Standard & Poor’s today outlined its transition plan for including income trusts in the S&P/TSX composite index, the benchmark index of the Toronto Stock Exchange.

The process is expected to be completed by March 2006.

S&P and the TSX announced their intention to include income trusts in the S&P/TSX composite back in January.

Following additional consultation with the Canadian Index Advisory Panel and other index users, S&P is proposing the following schedule for including income trusts in the S&P/TSX composite:

  • May 2005 – Publication of the plan to bring income trusts into the S&P/TSX composite;
  • June 2005 – Publication of revised rules for the S&P/TSX indices covering changes related to income trusts in the composite;
  • June 2005 Quarterly Rebalance – Continuation of the current indices;
  • September 2005 Quarterly Rebalance – Introduction of two provisional indices: the provisional S&P/TSX composite (which will include income trusts at full float adjusted weight) and the provisional S&P/TSX income trust index. Both indices will be published on an end-of-day basis;
  • December 2005 Quarterly Rebalance – The S&P/TSX composite will include income trusts at 50% of the full float adjusted weight. The S&P/TSX income trust index will add those trusts that are in the composite, but were not already in the old income trust index, at 50% of full float adjusted weight. Income trusts in the S&P/TSX income trust index, which do not qualify for inclusion in the composite, will be removed from the income trust index. Publication of the S&P/TSX equity index, including all the equities in the S&P/TSX composite, will begin;
  • March 2006 Quarterly Rebalance – The S&P/TSX composite and the S&P/TSX income trust index will include income trusts at full float adjusted weight. The transition will be complete. The two provisional indices will terminate.

S&P has also defined just what it will consider as an income trust for index inclusion. It notes that only trusts, REITs and limited partnerships based in Canada will be eligible.

Securities that are “paper-clipped” combinations of equity and debt, and which can be separated by holders, will not be eligible.

“Stapled” securities, in which a combination of securities trade as one and cannot be broken apart, will be eligible for inclusion.

Income deposit securities and income participating securities, both of which are paper-clipped, will therefore not be eligible.

S&P adds that if the recently announced action eliminating foreign property limits is not confirmed by regulatory changes, the definition of income trusts will be modified to exclude limited partnerships, since without changes to current regulations these would continue to be defined as foreign property.

So far, trusts will not be eligible for inclusion in the S&P/TSX 60. However, S&P notes that some market participants have commented that they believe trusts will have a place in the 60 in the future. So, the S&P/TSX Canada Index Committee, “will continue to listen to market comments on this issue”. Trusts will be included in both the S&P/TSX midcap and the S&P/TSX smallcap indices.

The S&P/TSX income trust index will include all trusts in the S&P/TSX composite. The current income trust index will change from an index managed to control for sector exposure to a rules-based index including all trusts that are in the Composite. Income trusts that are not in the composite will not be included in the income trust index, and the weights of individual constituents will not be capped. Rules defining eligibility for the index will continue to be based on size and liquidity, and will be the same for equities and trusts.

S&P will continue to publish real-time and end-of-day indices focused solely on the equities in the composite. This index will be named the S&P/TSX equity index.

A small number of equities may be removed from the composite on account of the universe being modified to include trusts. These removals will take place at the September quarterly rebalancing.