Ground Rules. FTSE TMX Canada Multi Dealer Pricing Methodology Guide v1.4

Transcription

1 Ground Rules FTSE TMX Canada Multi Dealer Pricing Methodology Guide v1.4 ftserussell.com December 2017

2 Contents 1.0 Introduction Multi Dealer Pricing Methodology Price Challenges Policy Further information... 8 FTSE Russell FTSE TMX Canada Multi Dealer Pricing Methodology Guide, v1.4, December of 8

3 Section 1 Introduction 1.0 Introduction 1.1 FTSE TMX Global Debt Capital Markets Inc (FTSE TMX) calculates prices for Canadian fixed income securities using quotes provided by the leading fixed income broker/dealers in Canada. This, allows for a greater consensus on the valuation of the securities. Once received, the quotes are passed through multiple verification filters to ensure that the prices calculated are accurate and representative. The multi dealer pricing methodology is used to price the securities in the FastQuote pricing service and the FTSE Bond Analytics software. The prices are also provided for the purposes of calculating the FTSE TMX Canada indexes for which FTSE International Limited is the benchmark administrator. This document describes the multi dealer pricing methodology which validates the pricing submissions and results in a single price for each security. FTSE Russell FTSE TMX Canada Multi Dealer Pricing Methodology Guide, v1.4, December of 8

4 Section 2 Multi Dealer Pricing Methodology 2.0 Multi Dealer Pricing Methodology 2.1 Price Sources As of October 1st, the FTSE TMX bond indices moved to the Multi Dealer Pricing model, which is incorporated into a patented system. Prices for securities moved from the single dealer price as of the following schedule: Bonds October 1, 2007 Strips (Coupons, Residuals & Packages) November 1, 2007 Mortgage Backed Securities April 2, 2008 Commercial Mortgage Backed Securities & Bankers Acceptances March 8, The quotes received are based on the trader s judgement of where a security should be priced, taking into account factors such as where the security previously traded, liquidity and any market-wide as well as security-specific developments that may have an impact on the price. For securities that trade frequently, the closing price will generally be close to where the security last traded, if not the same For securities that trade less frequently, however, there could be a larger difference between the closing price and the price where the security last traded. Consider the extreme case of a security that trades in the morning, is subsequently and unexpectedly downgraded, and does not trade for the rest of the day. When setting the 4:00 pm price, it is more accurate and conservative for the trader to reflect the expected impact of the credit rating downgrade, rather than simply rely on the latest available transaction The FTSE TMX Global Debt Capital Markets Group receives bond pricing contributions from the following Canadian dealers (listed alphabetically): BMO Nesbitt Burns Casgrain & Company CIBC World Markets Desjardins Securities Laurentian Bank Securities Merrill Lynch Canada National Bank Financial Scotia Capital RBC Dominion Securities TD Securities 1 Previous to October 1st, 2007, the Fixed Income Indexes utilized 4pm pricing from one Single Dealer Scotia Capital Inc. FTSE Russell FTSE TMX Canada Multi Dealer Pricing Methodology Guide, v1.4, December of 8

