SBCICB Proposal Fixed Income by fkm75091


									SBC/ICB Proposal:
Fixed Income Sector
ICB Fixed Income
 The Next Generation

         Mike Bruno
 Business Unit Head – Fixed Income
         The FTSE Group
Problem: Many ways to categorize equity
           portfolio holdings
 • Market Capitalization
 • Industry Exposure (ICB, GICS)
 • Fundamental Measures (P/E ratio, EPS, dividend
   yield, etc.)
 • Capital Structure
 • Country Exposure
 • SRI/ESG Criteria

                                                Slide 3
Problem: Many ways to categorize fixed
             income portfolio holdings
 •   Credit Ratings
 •   Industry Exposure
 •   Cash Flow Analytics (yield, duration, OAS)
 •   Seniority
 •   Collateral Type
 •   Debt Type (bond, note, ABS, index-linked, etc.)
 •   SRI/ESG Criteria

                                                       Slide 4
Problem: How to categorize fixed income
          holdings, or combined equity and
          fixed income holdings?

                                          Slide 5
Proposal: ICB Fixed Income

                             Slide 6
Historical Context of ICB Fixed Income
•   1Q 2007: SIX Swiss Exchange approached FTSE with
    requirement for a fixed income categorization product for
    CHF bond market
•   FTSE used ICB as a basis and developed conceptual
    framework for ICB Fixed Income model
•   2007: Model refined through collaboration with Dow Jones,
    SIX Swiss Exchange and valued input from SBC (OKS)
•   FTSE and Dow Jones officially launched ICB Fixed Income in
    May 2008
•   SIX Swiss Exchange is pilot client of ICB Fixed Income
                                                             Slide 7
What is ICB Fixed Income?
• A framework for grouping bonds into issuer sectors
  according to economic activity, a consolidated view of the
  corporate hierarchy and the majority of revenue principal
• A categorization of bond issuers based on the successful ICB
  (equity) model from Dow Jones and FTSE
• Modification of current ICB model to include non-corporate
  bond issuers (governments, agencies and intergovernmental
• Inclusion of corporations that only issue debt
                                                              Slide 8
                         The ICB Fixed Income Model
 Issuer Type             Industry Code                      SuperSector                     Sector                  SubSector
                        0001 - Oil & Gas
                     1000 - Basic Materials
                       2000 - Industrials
                    3000 - Consumer Goods
                       4000 - Health Care              Current ICB Product           Current ICB Product       Current ICB Product
                                                              Codes                        Codes                     Codes
                   5000 - Consumer Services                (0533 - 9578)                (0533 - 9578)             (0533 - 9578)
Corporate (C)     6000 - Telecommunications
                         7000 - Utilities
                       8000 - Financials
                       9000 - Technology
                10000 - Special Purpose Vehicles
                 11000 to 14000 - Reserved for
                                                      Reserved for Future Use       Reserved for Future Use   Reserved for Future Use
                          Future Use
                                                      15100 - Nation/Treasury
                                                             15300 -
Sovereign (S)         15000 - Government           Canton/Region/Province/State

                                                   15500 - City/Municipality/Town

Sub-Sovereign        16000 - Agency/Semi-
     (B)                 Government

                            17000 -                   17100 - UN Organization
                Intergovernmental/Supranational        17200 - Supranational
                         Organizations                     Organization

                                                                                                                            Slide 9
Logic & Design of the ICB Fixed Income Model
• Based on ICB (equity) for corporations
• Vast majority of bond issuers may be classified as
  corporation or government or some form of either
• The issuers of structured finance (ABS, CMOs, CDOs) and
  cash flow conduits are still a type of corporate entity, with
  a specific objective to isolate financial risk from the sponsor
  – the Special Purpose Vehicle (or, Special Purpose Entity)
• Flexible structure, to allow additional categories and sub-
  categories over time
                                                               Slide 10
Meanings of New ICB FI Categories
Corporate (C)
 • Special Purpose Vehicles:       Corporate entities which
   collect cash flows from a pool of underlying receivables
   and re-distribute those cash flows via tranches of an ABS,
   CMO or CDO (BA Master Credit Card Trust II, Holmes
   Financing No 6 Plc, Citibank Credit Card Issuance Trust)

