FTSE Actuaries UK Gilt Index Series Service Enhancement

FTSE Index Enhancement
February 2014
FTSE Actuaries UK Gilt
Index Series
Service Enhancement
OVERVIEW
The FTSE Actuaries UK Gilts indices are among the industry’s most widely-used
performance benchmarks for the UK Government bond market. They are
sanctioned by the UK Actuaries and used for benchmarking pension benefits and
obligations, and mutual funds. In January 2014 FTSE announced a number of
enhancements to the FTSE Actuaries UK Gilts Index Series. Effective 28 April
2014, the following items will be added to the product files:
• New gross redemption yields and interest rate risk values at index level based
on a Market Value Weighting (MVW) methodology.
• Modified Convexity values at constituent level for Conventional and Index
Linked Gilts.
• Modified Convexity values for Conventional and Index Linked Gilt indices at
index level using both the current Portfolio Cash Flow (PCF) method and the
new Market Value Weighting (MVW) method.
FTSE is also introducing a new enhanced methodology for the calculation of the
yield index product for conventional gilts. This paper provides further information
on these service enhancements and methodology change.
1.
New Methodology for the Calculation of Index
Level Interest Rate Risk Parameters
FTSE has historically used the Portfolio Cash Flow method (PCF) to
calculate index level statistics for the FTSE Actuaries UK Gilt Index Series.
Extensive market consultation and research indicates that although the
Portfolio Cash Flow method (PCF) generates more accurate measures of
the index yields and risks, it would also be beneficial to provide clients
with index level statistics calculated using the Market Value Weighting
methodology (MVW). The MVW which is currently used in the FTSE Global
Bond Index Series, is regarded as a simpler method to aggregate the
individual bonds and is a market standard.
To provide clients with a choice and enable them to track the
performance of their portfolios against FTSE benchmarks more effectively,
from 28 April 2014 FTSE will be adding the MVW version of index level
yields, duration and convexity calculations to the product files, so that
both the PCF and MVW measures are available.
For more information and a detailed overview of the new calculation
methodology, please refer to the Ground Rules at www.ftse.com.
2.
Providing Clients with Additional Modified
Convexity Values
FTSE currently calculates and publishes “Macaulay convexity” at both
constituent and index levels. As an extension to the existing service, FTSE
will be publishing “Modified Convexity”, at both constituent and index
level, for both Conventional and Index Linked Gilts.
At index level, Modified Convexity calculated under both the current
Portfolio Cash Flow (PCF) method and the new Market Value Weighting
(MVW) method will be published.
These changes will be effective from 28 April 2014.
3.
Yield Curve Methodology Change
FTSE calculates and publishes yield curves for UK conventional gilts which
provide the term structure of the gilt market from five years up to fifty
years.
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The existing yield curve model was developed by G. M. Dobbie and A. D.
Wilkie in 1978 and has been in use since then. FTSE has been working
with Andrew Cairns and David Wilkie, both highly experienced academics
in the field of actuarial mathematics, to improve the existing model. A
new yield curve methodology was proposed and approved by the FTSE
Bond Indices Committee in May 2013.
The enhancements under the new methodology, which will be effective
on 28 April 2014, include:



A more stable yield curve.
Introduction of a new yield curve function to model the zero-coupon
yield curve, in place of the existing gross redemption yield curve.
Calculation and publication of the zero-coupon yields, par yields and
forward yields.
As a result of the changes, the end of day product file for the yield indices
will include zero coupon yields, par yields and forward yields.
For more information and a detailed overview of the new calculation
methodology, please refer to the Ground Rules at www.ftse.com.
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If you have any questions and would like to speak to a client services
individual directly, please do not hesitate to contact us on the numbers
below, or via email at [email protected].
Hong Kong
London
Milan
New York
Sydney
Tokyo
+852 2164 3333
+44 (0) 20 7866 1810
+39 02 3604 6953
+1 888 747 FTSE (3873)
+61 (2) 9293 2864
+81 (3) 3581 2811
©FTSE International Limited (“FTSE”) 2014.
“FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited (“FTSE”) under licence. 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 FTSE or its licensors for any errors or for any loss from use of this publication. Neither FTSE nor any of its licensors makes any warranty
or representation whatsoever, expressly or impliedly, either as to the use of the FTSE Actuaries UK Gilt Index Series or the fitness or suitability of the Index
for any particular purpose to which it might be put. No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or
by any means without prior written permission of FTSE.
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