Index Announcements | March 23, 2021

FTSE Canada Bond Indexes – Market Consultation on Index Eligibility of New
Coupon Structure for Non-Financial Hybrid Capital Securities
FTSE fixed income indexes must keep pace with the evolving markets they measure, however its index methodologies
cannot anticipate or codify every eventuality. In such circumstances, FTSE Russell will seek to determine the appropriate
treatment by reference to the guiding principles set out in its Statement of Principles, which also summarizes the ethos
underlying our approach to index construction.
As announced on 5 March 2021, FTSE Russell is formally opening a market consultation to solicit feedback on the index
eligibility of a new coupon reset structure of recently issued non-financial hybrid capital securities in the FTSE Canada
Bond Index Series. Historically, fixed-to-floating rate non-financial hybrid capital securities have been included in FTSE
Canada Bond Indexes provided they meet other inclusion criteria. While the eligibility of fixed-to-floating rate securities iscodified in the FTSE Canada Bond Index rules, the eligibility of non-financial hybrid capital securities as an asset class isnot stated.
This consultation will also seek feedback on the appropriate exit timing for index-eligible structures that have an optional
reset to a coupon that is not pre-determined at issuance; this is currently one year prior to the reset date.
FTSE Russell acknowledges the distinction between financial1 hybrid capital securities and non-financial hybrid capitalsecurities and affirms the previously announced exclusion of Limited Recourse Capital Notes (LRCNs) from the FTSE
Canada Universe Bond Index and FTSE Canada High Yield Bond Index.
Background
According to the Ground Rules for fixed-rate indexes in the FTSE Canada Bond Index Series, including the FTSE Canada
Universe Bond Index and the FTSE Canada High Yield Bond Index, the following coupon types are eligible for index
inclusion:•••

Fixed-rate;
Fixed-to-floating rate with a stated legal maturity; andFixed-rate with a step-up coupon schedule with fixed-rates that are predetermined at issuance.

Both hybrid capital and non-hybrid capital securities with a coupon that is fixed-rate for a predetermined length of time
followed by an optional conversion to floating-rate at a future date are currently eligible for the index during their fixed-rate
period only. These fixed-to-floating rate securities are treated as bullet bonds for analytics purposes with an effective
1

For purposes of defining financial hybrid capital securities, financial entities are those regulated by the Canadian Office of the Superintendent ofFinancial Institutions (OSFI). This does not include entities that operate in the financial services sector which are not required to meet bank regulatory
capital requirements.

For further information please contact FTSE Russell Client Services at info@ftserussell.com or call:
Australia
Hong KongJapanLondon
New York+1800 653 680+852 2164 3333
+81 3 4563 6346
+44 (0) 20 7866 1810
+1866 551 0617

Alternatively please visit our website at www.ftserussell.com

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Index Announcements |01

Index Announcements | March 23, 2021
maturity set to the first date at which their coupon may be converted to floating-rate. The rationale for this handling, froman index perspective, is that their floating-rate coupons make them ineligible for a fixed-rate index after their optional reset
date.
Several recently issued non-financial hybrid capital securities have a coupon structure that allows for an initial fixed-rate
period, followed by an optional conversion to a rate that is not predetermined at issuance and is based on the prevailing
Government of Canada 5-year yield at a future date. The subsequent multi-year periods during which the reset fixed-rate
coupons of these instruments are paid are longer than the one-year minimum time to maturity for inclusion in most FTSE
Canada Bond Indexes. This coupon structure is comparable to the coupon reset structure of Limited Resource Capital
Notes (LRCNs), which are an explicit exclusion from FTSE Canada Bond Indexes. Other features, however, arestructurally similar to existing index-eligible fixed-to-floating rate non-financial hybrid capital securities.
FTSE Russell acknowledges that two recently issued non-financial hybrid capital securities with this new coupon
structure2 were recently included in the FTSE Canada High Yield Bond Index prior to this broad market consultation and acomprehensive review of the new structure with market participants. FTSE Russell will consider an appropriate way
forward for these securities in the light of the responses received to this consultation.
Consultation Approach
Market stakeholders are encouraged to submit their responses to a questionnaire online at:https://www.surveymonkey.co.uk/r/8RLKJT6
All responses will be treated as confidential, however, FTSE Russell may publish a summary of the results in the interestof transparency of process for any ultimate decision it takes. No individual responses will be published and norespondents will be named, however, a summary of responses by stakeholder group may also be made available.
The consultation will close on 2 April 2021, and FTSE Russell will target to communicate its decision the following weekcommencing 5 April 2021. The exact timing of the announcement will also be published to market participants in advanceof its release.
During the consultation period, any new issuance with similarities to the new coupon structure described in thisconsultation will not be added to the FTSE Canada Bond Indexes, including both the FTSE Canada Universe Bond Index
and the FTSE Canada High Yield Bond Index.
Any questions or feedback may also be submitted through the online link.

2Gibson Energy Inc.5.25% 2080 (374825AJ) and Pembina Pipeline Corp. 4.80% 2081 (706327AK).

For further information please contact FTSE Russell Client Services at info@ftserussell.com or call:
Australia
Hong KongJapanLondon
New York+1800 653 680+852 2164 3333
+81 3 4563 6346
+44 (0) 20 7866 1810
+1866 551 0617

Alternatively please visit our website at www.ftserussell.com

Terms of Use | Copyright © 2021 FTSE Russell
Index Announcements |02Index Announcements | March 23, 2021
Consultation Questions
1.

While eligibility of fixed-to-floating rate securities is codified in FTSE Canada Bond Index rules, specific reference tothe eligibility of non-financial hybrid capital is not referenced outright. Historically, fixed-to-floating rate non-financial
hybrid capital bonds have been included in FTSE Canada Bond Indexes provided they meet other inclusion criteria.
For index inclusion purposes, FTSE Russell proposes to define non-financial hybrid capital securities as “a bond thatallows for any option (other than principal redemption) to be exercised by the issuer at the earliest opportunity”. Do
you agree with this definition?

••
•

Yes
NoPlease state your reasons

2. Should ALL non-financial hybrid capital securities, regardless of their coupon reset structure, be eligible for inclusionin the FTSE Canada Universe Bond Index?
••
•
•

Yes
NoIt depends on the coupon reset structure after the first call date. Please provide further details in thecomments.
Please state your reasons

3. If all coupon reset structures are deemed index-eligible for non-financial hybrid capital securities, when should theyexit FTSE Canada Bond Indexes?
••••

One year prior to their reset date (in line with the treatment of existing fixed-to-float securities) regardless ofthe coupon structure thereafter
At their first call date
It depends based on cash flow projections and / or call probability
Please state your reasons

4. Do you believe that the approach taken in the FTSE Canada Universe Bond Index should also apply to the FTSE
Canada High Yield Bond Index?
•••

YesNo
Please state your reasons

5. Please submit any other feedback you would like FTSE Russell to take into consideration.

For further information please contact FTSE Russell Client Services at info@ftserussell.com or call:Australia
Hong KongJapanLondon
New York+1800 653 680+852 2164 3333
+81 3 4563 6346
+44 (0) 20 7866 1810
+1866 551 0617

Alternatively please visit our website at www.ftserussell.com

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