By Waqas Samad, CEO, FTSE Russell
One of the least understood aspects of the index provider’s role is their position regarding inclusion of securities in indexes used by the community of investors, regulators and other market participants.
Index providers’ classification decisions have been compared – by others outside this company – to papal conclaves, where cardinals electing a pope are locked in the Sistine Chapel until a decision is reached. Smoke billowing from a chimney is the only sign of the ongoing decision-making process.
The inference is that the index classification process is opaque. That’s a serious charge, as any index, regardless of asset class, should follow clear, coherent rules within a construction framework that reflects the realities facing participants in the international capital markets.
The world increasingly demands openness in corporate decision-making processes, and that is how we operate. For example, we have just announced a country classification process for our fixed income indexes that we believe will deliver the equivalent levels of transparency and dialogue to our equity classification process.
That process is built on a transparent equity country classification process that we followed when concluding that we would be admitting China A Shares to emerging market status, or when Poland’s equity market transitioned from emerging to developed market status. FTSE Russell’s flagship global equity index series, FTSE GEIS, now covers cover 48 countries and over 98% of the world equity market, from a universe of 23 countries and around 70% of the global equity market’s capitalization 30 years ago.
The process demands engagement with both regulators and investors. That engagement works best when there is a framework – a structure that they can work with, and one that tries to encompass the broad set of issues that investors face when investing in local markets. Engagement should be fruitful and with a purpose that is independent of other considerations.
Large investors need to communicate their wishes for reforms in technical areas like local securities settlement mechanisms, or foreign exchange and derivative market liquidity to local financial regulators. Local finance ministries and central banks may want to gain reassurance regarding the nature and volume of the investment flows that may follow index changes.
And the rules should allow for a governance structure to resolve tricky questions, such as those affecting index inclusion or exclusion, in a fair, consultative and transparent way.
The index firm has to play the role of a neutral arbiter in these communications and can only do so by being as transparent as possible about the framework and processes involved; helping to develop a consensus view when investors’ views diverge, and to allow transparent communication to the market when the time comes.
Index providers are the bridge between several constituencies, and we have to recognize the interests of different market participants will often diverge. So we have to agree on changes to benchmarks in a thoughtful, transparent and consultative manner, and we have to continue to strive to meet investors’ and regulators’ legitimate desire for transparency. We also need to continually reflect on the issues investors and regulators raise with us, and recognize when our processes need to change as markets evolve.
© 2019 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 Canada”), (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 Canada, MTSNext, Mergent, FTSE FI, YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®” and all other 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 Canada, Mergent, FTSE FI, YB. 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 LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective 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 FTSE Russell indexes or the fitness or suitability of the FTSE Russell indexes for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell indexes 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) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this communication or links to this communication 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 such damages, 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 and nothing contained in this communication or accessible through FTSE Russell indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
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 and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB, and/or their respective licensors.