                                                           Slide 11
Meanings of New ICB FI Categories (cont.)
Sovereign (S)
 • Government…Nation/Treasury:     Bonds issued by Central Bank or
 Treasury of a sovereign government (Republic of Italy, Confederation
 of Switzerland, United States Treasury).
 • Government…Canton, Region, Province, State: Bonds issued by
  governments of regions which, collectively, make up a sovereign
  country. These are semi-autonomous provinces, unified under a
  central government (Canton of Basel-Stadt, Province of Quebec,
  Federal State of Saxony-Anhalt, State of California, Emirate of
 • Government…City, Municipality, Town:       Bonds issued by local
  governments (Bern Stadt, New York City, Ville de Paris).
                                                                 Slide 12
Meanings of New ICB FI Categories (cont.)
Sub-Sovereign (B)
 • Agency/Semi Government: Bonds issued by an entity that is
  an official agency of a central government (not a GSE). If no
  public companies exist that serve a similar function, these
  bond issuers are true agencies. If a government lists the
  entity as an official agency, that listing is definitive (Kexim
  Asia Ltd., KFW Bankengruppe, Eksportfinans ASA).
 • Note: if a bond issuer is a GSE (Government-Sponsored Enterprise), it
 will be categorized under the Corporate sectors.

                                                                   Slide 13
Meanings of New ICB FI Categories (cont.)
 Supranational (P)
 • Intergovernmental/Supranational Organizations…UN
   Organization: Bonds issued by any organization listed under
  the United Nations System of Organizations (World Bank,
  International Finance Corp, UN Development Program).
 • Intergovernmental/Supranational Organizations…Supranational
   Organization: Bonds issued by multilateral organizations,
   established for the advancement of regional economic and
   social development (Eurofima, Inter American Development
   Bank, African Development Bank, Asian Development Bank).

                                                             Slide 14
Benefits of ICB Fixed Income
• Enables categorization of the economic exposure of equity and fixed
   income holdings
• One internationally-recognized classification standard (ICB) from
   one neutral financial solutions provider with proven expertise
• Full coverage of CHF bonds listed on SIX Swiss Exchange
• Flexibility for adding future categories to the model
• Multi-level data granularity
• Primary focus on economic sector classification of issuers
• Allows efficient data processing by IT systems, database and
                                                                    Slide 15
Future Development of ICB Fixed Income
• Categorization of issuers for bonds listed on other regional
• Categorization of non-CHF bonds
• Research into sub-categories of instrument-specific risk
  (seniority, collateral, liquidity, covenants, etc.). Additional
  dimension describing guarantee incorporated in individual
• ICB Fixed Income pan-European coverage planned for 2009

                                                              Slide 16
                Current ICB Fixed Income
              by Issuer Type (over 600 Issuers)
                                              Basic Materials
          Agency/Semi-Gov         Oil & Gas             Industrials
               3.48%               1.82%                  7.12%

        Government                                                  Consumer Goods
          13.74%                                                         4.47%

SPVs                                                                   Health Care
0.33%                                                                    2.65%
                                                                            Consumer Svcs
  1.66%                                                                     Telecom


                                                                                        Slide 17
ICB Fixed Income and the Credit Crisis
• Icelandic government (Financial Supervisory Authority)
  takes control of Landsbanki and nationalizes Glitnir
  (acquiring 75% stake)
• FNMA and FHLMC put under conservatorship of the US
• UK nationalizes Northern Rock Plc and Bradford & Bingley

                                                       Slide 18
ICB Fixed Income and the Credit Crisis (cont.)
• Fortis partially nationalized with Belgium, the Netherlands
  and Luxembourg investing a total of €11.2 billion
• Hypo Real Estate (second largest commercial property
  lender in Germany) bailed out by a consortium of German
  banks and the Bundesbank

Regardless of ownership, ICB Fixed Income will continue to
   assign the same code to each of these companies until
           their business lines change significantly
                                                         Slide 19
Interest in ICB Fixed Income continues to
grow, as financial firms and exchanges in
       Europe, North America and
  Asia are made aware of its existence.

    2009 looks promising in terms of
   expansion in product coverage and

                                        Slide 20
Slide 21

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