.

In future, a company’s free float can be adjusted in the index calculation between the regular quarterly dates, provided that the extraordinary event causes a change in the company’s free float of more than 10 percent of its share capital.

To avoid excessively frequent adjustments in cases of acquisition, the free float is noted at the time of an initial tender offer and again in the closing reports at the end of the offering period. This enables the index to track the market activity more closely and transparently, as the changes are effected immediately with a two-day lead. Other changes to free float will continue to be implemented by Deutsche Börse on a quarterly basis only.

The recently-introduced volatility criterion remains unaffected by the latest amendments. This says a stock can be removed from the Dax, MDax or SDax selection indices if its weighting in the index, based on current free float market capitalisation, exceeds 10 percent at the close of trading on one trading day and its annualised volatility over the past 30 trading days exceeds 250 percent. This rule has now been extended to cover the TecDax equity index.

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