Market consultation

FTSE TMX Canada
Market Consultation
Universe Bond Index treatment of NVCC debt issued
prior to 1 July 2017

Important Information
The proposals set out in this consultation document are included in order to gather feedback and may or may
not result in changes to the FTSE TMX Canada Bond Index Series..

ftserussell.com

June 2017

FTSE TMX Canada Market Consultation
Responding to the Consultation
Please submit your response to the questions included in this survey online athttps://www.surveymonkey.co.uk/r/5FMYLW2This consultation will close on June 30, 2017. If you have any questions please contact us at pcbond@ftse.com or416.572.7979. If you encounter any technical issues, please contact rpawson@ftserussell.com.

Introduction
With the guidance and direction of FTSE Russell’s independent fixed income advisory committees, FTSE
Russell regularly consults with market participants on the preferred index handling of market developments
to ensure that the indexes continue to meet their stated objectives and lead global standards inbenchmarking. As part of our commitment to protecting and enhancing the FTSE TMX Canada Indexes, weare soliciting stakeholder feedback regarding index treatment of previously issued (settled prior to 1 July2017) non-viability contingent capital (NVCC) bank debt in the Universe Index in light of our recently
announced rules change to include newly issued NVCC bonds, effective 1 July 2017.
Accordingly, we invite index users to respond to the consultation questions below. The feedback received
from this consultation will assist FTSE Russell in making a final decision regarding the index treatment ofNVCC securities issued prior to 1 July 2017. The consultation will close on 30 June 2017 and FTSE Russell
will make an announcement shortly thereafter (and no later than 31 July).

BackgroundOn 5 June 2017, FTSE Russell announced that newly issued non-viability contingent capital (NVCC) bonds
will be eligible for the flagship FTSE TMX Canada Universe Bond Index, effective from 1 July 2017. Thisdecision was made after careful consideration to ensure that the FTSE TMX Canada Universe Bond Index
continues to accurately measure and represent the domestic Canadian investment grade fixed incomemarket. While inclusion of these securities ensures that the Universe Bond Index continues to haveappropriate representation of core Canadian banking debt going forward, there are additional considerations
for handling the outstanding issuance, which require further review.
For further details on this rules change, click here to see the announcement.

FTSE Russell | FTSE TMX Market Consultation – June 20172

Implementation Options for NVCC Debt Issued Prior to 1 July 2017
We recognize that as an index provider, we must balance the objective of the index to accurately represent
the market it is intended to track with potential market implications of any rule changes. In considering thetreatment of previously issued NVCC debt within the Universe Bond Index, we are asking index users toconsider three potential approaches:
1. NVCC debt will be eligible for the Universe Bond Index on a going forward basis only from 1 July
2017, and NVCC debt issued prior to 1 July 2017 will be permanently excluded from the Universe
Bond Index;
2. NVCC debt issued prior to 1 July 2017, following a notice period, will be phased into the UniverseIndex over a predetermined time frame on a security-by-security basis starting with the bonds
closest to their final maturity date;
3. All NVCC debt issued prior to 1 July 2017, following a notice period, will be included in full on thesame predetermined date.
Note: For options #2 and #3, the predetermined dates will be chosen to avoid market sensitive periods ordays, such as quarter- or year-end.

Projected Index Impact of Inclusion of NVCC Debt Issued Prior to 1 July 2017
The NVCC universe under consideration as part of this consultation is comprised of 15 NVCC bonds withC$15.8 par amount outstanding. It is projected that these securities would comprise 1.0% of the Universe
Index by market value, 3.7% of the Corporate, 6.6% of the Short Term Corporate, and 8.9% of the Financial
sectors as of May 2017. A list of the NVCC bonds can be found in Table 1 and a pro forma impact to theUniverse Index is provided in Table 2.
Table 1: Legacy NVCC Securities under Review for Universe Index Inclusion
Cusip

IssuerCouponMaturity Date

780086JC906369ZBS2136069JJ1780086KR4AO ($bn)

RatingRoyal Bank Of Canada

3.04

07/17/2019964.5

ABank of Montreal

3.12

09/19/2019

1,000.00

BBB

C.I.B.C.

310/28/2019

934BBB

Royal Bank Of Canada

2.48

04/06/2020

1,000.00

A8911454X9

Toronto-Dominion Bk

2.692

06/24/2020

1,500.00

A06369ZBT0Bank of Montreal

3.34

08/12/2020

1,000.00

BBB064151GC1

Bank of Nova Scotia

3.367

08/12/2020

655.4

BBB8911455X8

Toronto-Dominion Bk

2.982

09/30/2020

951.5

A06369ZCC6Bank of Montreal

3.32

01/06/2021

1,214.00

BBB780086LZ5

Royal Bank Of Canada

3.31

01/20/2021

1,500.00

A136069LY5C.I.B.C.

