Market consultation

FTSE Fixed Income Client Consultation

Fixed Income Country Classification
Framework

ftserussell.com

August 2018

FTSE Fixed Income Client Consultation
Fixed Income Country Classification Framework
Introduction
A distinguishing feature of multi-currency fixed income benchmarks is their approach to local market inclusion.
There are a number of dimensions across which global markets can be evaluated to establish how they are
represented as peer groups in broad-based benchmarks. These can include market size, credit rating, assettype, designation as an emerging or developed market, and degree of market accessibility.
Users of global fixed income benchmarks require a robust and transparent framework for evaluating such local
market inclusion considerations that can be applied to both flagship and bespoke benchmark construction. To
provide the necessary foundation and enhance our benchmarking approach, this consultation proposes arobust and transparent scoring system to assign a “Market Accessibility Level” for local government markets.
Given the proposed annual nature of the review for Market Accessibility Levels, we are also soliciting user
preferences for a continual versus annual application of the objective market size and credit rating criteria for
local market inclusion in flagship indexes once the accessibility framework is formally adopted.
FTSE Russell also maintains an equity country classification framework, which has been used by investors formany years to assess the eligibility of equity markets across the full global spectrum of country classifications,spanning frontier through emerging to developed markets. Our goal as a multi-asset index provider is to draw
inspiration from the equity country classification framework to create a transparent country classification
framework for fixed income index users, while acknowledging and preserving the clear and important nuances
between the two asset classes.
Comprehensive client engagement and market education play an important role in evolving and developing our
extensive families of fixed income benchmarks. The feedback received from this consultation will assist FTSE
Russell in making any final decisions related to the topics considered. We value your input and participation.

Responding to the Consultation
The proposals set out in this consultation document are included in order to gather feedback and may
or may not result in changes to FTSE Fixed Income Index rules.
Please submit your response to the questions included in this consultation online athttps://www.surveymonkey.co.uk/r/WMTSC7H
The consultation will close on September 14th. All responses will be treated as confidential. FTSE
Russell may publish a summary of the consultation results, but no individual responses will be
published and no respondents will be named.
If you have any questions about this survey, or if you encounter any technical issues, please contact
rpawson@ftserusssell.com.

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-20182

Background1
Historically, inclusion of local markets within flagship fixed income multi-currency government benchmarks,
such as the FTSE World Government Bond Index (WGBI) and FTSE Emerging Markets Government Bond
Index (EMGBI), has been based on both objective (market size and credit rating) and relatively subjective(market accessibility) criteria.2
To be formally considered for index inclusion, a local currency government debt market is required to firstmeet a series of quantifiable and observable index criteria. These are designed to assess the accessibility ofcandidate countries from the point of view of global investors and to minimize unnecessary index turnover. An
assessment of “barriers to entry” would subsequently take place to evaluate the eligibility of new markets, withongoing monitoring of existing markets for any significant deterioration in accessibility.
The purpose of this consultation is to establish a robust and transparent framework for the “barriers to entry”
assessment through the assignment of a “Market Accessibility Level” (0, 1 or 2) for local currency fixed-rate
government bond markets. Accessibility will be measured across four dimensions: Market, Macroeconomic
and Regulation; FX and Fixed Income Derivatives; Technical and Market Structure; and Global
Settlement and Custody. Once this accessibility framework is established, flagship benchmark inclusion will
be based on whether a stated Market Accessibility Level is met according to the requisite accessibility value
stated in its methodology, as well as whether the existing objective market size and credit quality criteria aresatisfied. This local market accessibility value will be transferrable across the design of all benchmarks
tracking fixed rate, native currency government bonds and maintained through our formal FTSE Russell
governance process. Given the proposed annual nature of the review for Market Accessibility Levels, we will
also review the application of objective inclusion criteria to ensure a coordinated, consistent approach tomarket entry and exit.
This consultation applies exclusively to local currency denominated fixed-rate nominal treasury/government
bond markets tracked by FTSE Fixed Income Indexes. It does not include non-government local currency
asset classes that may be a consideration for inclusion into broad-based, multi-currency and multi-sector
indexes, such as the FTSE World Broad Investment-Grade Bond Index (WorldBIG®), as this assessment may
include additional variables to consider.3 Owing to potential differences in issuance patterns and technical /market structure (i.e., liquidity, bond pricing, etc.) between nominal and inflation-linked government markets(and within the global inflation-linked market, between developed and emerging markets), it also does not
apply to inflation-linked securities, such as those tracked by the FTSE World Government Inflation-Linked
Securities Index (WorldILSI). We intend to expand the scope of the FTSE Fixed Income Country Classification
Framework in the future to account for idiosyncratic markets, such as the global inflation-linked government
bond market, and address inclusion of other asset types.
Based on feedback gathered from market participants, we intend to finalize the FTSE Fixed Income Country
Classification framework in the coming months and subsequently use it to assign Market Accessibility Levels
to the local markets tracked by our fixed rate government benchmarks.

