1. Description of the index
1.1 Official Hungarian name of the index:
RMAX CA IB Értékpapír Rt. - Profitvadász Rövid Lejáratú Magyar Állampapír Index
1.2 Official English name of the index:
RMAX CA IB Securities Ltd. - Profitvadász Short Term Hungarian Government Debt Securities Total Return Index
1.3 1.3 Official abbreviation of the index:
1.4 Basis of the index:
100.0000 points on December 31, 1996 (trading day)
1.5 Frequency of calculating and publishing the index:
The index is calculated once each trading day during the daily trading hours of government securities. The daily index value is rounded to four decimal points and published in HUF on Reuters' HUBONINDEX page at 4 p.m. every day.
1.6 Formula of the index:
midprice t,i: is the arithmetical average, rounded to 4 decimals, of the best bid and offer price of government bond, or discount Treasury bill 'i' on trading day 't' with payment on trading day 't+2' based on primary dealers' two-way secondary market price quotation, which is published by the Government Debt Management Agency. accrued interest t+2,i is the interest accrued on government bond 'i' until the trading day 't+2', rounded to 4 decimals. interest payment t+2,i is the interest payment for government bond 'i' on trading day 't+2'. weight t-1,i: is the weight of the government bond, or discount Treasury bill 'i' in the index basket on the 't-1' trading day.
2. Objective of the index
The successful introduction of MAX Index in 1997 encouraged the elaboration of another index supplementing the government bond index. Although from the second half of 1995, the market demand has shifted to longer term fixed rate government securities from short term or floating rate securities playing a dominant role until then, the share of instruments with residual maturity shorter than one year is still significant in the maturity structure.
These aspects were taken into consideration when the RMAX Index was worked out that contains government bonds and discount Treasury bills with residual maturity between three months and one year. The calculation method of the index is the same as for MAX Index, i.e. the total return index concept laid down by the European Federation of Analysts' Societies (EFFAS) Commission on Bonds was applied. Regarding the index portfolio revision the same principles were used as for MAX Index, so to make the portfolio a reliable benchmark for institutional and private investors against which they can measure the performance of their own government bond portfolios. A key consideration was to reduce the number of basket revisions. In relation to RMAX Index the number of revisions can not exceed four occasions each month. It is the result of bi-weekly discount Treasury bill auctions and the revision of government bonds on the first trading day of the month.
A characteristic feature of the total return index is that it uses dirty prices (clean price + accrued interest) so the accrued interest is continuously increasing the index value. For discount Treasury bills the accrued interest is contained in the price and accrues until redemption. All coupons paid by the issuer for the constituent bonds are automatically reinvested in the index, proportionally to the weights of the papers (government bonds + discount Treasury bills) in the index basket. If a government bond, or a discount Treasury bill is excluded from the index basket, the market value of the security shall be reinvested in the actual index basket. As the index is calculated by using the so called chain-link method, i.e. the today's index value is defined as the previous day index value multiplied by the weighted percentage change in dirty prices of the current constituents since the previous index calculation, the changes in the constituents should not cause the index calculations to jump or get distorted.
The RMAX Index very closely related with the MAX Index, because the government bonds excluded from the latter index are automatically included in RMAX Index thereby complementing discount Treasury bills. The composite index of the two indices based on their market shares is the MAX Composite index, which is described in a separate document.
3. General principles
3.1 Composition of the index basket
A government security shall be added to the index basket if it meets the following criteria:
• it is a fixed rate Hungarian Government Bond and Discount Treasury Bill that has been issued publicly,
• it is subject to Primary Dealer price quotation obligation, and Primary Dealers quote secondary market bid and offer prices for the government bond or the discount
• it has more than 91, but less than 365 days to final maturity when it is added to the index basket.
3.2 Weighting of government bonds included in the index basket
Government bonds and discount Treasury bills are represented in the index basket by their amount accepted at the auctions at par value. The sum of these amounts constitute the total nominal value of the index basket. The weight of individual government bonds and discount Treasury bills in the index basket is determined by the relationship of their nominal value accepted at the auction to the nominal value of the whole index basket. The weights of constituent government bonds is reviewed once a month, on the first trading day of the month following the month when the government bond was re-opened. In case the re-opening date of a constituent government bond falls on the first trading day of a month, the weight of the bond is reviewed on the first trading day of the given month. If a constituent government bond is bought back through a publicly announced reverse auction than its weight is changed in the revision of the index basket following the payment date of the reverse auction. The weight of Discount Treasury Bills is modified on the Tuesdays following the auction date. If this day is a holiday than the modification shall be effected on the next trading day.
3.3 Reinvestment of coupons paid
The coupons paid by the issuer for constituent bonds are reinvested in government bonds and Discount Treasury Bills included in the current index basket on the interest payment date in proportion to the weights of the individual securities.
3.4 Reviewing the index basket
If the residual maturity of a MAX Index constituent Hungarian Government Bond decreases below 365 days it is excluded from the MAX Index on the first trading day of the following month. On the same trading day this government bond shall be included in the RMAX Index at its current market value. If the residual maturity of a government bond is 365 days on the first trading day of a given month than it shall be excluded from the MAX Index and included in the RMAX Index on that day. (Exclusion means that on this day the name of the bond can not be found in the list but the index value reflects the weighted change in the bond price. On the day of inclusion the name of the bond appears on the list, but it contained in the index value only from the next trading day.) In case the Hungarian State Treasury Government Debt Management Agency issues a discount Treasury bill that has not existed before and meets all the requirements for the inclusion in the index basket, the discount Treasury bill will be added to the basket on the Tuesday (trading day) following the discount T-bill auction. If on that day the Hungarian State Treasury Government Debt Management Agency does not disseminate price information for the given discount T-bill than the discount T-bill shall be included in the index in the next revision day connected with discount T-bill auction.
In case the residual maturity of a constituent discount Treasury bill decreases below 105 days from the value date of the index to the redemption date of the security, than it is excluded from the index basket at its current price value on the next Monday (trading day). If the residual maturity of constituent government bonds decreases below 105 days, than they shall be excluded from the index basket on the next discount T-bill exclusion day. If the exclusion day is not a trading day than the securities are excluded on the next trading day. In line with the index calculation method, the current price value of the bonds and discount T-bills excluded is reinvested in the index constituents according to their weights on the day of exclusion.
If the Hungarian State Treasury Government Debt Management Agency buys back an index constituent bond through a publicly announced reverse auction than on the next index basket revision day the weight of the given bond in the index basket shall be reduced by the amount accepted at the reverse auction.
3.5 Treatment of extraordinary events
3.5.1 Interest payments falling due on holidays
If the interest payment of a constituent bond falls due on a holiday, the amount of interest will not be paid or reinvested until the next working day. For index calculation purposes, the coupon payment shall be included in the formula two trading days before the actual payment date.
3.5.2 Lack of price quotation for a security
In case Primary Dealers temporarily suspend price quotation for a constituent security, or incorrect price information is disseminated for technical reasons, the last correct clean price should be used for calculating the index for not longer than 5 consecutive trading days.
In case Primary Dealers' price quotations or the dissemination of correct price information of the security is not restored within 5 trading days from the date of suspension the security must be temporarily excluded from the basket at its current price value on the fifth trading day.
If Primary Dealers' price quotations or the dissemination of correct price information of the security temporarily excluded from the basket return, the security must be reinstated at its current price value in the index basket with the same value date.
In accordance with the index calculation method, the current price value of government papers being temporarily excluded from the index basket is reinvested in constituent bonds according to their weights on the day of exclusion.