3.4201/26/2021

990

BBB780086JM7Royal Bank Of Canada

3.4509/29/2021

887.5

A06369ZCD4Bank of Montreal

2.57

01/06/2022

850.00

BBB064151AR4

Bank of Nova Scotia

2.5803/30/2022

1,197.80

BBB8911457R9

Toronto-Dominion Bk

4.859

04/03/2026

1,168.00

A

Note: Data are as of May 31, 2017

FTSE Russell | FTSE TMX Market Consultation – June 20173

Table 2: Pro forma Impact of Legacy NVCC Inclusion in the Universe Index, by Sector

Government
FederalCurrent Universe Index
CountMV (bn) MV (%)
494
1,145.0
72.896577.8
36.7

Projected Universe Index
CountMV (bn) MV (%)
494
1,145.0
72.1
96
577.8
36.4

Provincial

308

537.5

34.2

308

537.5

33.8

00.0

-0.4

Municipal
Corporate

90
935

29.8
427.4

1.9
27.2

90
950

29.8
443.9

1.9
27.9

0
15

0.0
16.5

0.0
0.8

Communication

69

42.0

2.7

69

42.0

2.6

00.0

0.0

EnergyFinancial
Auto Finance

251
220
35

84.0
169.0
16.6

5.3
10.7
1.1

251
235
35

84.0
185.5
16.6

5.3
11.7
1.0

0
15
00.0
16.5
0.0

-0.1
0.9
0.0

Bank

94112.77.2

109

129.2

8.1

15

16.5

1.0

Insurance

44

18.8

1.2

44

18.8

1.2

0

0.0

0.0

Services

47

20.9

1.3

47

20.9

1.3

00.0

0.0

Industrial

76

26.9

1.7

76

26.9

1.7

0

0.0

0.0

Infrastructure

203

68.7

4.4

203

68.7

4.3

0

0.0

0.0

Real Estate

99

27.1

1.7

99

27.1

1.7

0

0.0

0.0

Securitization
TOTAL

17
1,429

9.7
1,572.5

0.6
100.0

17
1,444

9.7
1,589.0

0.6
100.0

015

0.0
16.5

0.00.0Count00Change
MV (bn) MV (%)
0.0-0.8
0.0-0.4

Note: Data are as of May 31, 2017

With the exception of one medium issue, the majority of the legacy NVCC securities are short-dated withless than 5 years to final maturity and fall into the Short Term sub-indexes of the Universe and Corporate
benchmarks. Table 3 provides further details on the pro forma impact of inclusion by maturity.

Table 3: Pro forma Impact of Legacy NVCC Inclusion in the Universe Index, by Maturity

Short

Current Universe Index
Count MV (bn) MV (%)
556
714.3
45.4

Projected Universe Index
Count MV (bn) MV (%)
570
729.4
45.9Change
MV (bn) MV (%)
15.1
0.5

Count
14

Government

154

485.6

30.9

154

485.6

30.6

00.0

Corporate
Mid

402

228.7

14.5

416

243.8

15.3

1415.1

0.8

323

359.4

22.9

324

360.8

22.7

1

1.3

-0.2

Government

126

276.7

17.6

126

276.7

17.4

00.0

-0.2

Corporate

197

82.7

5.3

198

84.1

5.3

1

1.3

0.0

Long

550

498.8

31.7

550

498.8

31.4

00.0

-0.3

Government

214

382.8

24.3

214

382.8

24.1

00.0

-0.3

Corporate
TOTAL

336
1,429

116.0
1,572.4

7.4
100.0

336
1,444116.01,588.9

7.3
100.0

0150.016.5-0.1
0.0-0.3

Note: Data are as of May 31, 2017

FTSE Russell | FTSE TMX Market Consultation – June 20174

Questions
Please submit your response to the questions included in this survey online athttps://www.surveymonkey.co.uk/r/5FMYLW2This consultation will close on June 30, 2017. All responses will be treated as confidential. FTSE Russell
may publish a summary of consultation feedback, but no individual responses will be published and norespondents will be named.
If you have any questions please contact us at pcbond@ftse.com or 416.572.7979. If you encounter any
technical issues, please contact rpawson@ftserussell.com.

1. What is your preferred treatment for NVCC debt issued prior to 1 July 2017 in the Universe BondIndex?
Inclusion on a going forward basis only (i.e. NVCC debt issued prior to 1 July 2017 will remainineligible)
Inclusion using a phase-in approach where bonds are added on a security-by-security basis with thebonds closest to maturity first
Inclusion in full at a predetermined date, with sufficient notice

2. If FTSE Russell were to incrementally include NVCC bonds issued prior to 1 July 2017, which
sequencing approach would you prefer? All approaches listed below would also include a notice
period of at least one month prior to the first inclusion detailing the sequencing for all bonds.
One security at a time, on a weekly basis
Four securities at a time, on a monthly basis
One security at a time, on a monthly basis

3. If FTSE Russell were to include all NVCC bonds issued prior to 1 July 2017 at a single future date,
how much lead time would be sufficient to accommodate the rebalance?
1 month
3 months
6 months
Other/no preference

4. If you prefer exclusion of NVCC debt issued prior to 1 July 2017 from the Universe Bond Index,
what is your primary reasoning?
Inclusion of these bonds will disadvantage certain market participants (i.e. those investors who havenot tactically invested out-of-index)
On the inclusion date, the anticipated market disruption/liquidity effect is likely to impact index
rebalancing
In principle, I disagree with their inclusion and want to minimize index exposure
OtherFTSE Russell | FTSE TMX Market Consultation – June 20175

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