1

FTSE Russell also maintains a country classification framework for its global equity indexes. We believe important distinctions between
these two asset classes merit a tailored approach for each. Please see Appendix 1 for further details.
2

Market inclusion in dedicated fixed income Emerging Markets (EM) benchmarks also requires that a local currency market be classified
as emerging under a given index provider’s EM definition. For purposes of inclusion in FTSE Emerging Markets hard and local currency
benchmarks, a market is considered to be emerging if it defined by the IMF to be among “emerging and developing economies” or if it isdefined by the World Bank to be among “low-income economies”, “lower-middle-income economies” or “upper-middle-income economies.
Therefore, to be included in the EMGBI, a local currency market must meet this definition. Conversely, the WGBI is comprised of highquality, generally developed markets, but can and does have overlap with dedicated EM benchmarks, such as the EMGBI; markets thatare eligible for both WGBI and EMGBI benchmarks are commonly referred to as “crossover markets”.
A “Country” is also assigned for each security tracked by the FTSE Fixed Income Indexes to represent its issuer’s country of risk andcan be different from the “Country” for the purposes of local market inclusion. This Country of Risk attribute is used to determine eligibility
in the hard currency FTSE EM USD Broad Bond Index (EMUSDBBI), and the FTSE High Yield Market Index, which includes debt from
United States and Canada issuers only.
3

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-20183

Proposed Framework for Assigning Market Accessibility Levels
The proposed country classification framework will be evaluated annually, at a pre-determined date and willseek to calibrate a relative accessibility value for a super-set of local fixed-rate government bond markets.
This will include existing markets eligible for flagship local currency government bond indexes, such as the
WGBI and EMGBI, as well as candidate markets for potential promotion or demotion4, which will be
published on a “Watch List”. Market Accessibility Levels will be determined by FTSE Russell based onmarket feedback via a predefined, transparent, and rigorous governance process. Index users will provide
feedback on their assessment of a local market’s accessibility using the criteria and variables outlined in thisconsultation. Once established, these levels will be reviewed annually and formally incorporated into theinclusion criteria of flagship multi-currency FTSE government benchmarks, and available for use in custom
indexes. The accessibility threshold will vary according to the nature of the benchmark; benchmarks such as
the WGBI have a high-bar for inclusion, therefore their accessibility threshold levels will be more stringent
than for the EMGBI.

Annual Review Cycle
Relative market accessibility will be reviewed on an annual basis each September. Based on market
feedback, a local market’s accessibility value may be adjusted if there is a failure to meet the existing
accessibility thresholds or if there are material changes to the local investment conditions that warrant ahigher value.5 FTSE Russell will maintain a “Watch List” of fixed income local markets that are close tomeeting the criteria for either a higher or lower Market Accessibility Level. Local markets either failing to meet
the accessibility thresholds of their existing level (i.e., due to incremental deterioration in their investment
conditions) or are close to meeting the thresholds for a higher Market Accessibility Level will be consideredas part of this annual review. Proposed implementation of the FTSE Fixed Income Country Classification
framework is discussed later in this document, and allows for an inaugural March 2019 review andassignment of Market Accessibility Levels.
Any resulting benchmark changes will be announced along with changes to Local Market Accessibility Levels.
The notice period between announcement and implementation of index inclusion changes will be also
communicated to the market and allow for sufficient lead time for clients.
In the case of a market disruption event (i.e., the introduction of prohibitive capital controls), FTSE Russell willreference its Statement of Principles to determine whether an off cycle review of Market Accessibility Levels is
triggered.

Determination of Market Accessibility Levels
Under the proposed FTSE Fixed Income Country Classification framework, a Market Accessibility Level isassigned for each fixed rate government market based on its fulfillment of a set of transparent criteria. Each
local market will receive a level of 0, 1 or 2, with “2” representing the highest level of accessibility. A local
market value of “2” is assumed to already satisfy the Level 1 thresholds; a local market value as “1” isassumed to already satisfy the Level 0 thresholds. A value of “0” represents the lowest level of accessibility adebt market must satisfy to be tracked by a FTSE fixed income benchmark. The approach to assigning Market

4

The composition of this Watch List will incorporate feedback from market participants and other index stakeholders.

5Market eligibility is currently reviewed on a continual basis for both the FTSE World Government Bond Index (WGBI) and FTSE
Emerging Markets Government Bond Index (EMGBI). Once a market has met all the requirements, including both objective criteria andmarket accessibility thresholds, an announcement is made that this market is eligible for inclusion into the index. If it continues to meet
all the requirements for three consecutive months after the announcement, the market will join the index at the end of the three months
that follow.

