For the purposes of the EU Short Selling Regulation (SSR), the calculation of a sovereign bond constituent's weighting in a bond index differs from that of equity or equity-like index weightings. While equity indices typically use market value weighting, for the SSR, face value weighting is required for bond indices to reflect nominal exposure.
Face Value-Weighted Bond Index Calculation
For a face value-weighted bond index, as required by the SSR, the Weighting of an individual bond can be calculated in two steps:
Step 1: Calculate the total index sum
The total sum of the bond constituents is calculated as follows:
Total Sum (index) = Sum((FaceValue of Bond1 x WeightingQuantity of Bond1)+(Face Value of Bond2 x WeightingQuantity of Bond2)+...)
Step 2: Calculate the weight of each bond
Once the total sum is determined, the weight of a specific bond is calculated as follows:
Weighting = (FaceValue* WeightingQuantity) / Total Sum (index)
Where:
Weighting is the weight of the bond in the index.
FaceValue refers to the face value of a single bond.
WeightingQuantity is the number of units of the bond in the index
Total Sum represents the total of all constituent bond face values multiplied by their respective WeightingQuantity.
This method ensures that each bond’s weight is proportional to its total face value contribution to the index. Key points to note:
This weighting is based solely on FaceValue and WeightingQuantity.
It does not take into account the current market price of the bonds.
It differs from market value-weighted calculations, which rely on current market prices.
WeightingQuantity is not a required input property; it is only mentioned here to clarify how to calculate each constituent bond’s Weighting.
Example Scenario:
Let's say we have a sovereign bond index with three bonds:
Bond A: FaceValue = €1,000, WeightingQuantity = 10,000
Bond B: FaceValue = €5,000, WeightingQuantity = 5,000
Bond C: FaceValue = €2,000, WeightingQuantity = 15,000
Step 1: Calculate the total index sum
Total Sum (index) = (FaceValue of BondA × WeightingQuantity of BondA) + (FaceValue of BondB × WeightingQuantity of BondB) + (FaceValue of BondC × WeightingQuantity of BondC)
Total Sum (index) = (€1,000 × 10,000) + (€5,000 × 5,000) + (€2,000 × 15,000) = €10,000,000 + €25,000,000 + €30,000,000 = €65,000,000
Step 2: Calculate the weight of each bond
Bond A Weighting = (€1,000 × 10,000) / €65,000,000 = 0.1538 or 15.38%
Bond B Weighting = (€5,000 × 5,000) / €65,000,000 = 0.3846 or 38.46%
Bond C Weighting = (€2,000 × 15,000) / €65,000,000 = 0.4615 or 46.15%
Note: WeightingQuantity is simply how many (number of) that bond is in the index.