Germany's DAX will get bigger and stricter after Wirecard fiasco

The new proposals also require members to have staffed audit committees and post quarterly statements.
The new proposals also require members to have staffed audit committees and post quarterly statements.PHOTO: REUTERS

FRANKFURT (BLOOMBERG) - Germany’s DAX benchmark is about to undergo the biggest makeover since its inception in 1988.

Index operator Qontigo, a unit of Frankfurt-based Deutsche Boerse, plans to increase the number of members to 40 from 30 and impose new quality criteria on both existing and prospective members.

New rules require members to post quarterly statements, as well as audited annual results, with a fast exit for those failing to present them on time. Supervisory boards must have staffed audit committees.

Effective immediately, aspiring members will need to show they’ve been profitable for two years to join the benchmark. The changes follow a four-week long market consultation that got more than 600 responses.

“Market participants will benefit from a simple set of rules in line with international standards and new qualification criteria for the German benchmark index,” Stephan Flaegel, global head of benchmarks & indices at Qontigo, said in a statement.

While the DAX’s composition was long governed by rankings based on market cap and traded volume, the index owner plans to drop the volume ranking, leaving market cap, a general liquidity threshold and the new qualitative criteria as the main tests for entry.

The earnings reporting requirements will become effective during the first-quarter index review, while the increase to 40 members will only take effect in the third quarter next year. Existing members that don’t yet have an audit committee will get until August 2022 to adapt to the new rule.

The only proposal that was not adopted would have banned companies involved in “controversial weapons;” according to Qontigo, this would have affected one current member of the MDAX.

The push to reform index rules, which had remained mostly unchanged for the past three decades, was sparked by the high-profile case of Wirecard, the fraudulent fintech that was a DAX member for two years despite repeated allegations of accounting irregularities. When it collapsed in June, pressure to overhaul the index mounted as existing rules didn’t allow for the benchmark’s first-ever insolvent member to be ejected right away.

Delivery Hero joined the DAX to replace Wirecard, and some investors expressed unease about the fact that the Berlin food delivery firm had never reported an annual profit. Had the new rules already been in place, it would not have been eligible to join.

Inclusion in benchmark indexes is becoming more important for companies in a financial landscape increasingly dominated by passive investment funds. Bank of America strategists predict that equity assets in index-tracking funds will surpass actively managed portfolios in August 2021. About 14 billion euros (S$22.3 billion) in exchange traded funds track Germany’s DAX Index, data compiled by Bloomberg shows.