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-20184

Accessibility Levels for other local markets, including inflation linked and credit instruments, will be reviewed
at a later date, but will draw from the framework derived as part of this consultation.
The required degree to which a criterion must be met (full or partial) depends on the Market Accessibility
Level (0, 1 or 2). Assessment will take place across the same four high level dimensions for each level,
however, it is also possible that a given dimension / factor will not be applicable for all levels. Assessment ofeach of these four high level categories will be based on suitable fulfillment of the requisite satisfaction (full or
partial) of each of the more granular sub-categorizations.
A local currency government debt market must have a value of “2” to satisfy the accessibility criteria for theflagship investment grade WGBI and a value of at least “1” for the local currency EMGBI. Market Accessibility
Levels will also be used as inclusion criteria for other regional and bespoke government benchmarks.
Details of the specific market criteria which will be considered to assign a Market Accessibility Level are givenin the framework below:
1. Market, Macroeconomic and Regulatory Environment•

Sustainable Issuance – Formal commitment and/or clear evidence of a commitment from local
debt management agents/treasury to sustain issuance across the yield curve. This prevents newmarkets from entering a flagship index and becoming illiquid due to lack of issuance. It should beinterpreted in absolute terms, but also at specific tenor points (i.e. lack of issuance at the longend, where there was previously issuance might cause replication issues).6•

Transparent and Open Monetary Policy Framework – Consideration will be given to perceived
credibility of monetary policy and inflation targets; communication of policy rates and parameters;
regularity and frequency of committee meetings, etc.

•

Foreign Exchange Policy and Communication – FX risks are an important consideration for
fixed income portfolio managers, as currency returns can form significant portion of bond returns
for global fixed income managers, (especially for EM investors). Therefore, the following variables
will be assessed:••

Repatriation risk should be minimal;•

Transparent FX policy environment where policies and parameters are clearly articulated andcommunicated to all market participants;•

Core FX fixings are predominately formed through open market mechanisms; and•Limited failed trades

Investment Restrictions/Quotas – Includes restrictions on investment into eligible assets orrepatriation of principal/cash flows or FX of eligible assets for foreign investors. Restrictions may
take a number of different forms, including investment quotas and capital controls. The degree towhich a market is required to either fully or partially meet this criterion will be based on the degree
to which these are not present (i.e., a market would not be eligible for WGBI if it imposedprohibitive or unduly discriminatory quotas or capital controls towards foreign investors).

2. Foreign Exchange and Fixed Income Derivatives•

FX Liquidity and Investability – “Hedgeable”, freely convertible and tradable spot FX and onemonth forward contracts. Measured by spot and forward daily turnover, compared to index peergroup as a proxy for FX liquidity.

6

For inflation-linked markets, to be assessed at a later date, sufficient nominal issuance underpinning the linker issuance for purposesof breakeven analysis is a prerequisite for inclusion in global linker benchmarks, such as the FTSE WorldILSI. However this rule would
likely be less stringently applied to emerging market inflation-linked indexes.

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-2018

5•

FX Forwards – Evidence of an established and developed forward market or non-deliverable
forward (NDF) market. Minimal divergence between on and offshore NDF markets, whereappropriate.

•

Fixed Income Derivatives – Sufficiently developed and liquid fixed income derivative markets
that underpin the local currency treasury market. Instruments included in the assessment include
repo, bond forwards/futures CDS and interest rate derivatives, such as swaps.

3. Technical and Market Structure•

Bond Conventions – Replicable and vanilla bond conventions that support unconstrained
calculation of returns and analytic. More exotic conventions tend to apply to niche markets, suchas the inflation-linked and EM markets. To receive the minimum level of “0”, which is required fora local market to be tracked by FTSE Russell, reliable terms and conditions data, and supported
analytics capabilities must be freely available.

•

Bond Pricing – Availability of suitable pricing, which is representative and conforms to the
local/appropriate convention (i.e. bid/mid or dirty). To receive the minimum level of “0”, which is
required for a local market to be tracked by FTSE Russell, reliable prices for benchmark purposesmust be seamlessly available.

•

Transaction Costs (sub-divided into Fiscal and Post-Trade Costs) – The cost of investment
for foreign investors should be reasonable and not prohibitive. The investment costs are assessed
across the full continuum, including but not limited to FX, taxation/fiscal, dealing, clearing, custodyand settlement.

••

Fiscal and Administrative Costs – Includes taxes for foreign investors applied to FX,
coupons or principal payments; tax administration; and ease of tax collection•

Fees associated with Post-Trade: Transactional – Includes costs related to transaction
capture and processing; pre-matching and matching efforts; transaction reporting (including
regulatory reporting); and CSD costs specifically relating to transactions•

Fees associated with Post Trade: Custody – Includes costs related to services such as
safekeeping; corporate actions maintenance/asset servicing; and CSD charges

Bond Liquidity - Representative, vibrant two-way pricing should be available from multiple
sources. Relative liquidity will be measured against its specific peer group and will be continuallymonitored given its dynamic nature. Examples of metrics that may be used to assess the liquidityof a local market include, but are not limited to level of foreign ownership, average bid/offer
spreads (contemporary and historic), trading volume and turnover ratios (recent and past).

