FTSE Russell takes over administration of local bond indices

From this week, the JSE’s major bond market indices will have a slightly new name. They will now be known as the FTSE/JSE All Bond Index (Albi20) and the FTSE/JSE Inflation-Linked Index (Cili15).

This will reflect that these two indices are now being administered by global index provider FTSE Russell.

The JSE’s partnership with FTSE Russell dates back to 2002, when the London-based company took over administration of local equity indices. This is reflected in the naming of indices such as the FTSE/JSE All Share Index and the FTSE/JSE Top 40.

“The growth story with FTSE Russell since then has been really good for us,” says Mark Randall, director of information services at the JSE. “Some of the benefits that we realised in equities we now hope to realise in the bond market as well.”

Upping the game

For now, this does not mean that the indices themselves or how they are calculated will change. However, Randall believes investors will immediately benefit from FTSE Russell’s involvement in a number of ways.

“One of the biggest bond indices in the world is the FTSE World Government Bond Index [WGBI],” he points out. “The same technology platform that FTSE Russell uses to calculate the WGBI is now going to be used to calculate our indices – the same software, and the same systems.

“So from a technology perspective, it’s as good as we’re going to get,” Randall adds.

FTSE Russell also has a depth of expertise that the JSE is able to leverage.

“They have a big team involved in research and development,” he points out. “From a JSE perspective, we don’t have that kind of manpower, so it’s great for us to pick up things like new index methodologies that we can roll out in South Africa.”

This has already been the case in the equity space, where FTSE Russell’s involvement has led to the creation of smart beta and sustainability indices, like the FTSE/JSE Dividend Plus Index. Randall says that on the bond market there should be scope to develop indices for bonds issued by state-owned enterprises and listed corporate bonds.

In time, the main indices may also be reviewed. This will however only be done in consultation with market users.

“Over time we may want to change the rules,” Randall says. “For example, the All Bond Index only has 20 bonds in it, when there are about 1 800 listed. So we are nowhere near ‘all bond’ in the way that the ‘all share’ index is for equities.”

Standards

A second significant benefit is that index administrators are already regulated as financial service providers in Europe. The Financial Sector Conduct Authority (FSCA) is expected to implement similar standards in South Africa.

As FTSE Russell is already compliant with the European regulation and the FSCA has tended to follow similar standards, this likely means that the JSE will not have to invest much, if anything, in complying locally.

“It also means that any European investor would not have been able to invest in these indices before, because the governance framework wouldn’t allow them to, but now they can,” Randall points out.

Thirdly, the data that market users will now be getting will be significantly improved. It will also be delivered in a consistent form for both the Albi20 and Cili15, which has not historically been the case.

“In the longer term – once we have equities and bonds on the same platform – this also sets us up to calculate multi-asset class indices that include bonds, equities and potentially cash,” says Randall. “We think there could be exciting work for multi-asset class benchmarks in the balanced fund and pension fund space, for investors to measure performance against.”