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In? Or Out? Country Inclusion in Fixed Income Global Indexes

By Scott Harman and Nikki Stefanelli, managing directors, fixed income and multi-asset benchmarks 

How fixed income index providers classify countries and include them to broad market global benchmarks can have a significant impact on the asset managers who rely on bond indexes to benchmark their performance. Currently, we see this with the case of China inclusion, where the different approach and methodologies of index providers has been resulting in varied inclusion decisions and time tables for flagship fixed income indexes.

FTSE Russell recently announced a comprehensive fixed income country classification framework to tackle the same inclusion consideration. While different bond indexes’ allocation to individual countries and processes for making inclusion decisions may vary, it’s important that the index construction process follows logical, coherent and transparent rules that reflect the realities facing participants in the international capital markets.

The country classification process that FTSE Russell recently introduced for our fixed income benchmarks1 draws inspiration from the process and evidence driven nature of the equity process that was adopted back in 2003. We’ve previously written here and here about specific technical considerations that are important to fixed income investors (and therefore to index inclusion decisions)—just as important is a transparent and independent process to manage index entry and exit, which can also help facilitate structural changes in the markets we track. Importantly, the framework provides a Watch List for markets that are on the cusp of reclassification, signaling our intent to engage with regulators in those markets to help address specific feedback from investors. In this respect, we view our role as an index provider as an arbiter between our users’ experience in specific markets and decision makers in countries who are able to address them. 

The benefits of the elements the new process introduces are multi-fold and allow users of our benchmarks to more effectively manage to them:

  • Objective Technical Criteria for Assessing Markets: An objective set of factors is used to calibrate Market Accessibility Levels and publicly available on our website, providing more insight for our users into the rationale behind market inclusion decisions.
  • Annual Review: By moving from a continuous review to a September review cycle, the process will ensure reviews are more proactive and less reactionary, and remove any opaqueness from how decision are derived. Importantly, it also ensures that investors have ample lead time to prepare for changes (for example, set up new onshore accounts) where they may need to replicate large exposures.
  • A Watch List: Market Accessibility Levels are reviewed on an annual basis and countries on the cusp of reclassification are included on a Watch List, which is publicly available. This provides asset allocators with a sense of potential evolution of our indexes, and affords them time to prepare for any inclusion changes.
  • Advisory Committee Oversight: Regional external advisory committees comprised of market practitioners provide the necessary forums for us to solicit feedback from practitioners globally in a consistent, predictable and structured way. It also ensures that inclusion decisions are stakeholder driven and incorporate investor feedback on specific investment conditions that may affect their ability to replicate index exposures and currency returns.

Now that the framework has been published, the next step for FTSE Russell is to review the specific investment considerations of markets tracked by our benchmarks with regional advisory committees at the inaugural March review of our country classification process. Subsequently, Market Accessibility Levels will be formally reviewed in September 2019, concurrent with the equity cycle, and any resulting changes will be announced to the market. Stay tuned...



1 The framework will be incorporated to the methodology FTSE World Government Bond Index (WGBI), FTSE Emerging Markets Government Bond Index (EMGBI), and indexes that explicitly derive their membership from the WGBI and EMGBI, effective March 30, 2019 It. enables the assignment of a “Market Accessibility Level” (2, 1, or 0) for local currency, fixed-rate government bond markets and synchronizes the application of the objective criteria (market size and credit rating) in index methodologies on an annual review cycle.


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