4. Global Settlement and Custody•

Settlement – Settlement via a global clearing agency, such as Euroclear, is desirable; otherwise
an equivalent seamless and frictionless solution that does not restrict local market access toforeign investors should be evident. Important considerations include, but are not limited to:•

Availability of delivery versus payment (DVP);•

Absence of prefunding (T+0) , unless a longer settlement cycle is available for foreign
investors;•

Minimal failed trades.

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-20186•Custody – Multiple custody options from both global and domestic custodians. Importantconsiderations include, but are not limited given to:•

Availability of both omnibus and segregated account structures;•

Account opening procedures without high operational hurdles (i.e., simple / unbureaucratic,
low latency, pre-approval not required, etc.).

Table 1 summarizes the requirements that must be met for classification of each Market Accessibility Level,
which are defined as follows:•A criterion marked withthreshold.

•A criterion marked with indicates that a criterion only needs to be partially met for a market tomeet the overall accessibility threshold. If a sufficient number of the listed sub-categories are met,then in aggregate, the high-level criteria could be deemed satisfactory fulfilled, even if some of theremaining sub-criterions are not sufficiently met. Certain sub-categories can be considered minor vs.
more important ones in determining the fulfilment each of the three top line criteria.

•

A criterion marked withaccessibility factor.

indicates that it is fully required for a market to meet that accessibility

indicates that the criterion does not apply to the evaluation of theEach of the sub-criteria will first be assessed individually to determine whether the four main categories are
sufficiently met. For example, it is possible for a market to fully meet FX Liquidity and FX Forwards, but only
partially meet Fixed Income Derivatives, but still fulfill the overall FX and FI Derivatives accessibility
requirement.

Table 1: Market Accessibility Values for Local Market Fixed-Rate Government Markets
Level 2
(i.e., WGBI)
Minimum
Requirements

Market Accessibility Level
Criteria/Factors

Level 1
(i.e., EMGBI &Regional Indices)
Minimum
Requirements

Level 0
Minimum
Requirements

Market, Macroeconomic and Regulation
Sustainable IssuanceMonetary Policy
FX Framework
Investment Restrictions / Quotas
Foreign Exchange and Fixed Income Derivatives
FX Liquidity
FX Forwards
Fixed Income Derivatives
Technical and Market Structure
Bond Conventions
Bond Pricing
Transaction Costs
Bond Liquidity
Global Settlement and Custody
Settlement
Custody

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-20187

Implementation of the FTSE Fixed Income Country
Classification Framework7
Based on market feedback, we plan to refine the proposed FTSE Fixed Income Country Classification
Framework as needed and publish a final version in October 2018.
In implementing the Country Classification Framework, we propose grandfathering a level of “2” to existing
WGBI markets and a level of “1” to existing EMGBI markets that are not WGBI-eligible (i.e., crossovermarkets will be assigned a level of “2”). Minimum Market Accessibility Level will also be incorporated formallyas part of the published methodology for these two benchmarks. Local markets not tracked by either the
WGBI or the EMGBI, including candidate markets that may warrant introduction of FTSE Russell local
currency government benchmark tracking for, will have their level reviewed and formally assigned in March
2019. We propose assigning a minimum level of “1” for those markets not tracked by the WGBI or EMGBI, buttracked by one of the regional benchmarks for purposes of the March 2019 review. Markets tracked by the
FTSE EMGBI Additional Markets Index are assigned a level of “0”. Market Accessibility Level review willcommence its annual cycle in September 2019.
We also intend to make a “Watch List” of markets whose accessibility levels will considered in March 2019available once the framework has been established based on these initial Market Accessibility Level
assignments.

Application of Objective Benchmark Inclusion Criteria
Given the proposed annual nature of the review for Market Accessibility Levels, we would like to solicit
feedback on the manner in which objective criteria (market size and credit rating) are used in local market
inclusion for the flagship FTSE World Government Bond Index (WGBI) and FTSE Emerging Markets
Government Bond Index (EMGBI). Currently local market eligibility is reviewed on a continual basis for bothbenchmarks as summarized below.
Market Size•

Current market size rules for the FTSE WGBI state that to qualify for entry, the outstanding amount ofa market’s eligible issues must total at least USD 50 billion, EUR 40 billion and JPY 5 trillion of index
eligible debt.8 After a market has met the criteria for three consecutive months, an announcement ismade that it will join the WGBI at the end of the 3 months that follow.

•

When the outstanding amount of a market’s eligible issues falls below half of the entry-level market
size criteria (USD 25 billion, EUR 20 billion and JPY 2.5 trillion) for three consecutive months, themarket will be removed from the WGBI at the next month’s rebalancing.9•

To be included in the FTSE EMGBI, the amount outstanding for of a market’s eligible issues must
total at least USD 10 billion for the market to be considered eligible for inclusion. When the amountoutstanding of a market’s eligible issues falls below half of the entry-level market size criteria (USD 5
billion), for three consecutive months, the market will be removed at the next month’s rebalancing.

