For the first time, the liquidity criteria will materially affect the weight of the companies included in TASE's indices
This reform will enhance equity liquidity, benefiting both the companies and the retail investors, including the incorporation of restraining mechanisms to prevent sharp fluctuations in the shares that comprise the indices.
The free float weight classes will be linearly weighted, replacing the existing weight brackets methodology.
For the first time, TASE will incorporate the liquidity criteria into the indices' methodology.
Shares will be gradually introduced into the indices, to avoid trading irregularities and price fluctuations.
Fast-track entrance will be available to new large companies only.
he Rimon Universe will be upgraded and will comprise up to 300 of the largest and most liquid shares.
The SME-150 Index will be upgraded based on the methodology that is applied to the leading indices.
Tel Aviv, June 14th, 2022 - TASE publishes today for public comments the principles of the reform for enhancing the liquidity in the TASE Equity indices.
One of the challenges encountered by the Israeli capital market is the encouragement of liquidity of the TASE-listed shares. To counter this challenge and improve the liquidity of the shares, for the benefit of the investors, which prioritize the shares' liquidity, TASE staff performed a comprehensive review of the existing indices methodology, including examination of the accepted practices among leading global indices' editors and the tools that are required to upgrade the indices in terms of liquidity.
The professional examination showed that, in the leading international indices, the liquidity criterion is a material entry criterion. It also found that the existing indices' methodology needs to be upgraded, including the incorporation of liquidity criteria as is the accepted practice in leading international indices.
The methodology under the new reform is designed to significantly motivate the public companies to enhance the liquidity through means such as: planning the structure of the offering to accommodate enhanced liquidity on the "day after" the offering, increasing the free float holdings by liquidity providers, such
as mutual funds, portfolio managers and retail investors, diversification and expansion of the base of long-term investors, incentivizing the companies to engage the services of market makers, and more.
Presented below are the principals of the proposed changes:
Discontinuance of free float brackets
Today, TASE encourages the companies to increase the free float rate by applying the free float brackets, which grant those companies that increase the free float rate a weight "bonus" in the index. The evolvement and maturing of the local capital market and the modifications to the free float structure, called for adjustments and changes. Accordingly, it has been decided to align the market with international standards that prioritize the free float rate as a criterion for determining the share's weight in the index. Under the proposed reform, the company's free float rate will be weighted into the calculation of its weight in the index, and the free float brackets will be discontinued. The change is expected to significantly curb trading distortions and enhance the liquidity in the market.
For the first time, TASE will incorporate the liquidity criterion into the indices methodology
The current methodology used to determine the weight of a company in the indices is based on a market cap and free float criterion. This methodology does not account for liquidity, a key criterion that supports the liquidity of the indices. The liquidity criterion is an integral part of global indices' methodologies and TASE has adopted the international standard, customizing it to the needs of the Israeli capital market. The incorporation of the liquidity criterion into the indices' methodology will reduce the investors' liquidity risk and benefit the companies in the long run.
Graded index-entry mechanism:
In order to protect the investors with holdings in the TASE indices and prevent unusual fluctuations of buys and sells upon entrance to the indices, which a possible scenario today, TASE will apply a new methodology that is designed to mitigate trading distortions following the rebalancing of the indices. The change is expected to improve the performance of the indices, while better protecting the investors.
Fast-track entrance for new large companies only
The number of companies on TASE grew significantly over the past two years, with a corresponding increase in the number of companies joining the indices by fast-track entrance. TASE believes that fast-track entrance should be restricted to a limited number of companies, as is the common practice globally. This helps maintain the stability of the indices and prevents distortions and frequent changes whenever companies join and exit the indices. Fast-track entrance will be available solely to new large companies and will be restricted to shares that meet the threshold criteria of the Rimon Universe and that are rated among the 100 shares with the highest average market cap within Rimon.
Upgrading of the Rimon Universe - weighting shares' liquidity component in determining the composition of the index
To optimize the quality of the index, TASE will weight the company's market cap and free float, together with the liquidity criterion of each share, such that greater liquidity will entail a greater weight in the index. In addition, the number of shares in the index will be limited to 300 only. The shares included in the index will be those with the highest market cap from among the shares that meet the threshold criteria of Rimon. The liquidity threshold criteria will be updated to a share that is among the 250 shares with the highest trading volume median or trading velocity median from among the shares that meet the threshold criteria of the Tamar Universe. The free float rate and free float value threshold criteria will be cancelled. Inclusion in the Rimon Universe will be a threshold criteria for inclusion in TASE's TA-Construction, TA-RealEstate, TA-Finance, TA-Technology and TA-Insurance indices.
Upgrading of the SME-150 Index - alignment with the methodology of the TA-90 Index
This move is intended to create a new center of liquidity for second- and third-row companies, which are the cornerstone of the Israeli economy. The index, which includes the companies that are included in the TA-90 Index and the SME-60 Index will be upgraded and its methodology will be aligned with that of the successful TA-90 Index, so that instead of a fixed weight in the index, the weight of the share will now be determined based on the market cap, the free float and the new liquidity criterion. This will create a more liquid index and enable the fund managers to launch investment products on a select part of the companies that are included in the index.