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SBC/ICB Proposal: Fixed Income Sector Classification

SBC/ICB Proposal: Fixed Income Sector Classification. 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 )

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SBC/ICB Proposal: Fixed Income Sector Classification

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  1. SBC/ICB Proposal:Fixed Income Sector Classification

  2. ICB Fixed IncomeThe Next Generation Mike Bruno Business Unit Head – Fixed Income The FTSE Group

  3. 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

  4. 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

  5. Problem:How to categorize fixed income holdings, or combined equity and fixed income holdings?

  6. Proposal:ICB Fixed Income

  7. 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

  8. 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 organizations) • Inclusion of corporations that only issue debt

  9. The ICB Fixed Income Model

  10. 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

  11. 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)

  12. 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 Dubai). • Government…City, Municipality, Town: Bonds issued by local governments (Bern Stadt, New York City, Ville de Paris).

  13. 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.

  14. 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).

  15. 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 datafeeds

  16. Future Development of ICB Fixed Income • Categorization of issuers for bonds listed on other regional exchanges • 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 issues • ICB Fixed Income pan-European coverage planned for 2009

  17. Current ICB Fixed Incomeby Issuer Type (over 600 Issuers)

  18. 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 FHFA • UK nationalizes Northern Rock Plc and Bradford & Bingley

  19. 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

  20. 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 clientele

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