7

Appendix 2 summarizes flagship FTSE multi-currency fixed-rate government bond benchmarks and their proposed inclusion criteriausing Market Accessibility Levels as defined in this proposal. Appendix 3 overview of local government markets tracked by various FTSE
fixed income benchmarks, and their current inclusion in flagship benchmarks.
8

Each Eurozone market must meet the market size criteria with its own eligible issues.
At each month-end, the >=1year fixed rate debt from each market is aggregated and then spotted into each of the currencies
aforementioned (USD, JPY and EUR) to determine the market size. The inclusion of the sub-1year debt prolongs inclusion in the index
and may minimize turnover.
9

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-20188

Credit Rating•

To qualify for entry into the WGBI, a market must have a minimum credit quality of A- by S&P and A3
by Moody’s. In the event that it is subsequently downgraded, a market would not exit until its credit
rating fell below BBB- by S&P and Baa3 by Moody’s. Downgraded markets exit the index at the next
monthly rebalance.

•

EMGBI countries must have a minimum rating of C by S&P and Ca by Moody’s.

Enhancements to application of these objective criteria with respect to implementation of any changes to index
inclusion that we would like to consider with users include:•

Implementation of any benchmark inclusion changes due to market size or credit rating upgrade moved
to the same annual cycle as the review of Market Accessibility Levels; and•Consideration of sub-one year-to-maturity and / or other fixed-rate local currency bonds that do notmeet minimum bond-level amount outstanding in total debt outstanding for market size assessment.
This would allow markets that are close to the exit threshold to count bonds towards the total throughtheir final maturity, which would potentially help reduce turnover.

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-20189

Appendix 1
The Distinctions between Fixed Income and Equity Country
Classifications
In their simplest sense, benchmark families define peer groups: peer groups of investments by asset class(fixed income vs equities; government vs corporate); by industry (industrial vs financial); by country(developed vs emerging), and so on… with endless possible permutations thereafter. The method by which
this grouping or classifying is achieved has been fundamental to the evolution of many established and widelyused benchmarks, across asset classes.
The classification process for countries employed by FTSE Russell for global equity indexes, for example, is atransparent and evidence driven process, which ensures that country classification, is judged objectively andmeets the needs of index users. At first glance, one could envisage the same rigorous and transparent
criteria could also be applied to local markets represented by fixed income benchmarks. However doing sowould ignore the important idiosyncrasies discussed below that warrant a more tailored approach to accountfor them.
•

In the global equity index world, a clearly defined graduation pathway for individual countries toprogress from frontier through emerging through to developed classification exists, withbenchmark inclusion mutually exclusive. Conversely, in the design of flagship investment grade
multi-currency fixed income benchmarks for global portfolios, credit quality tends to supersede
formal emerging markets (EM) definitions creating what are commonly referred to as “crossovermarkets”. Benchmarks such as the WGBI are comprised of high quality, generally developed
markets, but have overlap with dedicated EM benchmarks such as the EMGBI. Current examplesof crossover markets include South Africa and Mexico. This is broadly an accepted feature of the
fixed income market, which we believe merits preservation within a fixed income benchmark
design.

•Within fixed income benchmarks, currency denomination of a security is used to determine local
market inclusion and an issuer’s country of risk is used to determine inclusion in hard currency
emerging markets and high yield indexes. The diversity of sub-asset classes represented by fixedincome benchmarks can require assignment of different accessibility levels within a grouping of
securities denominated in the same currency (i.e. fixed rate treasury vs inflation-linked). Local
market inclusion within broad-based multi-sector benchmarks, such as the FTSE World Broad
Investment Grade Index (WorldBIG®), for example, will include considerations for which asset
classes and sectors should be included once a currency becomes eligible. This is particularly
relevant for smaller local currency markets and crossover markets where determinations must be
made around whether investment grade corporate, quasi-sovereign and securitized issuance in agiven local currency are appropriate for inclusion.

•

Unlike equities, fixed income instruments are generally not exchange listed. This means thequality and sourcing of pricing can present challenges for certain markets and must be formallyconsidered as part of the fixed income country classification framework.

•

Fixed income sub-asset classes can exhibit specific idiosyncrasies which may mean recalibrating
either the market size, credit quality or market accessibility criteria accordingly across distinct
flagship multi-currency benchmarks. For example, central government issuance patterns ofinflation-linked debt can vary greatly from its issuance of nominal debt. Similarly, the degree towhich issuance exhibits exotic or non-standard conventions can vary across a single government
issuer for these types of assets. Global high yield and EM hard currency markets are otherexamples where the factors considered as part of the country classification framework may
warrant tailoring to asset-class specific conventions.

