FTSE Russell publishes first Fixed Income Country Classification Review

Apr 16th, 2019 | By | Category: Fixed Income

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FTSE Russell has published the results of its first Fixed Income Country Classification Review, which kicked on in January.

FTSE Russell publishes first Fixed Income Country Classification Review

FTSE Russell’s Fixed Income Country Classification Review aims to bring greater transparency to managing country inclusion to the firm’s global fixed income indices.

The review process aims to bring greater transparency to managing country inclusion to FTSE Russell’s global fixed income index offering, which now incorporates all the indices acquired in the purchase of Citi Fixed Income Indices.

These indices include the flagship FTSE World Government Bond Index (WGBI), which covers fixed-rate, local currency, investment-grade sovereign bonds globally, as well as the FTSE Emerging Markets Government Bond Index (EMGBI), consisting of local currency government bonds from emerging market issuers.

Changes to these benchmarks also affects numerous sub-indices that are derived from them.

The WGBI and EMGBI are widely used as benchmarks by active bond managers and as the underlying references for passive funds, including ETFs such as the the $2.2 billion Xtrackers Global Government Bond UCITS ETF.

The review uses ‘Minimum Market Accessibility Levels’, which replaced the previously used barriers-to-entry criteria, for determining whether a country is eligible to be included within a given index based on the accessibility of its bond market.

The methodology assigns local currency fixed rate government markets a level of 0, 1, or 2, with 2 representing the highest level of accessibility.

Nikki Stefanelli, Head of Fixed Income Index Policy, FTSE Russell, said, “Our inaugural review of Market Accessibility Levels demonstrated their utility for enhancing our fixed income benchmarking approach.

“Index users appreciate the transparency and independence of the new process to manage index local market entry and exit. Importantly, it also helps facilitate structural changes in the markets we track by acting as a platform for us to engage with decision makers in countries who are able to address feedback from our users.”

In implementing the framework, countries currently included in the WGBI were assigned a preliminary Market Accessibility Level of “2”, while countries currently included in the EMGBI, but not in the WGBI, were assigned a preliminary Market Accessibility Level of “1”.

Countries tracked by FTSE Russell regional government indices only were assessed against the framework with FTSE Russell’s regional external advisory committees to assign an inaugural Market Accessibility Level. A level of “2” was assigned to Israel, Hong Kong, and New Zealand; and “1” for Czech Republic and South Korea.

Israel now meets the minimum Market Accessibility Level for the WGBI, in addition to the objective market size and credit quality criteria. FTSE Russell notes that if these criteria continue to be met for the September 2019 review, Israel will be scheduled for inclusion into the WGBI following a minimum six month notice period.

Other countries on FTSE Russell’s Watch List include:

  • Malaysia – currently assigned a “2” and included to the WGBI since 2007, is being considered for a potential downgrade to “1” which would render Malaysia ineligible for inclusion in the WGBI.
  • Onshore China – currently assigned a “1,” is being considered for a potential upgrade to a Market Accessibility Level of “2” which is the required minimum for inclusion in the WGBI

These markets will be reassessed during the September 2019 review before any action is undertaken.

FTSE Russell also intends to introduce tracking for a number of new fixed income markets, including Saudi Arabia, Nigeria, Vietnam, Argentina and Croatia.

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