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What have the Romans ever done for bond investors?

By: Waqas Samad, CEO benchmarks

At last, Netflix has included pretty much the entire back catalogue of Monty Python! Now, I think even the most ardent of Python fans would have to admit that one or two of the shows seem a little bit dated, but Life of Brian still hits the mark. I watched it for the nth time again the other week, and the character Reg’s exasperation in the scene where the revolutionary “People’s Front of Judaea” attempt to rally the disciples to revolt against the Romans is still funny:

"All right, All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the freshwater system and public health ... what have the Romans ever done for us?”

A similar question is being asked today with Index Providers cast as the Romans. After all, how hard can it be to calculate an equity index...? Well, as Mark Makepeace touched on, creating a basket of stocks to track for yourself is relatively easy. But turning that approach into an index that evolves around the market and is distributed to a wide audience who depends on its accuracy, reliability, representativeness and integrity is an altogether different proposition.

Details matter, and it’s the details that are hard to get right. Even in today’s world of cheap, scalable technology, tracking a broad market universe that includes 80,000 companies with 100,000 securities, 230,000 listings and all their corresponding corporate actions and price quotes is quite an undertaking.

Nowhere is this more apparent than for the fixed income markets. Whether you are dealing with government, corporate, agency or securitized debt, producing a timely and accurate bond benchmark requires a set of processes that pay close attention to quality control. This entails closely managing the reference, pricing and, if you are into that sort of thing, highly variable cashflow data so that a security’s risk can be modeled properly. And if you are into that sort of thing, then you should check out our analytics for agency MBS and the mortgage benchmark that tracks it. This all needs to be done at scale—after all, the US investment grade bond market alone, as measured by the FTSE US Broad Investment-Grade Bond Index (USBIG®), accounts for nearly $19 trillion of notional with roughly 1 million pools comprising the $5T MBS market that represents 26% of the USBIG®.

Computing returns at the bond level and aggregating those up to the index level are table stakes in the benchmarks business but even so it is not simple to do. The difficulty of ensuring the quality of pricing data and the complexity in maintaining the complex curve and cashflow data sets in an ever-changing market is high. Value is really added when proprietary IP in the form of quantitative models is layered in to be able to calculate yields, analytic durations, key rates and option-adjusted analytics for an entire universe of securities. Add in the need to quantify prepayment risk under different risk scenarios and you rapidly get into a space where large scale computational farms are needed; technology and automation are game changers in this space, and the new Yield Book Q is an environment where new visualization tools are being coupled with a high performing computational platform to enable our customers to make crucial investment decisions.

The markets are constantly changing, and size, maturity, structure and accessibility are just a few examples of characteristics that need to be constantly reviewed and monitored for change. The research needed to keep abreast of those changes, as well as to keep the constant new issuance of securities, is extensive, and once those changes are recognized and processed, they need to be synthesized into the benchmarks to ensure each index remains representative. Vast amounts of data are processed to factor into those changes, all of which must be properly assessed for their impact and suitability before being put into effect.

All significant indexes now fall under a range of regulatory rules and guidelines (IOSCO Principles and EU BMR). FTSE Russell maintains a robust control and governance framework to approve new indexes and evolve existing to the methodologies. That’s a combination of both internal governance bodies and, crucially, independent external advisory and oversight committees to ensure the indexes evolve in a manner that is most useful to the end users. Broad market consultation is a crucial feature of the process and, in fact, we are running one right now to determine how our benchmarks absorb changes in the US mortgage market that are coming down the pike.

So, apart from the data collection, data quality checking, security level returns, analytics calculations, index level aggregation, distribution of data, research and governance… what have the index providers ever done for us?

Please visit for more information about the creation of FTSE Russell indexes.



© 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 TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”), (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.

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