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-201810•Within fixed income, additional variables such as coverage of local bonds from international rating
agencies and availability of a deep and vibrant derivatives market are also among variables importantto foreign investors.

Despite these caveats, there are many shared features in the country classification assessment acrossequities and fixed income: a country’s regulatory environment, foreign exchange market, and dealinglandscape are just a few of the considerations that will apply to both frameworks (perhaps with a different
outcome). Our goal as a multi-asset index provider is to draw inspiration from the equity country classification
process to create a transparent framework for fixed income index users, while at the same time
acknowledging and preserving the clear and important differences between the two asset classes.

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-201811

Appendix 2
Summary of flagship FTSE multi-currency fixed-rate government bond benchmarks and their proposed
inclusion criteria using Market Accessibility Levels as defined in this proposal. 10
Regional Benchmarks
FTSE WGBIFTSE EMGBI(i.e. FTSE AGBI)

Market Accessibility Level

2

1

1, 2

EM vs DM Requirement

n/a

EM

n/a

A3 / A-Cn/a

USD 10 billion

USD 5 billion (AGBI only)

Objective Criteria: Credit Rating

USD 50 billion,
EUR 40 billion, AND
Objective Criteria: Market Size

JPY 5 trillion

FTSE World Government Bond Index (WGBI) – A flagship measure of fixed-rate, local currency,
investment-grade sovereign bonds. For inclusion in the WGBI, a market can be considered either developed
or EM (according to FTSE’s fixed income EM definition).
FTSE Emerging Markets Government Bond Index (EMGBI) – A flagship measure of fixed-rate, local
currency emerging markets debt. Countries classified as developed are excluded by rule from the EMGBI.
Regional Local Currency Government Indexes11 – Fixed-rate, multi-currency, regional government bondbenchmarks, intended to capture local region preferences and tailored to specific geographic areas, and havecrossover with both the WGBI and EMGBI:•FTSE Asia Government Bond Index (AGBI) – Covers select Asian government bond markets
including China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, and Thailand. Japanis explicitly excluded by rule from this benchmark.

•FTSE Asia Pacific Government Bond Index (APGBI) – Covers select Asian and Asian Pacificgovernment bond markets including China, Hong Kong, Indonesia, Korea, Malaysia, Philippines,
Singapore, and Thailand, with the addition of government bonds from Australia and New Zealand.
Japan is explicitly excluded by rule from this benchmark.

•FTSE Latin American Government Bond Index (LATAMGBI) – Covers select Latin American
government bond markets including Brazil, Chile, Colombia Mexico, and Peru.

•

FTSE Central and Eastern Europe, Middle East, and Africa Government Bond Index(CEEMEAGBI) – Covers select CEEMEA markets including Czech Republic, Hungary, Israel, Poland,
Romania, Russia, South Africa and Turkey.

10

Hence, a combination of accessibility levels and quantitative criteria such as market size and credit ratings will determine market
eligibility for flagship fixed-rate local currency government benchmarks, such as WGBI, EMGBI and AGBI.
11

In due course, we plan to solicit feedback through the relevant FTSE Russell fixed income internal and external governancecommittees on any refinements that may be warranted for these regional indexes. For example, Japan is excluded from the AGBI as
many Asian investors prefer to track Japan separately from other Asian government markets – does this continue to be representative /desired? Perhaps a version of the AGBI whereby Japan is capped at 10% for example, is a better representing of the regional fixed rate
government bond market.

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-201812

Appendix 3
Overview of local government markets tracked by various FTSE fixed income benchmarks, and their current
inclusion in flagship benchmarks.
Currency
RegionCountry

Americas US

EMEA

APAC

FTSE
FTSE WGBI
Index
EM vs DM FTSE
FTSE
Regional
FTSE
EMGBI
Additional
Credit Market Size*
Designation WGBIEMGBI Additional Benchmarks * WorldILSI*
Markets
RatingMarkets

