The overall aim of the reform is to boost trading in mid-cap stocks, which account for the majority of the companies listed on Euronext and on Euronext Brussels in particular. Today’s mid-caps can become the future blue chips.
Another aim is to bring the composition of these indices in line with European standards.
Euronext uses a methodology combining liquidity and market capitalisation, as is the case for other stock indices. Following a series of consultations with mid-cap specialists, the indices were tailored to the requirements of users such as asset managers, derivatives trading, etc., particularly as regards capitalisation and liquidity thresholds (minimum degree of liquidity).
In addition to free float weighting, the calculation methods respect three key methodological principles:
a nested structure whereby new indices can be created by combining existing ones
a minimum degree of liquidity for the component stocks
This is not the primary purpose of the new indices, which have been designed as benchmarks for mid and small-cap managers and their portfolios. Remember that the indices are the result of a joint project that included mid and small-cap fund-managers, who had been calling for a new range of indices for medium sized stocks. These indices represent a sizeable portion of our market reform.
Indices that are likely to be used as underlying for derivatives or tracker funds must fulfill certain conditions. In particular, the weights of the component stocks must be limited. Indices such as the BEL 20 are used to replace, complement, cover and hedge positions on the Belgian market. Too much weight on one or two companies would render the index useless. The level of 15% is a general accepted market consensus.
quarterly to review the BEL Mid and BEL Small Indices
annually to review the BEL 20 Index
The schedule for reviewing the other indices is unchanged: BAS daily adjustments following corporate actions and Belgian Continuous at every switch of trading segment.
Euronext Brussels has proven over the years that it puts a real focus on mid and small companies, as they are very numerous. The successful Next events like the Financial Cocktails and Brunches and the road shows etc are now completed by the new indices.
The BEL Mid and BEL Small indices will increase the visibility of the Belgian Mid & Small caps on a national & international level. This in turn should attract other Belgian companies.
We consulted different market participants, including Belgian and foreign members and investors, about the family of indices. We set up working groups, which included mid-cap asset managers, to consult the financial community. Naturally, the Index Steering Committee was closely involved in this process. These meetings made it quite clear that investors increasingly use indices, sectors and company profiles as a basis for investment decisions, rather than compartments set up by regulated markets.
The compiler, composed of Euronext specialists manages the Belgian indices. The Index Steering Committee (ISC) decides upon the modifications of the rules governing the index. The members of this ISC are external people: Roland Gillet, Betty Pestiaux and Hugo Clemeur.
The BEL 20 suffered from the numerous mergers or takeovers of its blue chips a few years ago. That’s how progressively more and more mid-caps entered the blue chip index, rendering it less attractive for investors, especially when launching products on it. At the beginning of the euro period, investors for a short while had the tendency to disinvest in other euro countries, choosing well-known big caps. Those were also the booming days of the technology sector. As the BEL 20 contained not many very big caps neither technology companies, the performance in those days remained behind the other euro indices. The overall crisis did not spare the Belgian market, although quite high dividends preserved the market from a long crash scenario.
The overall crises in the late nineties, early 2000 did not spare the Belgian market, although quite high dividends preserved the market from a long crash scenario. Changing the BEL 20 index under those circumstances would not have given any positive result. Since March 2003 however the market is recovering and the BEL 20 performed much better than most of the European markets. This is due to the fact that investors are rediscovering Mid and Small-Caps, as well as other companies presenting solid assets as well as dividend return.
The performance of the BEL 20 in 2004 puts the Belgian market in the picture. Turnover increased by more than 60%. The demand for products linked to the Belgian market is increasing. That ‘s why now is the time to adapt the indices to the market needs and standards.
The new BEL 20 index rules will be implemented on Tuesday March 1,2005 after trading hours, based on the closing prices of that day. The new divisors will be announced that same day after trading hours.
A grandfather clause is applied for a number of companies as to the timeframe for implementation. The Steering Committee has adopted the following temporary provisions.
In the first year, the companies currently represented in the BEL 20 index will not have to comply with the new requirements for free-float capitalization. This provision will be extended for one year for the same companies that still fail to meet these requirements on 31 December 2005 but have made adequate progress from the same date in 2004. Following review at 31 December 2006, only companies complying with all requirements will remain in the index. The companies to which these temporary measures apply will also be included in the BEL Mid index.
With this provision, Euronext aims to allow the companies concerned sufficient time to adapt, while at the same enhancing the tradability of the BEL 20 by stages and setting up benchmarks for mid and small-cap stocks, thereby benefiting all market participants.
The BEL Mid index replaces the current Belgian Mid-cap index (a return index) from 3 January 2005. Component selection is based on data at 30 November 2004. The price version will be available on 1 March 2005 and the base will be the level of the current Belgian Mid-cap at 31 December 2004 (2631,03).
The BEL Small Index replaces the current Belgian Small-cap (a return index) from 3 January 2005. Component selection is based on 30 November 2004 figures. The price version will be available on 1 March 2005, and the base will be the level of the current Belgian Small-cap index at 31 December 2004 (4999,83).