5 2.2 Price Verification and Final Price Calculation Once the dealer quotes have been received, they are passed through two scrub mechanisms. This process aims to remove stale or off-market prices which could possibly distort the final price. The scrub mechanisms: utilize the database, by reviewing historical volatilities of daily yields; review the lead dealer pricing, which is initially defined as the lead-underwriter of the issue, on an bond by bond basis where there is a poor consensus from dealers regarding levels; filter CDS data (Clearing and Depository Services for Canadian Securities) to best identify dealer pricing that is most in line with recent trades (qualified by minimum size of $500,000 par value; compare Dealer to Dealer valuations for each instrument Once the quotes have successfully passed through the initial validation described above, the pricing from each respective dealer is then included in the Standard Deviation Mean calculation. In this calculation, the mean and standard deviation are calculated from the remaining quotes. Prices falling above or below one standard deviation of the mean are eliminated, and the final price is derived as the mean of the remaining quotes. A worked example of this calculation is provided in the next section The prices at this stage form the FastQuote prices. The yield and price change of each bond are then compared against the yield/price change of the nearest maturing Canadian Government benchmark bond. For the purposes of determining the nearest maturating benchmark bond, each bond is assigned to one of the following maturity buckets: Y, Y, Y and 12.5Y If the price/yield movement is not in line with the change in the underlying benchmark, the bond price is manually checked against recently reported trades and whether the price movement is supported by the majority of the contributing dealers. If these checks do not support the price movement, the previous day s bond price is carried forward with an adjustment for the movement in the underlying yield Once these checks have been carried out,. clients are notified via of any resulting corrections to the originally supplied prices, and the dealers will receive a price challenge for the affected bonds. 2.3 Worked Example: Standard Deviation Mean Calculation In this example of a Standard Deviation Mean Calculation, a bond had originally ten contributions, which have been pared down to six after the initial verification steps. The example also compares the benefits of the Standard Deviation Mean calculation to that of a Tops and Tails (trimmed mean) model. The quotes are as follows: Mid Price Contributor A Contributor B Contributor C Contributor D Contributor E Contributor F FTSE Russell FTSE TMX Canada Multi Dealer Pricing Methodology Guide, v1.4, December of 8

6 The computed mean and standard deviation are and 0.12, respectively. The lower bound, computed as the mean minus the standard deviation, is Similarly, the upper bound is The prices provided by Contributors A and C are above the upper bound, as a result, they are removed from the final price calculation. Mid Price Contributor A Contributor B Contributor C Contributor D Contributor E Contributor F The mean of the remaining quotes is 99.58, which becomes the final price of the bond. The Top and Tails model would have removed the highest and the lowest price, before calculating the mean of the remaining quotes resulting in a price of This price is more heavily influenced by the two prices which are significantly higher than the cluster of prices between and Contingency Prices In the unlikely event that fewer than two dealers are able supply a quotation for a particular security, the price for the security will revert to the previous day s price. In the event that the quotations cannot be verified by the checks in paragraph 2.2.4, the price for the security will again revert to the previous day s price and a challenge will be issued to the dealers as set out in Section 3. FTSE Russell FTSE TMX Canada Multi Dealer Pricing Methodology Guide, v1.4, December of 8

7 Section 3 Price Challenges Policy 3.0 Price Challenges Policy 3.1 FTSE TMX has an established policy for clients to challenge the price of any fixed income security which has been derived through the multi dealer pricing methodology. 3.2 In the event of a challenge, clients should send any valuation challenges by to info@ftserussell.com. The should include the following information: the Terms and Conditions of the issue(s) in question (Issue Name, Coupon, Maturity, and CUSIP), the pricing level they observed from FTSE TMX, as well as their expectation of what the pricing should have been and any rationale for this, including a secondary source if available. 3.3 Once a challenge has been received, FTSE TMX will notify, via , all dealers who have submitted a quote for the issue(s) in question. This requests each dealer to review their pricing contributions of the issue(s) in question. 3.4 FTSE TMX does not require feedback from the dealers in response to any challenge. Updated pricing levels (if applicable) will be reflected in the future quote submissions from the dealer(s). 3.5 Clients challenging a price will receive an notification from FTSE TMX, confirming that FTSE TMX has challenged the respective dealers for the issue(s) in question. FTSE Russell FTSE TMX Canada Multi Dealer Pricing Methodology Guide, v1.4, December of 8

8 Section 4 Further Information 4.0 Further Information For further information on the FTSE TMX Canada Index Series please visit or info@ftserussell.com. Contact details can also be found on this website 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 ) and (4) MTSNext Limited ( MTSNext ). All rights reserved. FTSE Russell is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. FTSE, Russell, FTSE Russell MTS, FTSE TMX, FTSE4Good and ICB and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX. All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a licence with FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors. FTSE Russell FTSE TMX Canada Multi Dealer Pricing Methodology Guide, v1.4, December of 8