USD

Developed

CanadaCAD

Developed

MexicoMXN

Emerging

BrazilBRL

Emerging

Chile

CLP

Emerging

Colombia

COP

Emerging

Peru

PEN

Emerging

UnitedKingdom

GBP

Developed

EurozoneMarkets*

EUR

Developed

Denmark

DKK

Developed

NorwayNOKDeveloped

SwedenSEKDeveloped

Switzerland

CHF

Developed

PolandPLN

Developed

South Africa

ZAR

Emerging

Greece,Portugal

EUR

Developed

Czech
Republic

CZK

Developed

IsraelILS

Developed

RussiaRUB

Emerging

Hungary

HUF

Emerging

Romania

RON

Emerging

TurkeyTRY

Emerging

Japan

JPY

Developed

Australia

AUD

Developed

Singapore

SGD

Developed

Malaysia

MYR

Emerging

New Zealand

NZD

Developed

South Korea

KRW

Developed

Hong Kong

HKD

Developed

China Onshore

CNY

EmergingIndonesia

IDR

Emerging

Philippines

PHP

Emerging

India

INR

Emerging

Sri Lanka

LKR

Emerging

TaiwanTWDDeveloped

Thailand

THB

Emerging

China Offshore

CNH

Emerging

•
•
•

•
•
•
•

•
•
•
•
•

•
•
•
•
•

•
•
•

AA+

7,571,706

AAA

330,425

A

136,775BB

100,006AA

25,212

BBB

58,027

A

25,677••

AA

832,032

•
•
•
•
•
•
•

•

VariesVariesAAA71,858AAA

31,631

AAA

48,975

AAA

16,263

A

90,147

BBB

91,499VariesVariesAA

32,388

•
•
•

•
•

•
•

•

•
•
•
•

•
•
•
•
•
•

•
•
•
•
•
•
•
•
•
•

•
•
•
•
•
•

•
•
•
•

•

•
•
•

•

•
•

•
•
•
•
•
•
•
•
•

•

•
•

•

A+

45,527BBB

56,602

BBB

33,652

BBB

22,294

BB+

56,743A+

413,394,646

AAA

37,891,206

AAA

7,221,862

A

9,288,885

AA+

3,644,231

AA

51,420,462

AA

1,146,412

A+

142,597,837

BBB

12,124,314

BBB

4,746,934

BBB

76,847,772

B+

1,134,229

AA

12,922,096

A

9,517,857

A+

9,406

*As of July 2018, Eurozone markets eligible for the WBGI include: Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Netherlands, and Spain.
*WorldILSI Euro Markets include France, Germany, Italy, Spain. Currently no Poland bonds qualify for index inclusion.
* Regional benchmarks include: FTSE Central and Eastern Europe, Middle East, and Africa Government Bond Index (CEEMEAGBI),FTSE Latin America Government Bond Index (LATAMGBI, FTSE Asian Government Bond Index (AGBI), FTSE Asia Pacific Government
Bond Index (APGBI)*Market Size shown in millions in USD / EUR / JPY by region and includes index eligible instruments only. Data are as of July 2018

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-201813

Consultation questions
Market Accessibility Levels
As part of the proposed FTSE Fixed Income Country Classification Framework, we propose four high level
criteria for assigning Market Accessibility Levels. Please indicate in the following section whether you endorse
the criteria outlined in the proposal contained in this document. If further refinement is required, in your view,please use the comments section to provide details or contact us to schedule a meeting to discuss.

1. Do you endorse the proposed criteria for the Market, Macroeconomic and Regulation componentof the market accessibility component of the framework?

☐ Yes
☐ No
Please provide any additional feedback you may have:

2. Do you endorse the proposed criteria for the FX and Fixed Income Derivatives component of themarket accessibility component of the framework?

☐ Yes
☐ No
Please provide any additional feedback you may have:

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-201814

3. Do you endorse the proposed criteria for the Technical and Market Structure component of themarket accessibility component of the framework?

☐ Yes
☐ No
Please provide any additional feedback you may have:

4. Do you endorse the proposed criteria for the Global Settlement and Custody component of themarket accessibility component of the framework?

☐ Yes
☐ No
Please provide any additional feedback you may have:

5. Are there any other criteria that should be considered when assessing Market Accessibility
Levels, not included in the proposed framework?
Please provide any additional feedback you may have:

6. Are there any factors in the proposed framework that should not be considered when assessing
Market Accessibility Levels?
Please provide any additional feedback you may have:

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-201815

Fixed Income Market Accessibility Watch List
In between the formal annual review of Market Accessibility Levels, FTSE Russell will maintain a “Watch List”
of local currency markets that potentially meet the eligibility criteria of a higher or lower level for consideration
at the next review date. In implementing the FTSE Country Classification Framework, we propose
grandfathering a level of “2” to existing WGBI-eligible markets and a level of “1” to existing EMGBI-eligible
markets. Local markets not tracked by either of these benchmarks, including candidate markets to introduce
FTSE Russell fixed income benchmark tracking for, will have their level reviewed and formally assigned in
March 2019 once the framework is established. We propose assigning a minimum level of “1” for thosemarkets not tracked by the WGBI or EMGBI, but tracked by one of the regional benchmarks for purposes ofthe March 2019 review. Markets tracked by the FTSE EMGBI Additional Markets Index will be assigned alevel of “0”.

7. Which countries do you believe should be on the Watch List for further consideration of Market
Accessibility Level in March 2019 based on their proposed initial assignment? Check all that
apply.

☐ Malaysia☐ Israel☐ China☐ South Korea☐ Nigeria☐ Vietnam☐ Saudi Arabia☐ Other (please indicate bellow)
Comments:

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-201816

Application of Objective Benchmark Inclusion Criteria
Given the proposed annual nature of the review of Market Accessibility Levels, we would like to solicit
feedback on the manner in which objective criteria are used to determine inclusion in flagship benchmarks.
Currently, local market eligibility is reviewed on a continual basis for both the WGBI and EMGBI. Once amarket has met all criteria (market size, credit rating and barriers to entry thresholds), an announcement will
be made that it is eligible for inclusion into the index. If it continues to meet all the requirements for threeconsecutive months after the announcement, the market will join the index at the end of the three months that
follow. If a market no longer meets the minimum market size criteria for exit (half of the minimum for entry), anannouncement will be made and if it continues to no longer meet the requirement for three consecutive
months after the announcement, it will exit the index at that time. If a market no longer meets the minimum
credit quality criteria for exit, it will exit the index at the next rebalance.

8. Do you believe that market size should be reviewed on an annual basis, along with Market
Accessibility Levels, for purposes of local market WGBI and EMGBI inclusion?

☐ Yes, changes to local market inclusion for the WGBI and EMGBI should be made for changes inmarket size on the same annual cycle as review of Market Accessibility Level☐ No, prefer the current handling of entry and exit of local markets due to changes in market size, whichtakes place continually☐ Other (please comment in the space provided below)
Comments:

9. What is your preference for the universe of securities that is used to determine market size?

☐ Only those securities that would quality for index inclusion based on other rules (i.e., amountoutstanding, time to maturity, etc.) should be considered☐ Both securities that are currently eligible and were at some point eligible, including securities that fall
below the minimum time to maturity, should be considered☐ All fixed-rate local currency government issuance should be considered, regardless of whether itmeets other rules, such as amount outstanding☐ Other (please comment in the space provided below)
Comments:

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-201817

10. If a country newly meets the credit rating minimum applied for entry to the WGBI and EMGBI, what
is your preference for when any resulting index inclusion changes are made?

☐ Changes to local market inclusion for credit rating upgrade should be made on the same annual cycle
as review of Market Accessibility Level☐ Entry of local markets for credit rating upgrade can be implemented at any point during the year in linewith current handling☐ Other (please comment in the space provided below)
Comments:

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-201818

For more information about our indexes, please visit ftserussell.com.
© 2018 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE
International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt
Capital Markets Limited (together, “FTSE GDCM”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed
Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE GDCM, MTS Next Limited, Mergent, FTSE FI and YB. “FTSE®”, “Russell®”,“FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “WorldBIG®”, “USBIG®”, “EuroBIG®”, “AusBIG®”, “The Yield Book®”, and allother trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or
licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE,
Russell, MTSNext, FTSE GDCM, Mergent, FTSE FI or YB. “TMX®” is a registered trademark of TSX Inc. FTSE International Limited is
authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSEGroup, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as otherfactors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor theirrespective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever,expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained
from the use of the FTSE Russell Products or the fitness or suitability of the FTSE Russell Products for any particular purpose to which
they might be put. Any representation of historical data accessible through FTSE Russell Products is provided for information purposes
only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners
or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) orother circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating
or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special,consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of suchdamages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice andnothing contained in this document or accessible through FTSE Russell Products, including statistical data and industry reports, should
be taken as constituting financial or investment advice or a financial promotion.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions
that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affectedby various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty toand do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use anddistribution of the LSE Group data requires a licence from FTSE, Russell, FTSE GDCM, MTSNext, Mergent, FTSE FI, YB and/or theirrespective licensors.

FTSE Russell

19About FTSE Russell
FTSE Russell is a leading global index provider creating and managing a wide
range of indexes, data and analytic solutions to meet client needs across asset
classes, style and strategies. Covering 98% of the investable market, FTSE
Russell indexes offer a true picture of global markets, combined with thespecialist knowledge gained from developing local benchmarks around the world.
FTSE Russell index expertise and products are used extensively by institutionaland retail investors globally. For over 30 years, leading asset owners, asset
managers, ETF providers and investment banks have chosen FTSE Russell
indexes to benchmark their investment performance and create investment
funds, ETFs, structured products and index-based derivatives. FTSE Russell
indexes also provide clients with tools for asset allocation, investment strategy
analysis and risk management.
A core set of universal principles guides FTSE Russell index design andmanagement: a transparent rules-based methodology is informed byindependent committees of leading market participants. FTSE Russell is focusedon index innovation and customer partnership applying the highest industry
standards and embracing the IOSCO Principles. FTSE Russell is wholly owned
by London Stock Exchange Group.
For more information, visit ftserussell.com.

To learn more, visit ftserussell.com; email info@ftserussell.com; or call your regional
Client Service Team office:EMEA+44 (0) 20 7866 1810

North America+1 877 503 6437

Asia-PacificHong Kong +852 2164 3333
Tokyo 81 3 4563 6346
Sydney +61 (0) 2 8823 3521

FTSE Russell | FTSE Fixed Income Country Classification Framework Market Consultation –-201820