FTSE Russell applies a wide range of controls and oversight mechanisms to all of its indexes, and high standards of governance are applied to all FTSE Russell products.
In line with the principle of proportionality highlighted in the IOSCO Principles, FTSE Russell has established that by virtue of their size, known usage, risk profile and underlying input data sources, the index families set out in Table 3.1 (referred to as “Key Benchmarks”) in Section 3 of this Statement are the most relevant for the application of the IOSCO Principles. The responses in this Section 7 relate to those Key Benchmarks.
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IOSCO Principle FTSE Russell Response Work performed by KPMG
1. Overall responsibility of the Administrator The Administrator should retain primary responsibility for all aspects of the Benchmark determination process. For example, this includes:
FTSE Russell maintains responsibility for all aspects of the Benchmark determination process. The following Boards are accountable:
• FTSE Board for the FTSE Benchmarks;
• FTSE TMX Board for the FTSE TMX Benchmarks; and
• Frank Russell Company (FRC) Board for the Russell Benchmarks.
These Boards are assisted in their tasks by the internal bodies described in Section 4 of this Statement, particularly the FTSE Russell Governance Board and the FTSE Audit, Risk and Compliance Committee (FTSE ARCC).
For each Key Benchmark, we obtained the Methodology documents and inspected for evidence that:
• FTSE in respect of FTSE Benchmarks;
• FTSE TMX in respect of FTSE TMX Benchmarks; and
• FRC in respect of Russell Benchmarks,
accept responsibility as the Benchmark Administrator.
a) Development: The definition of the Benchmark and Benchmark Methodology;
a) FTSE Russell maintains responsibility for the development and maintenance of all Benchmark Methodology documents. The Methodology documents set out the Benchmark definition and Benchmark Methodology to be followed for the construction and ongoing operation of the Benchmark. Methodology documents for existing Benchmarks are updated regularly to ensure they continue to reflect market practice and in addition are subject to a formal review, annually in the case of the Key Benchmarks, by the external Advisory Committees and the FTSE Russell Governance Board. Methodology documents for new Benchmarks, and modifications to the rules for existing Benchmarks, are approved by the FTSE Russell Governance Board according to the procedures set out in Section 4.3 of this Statement. Copies of Methodology documents are available on the respective websites of the Benchmark Administrators, details of which are in the Contacts section at the end of this
Statement.
For each Key Benchmark, we obtained the Methodology documents and inspected for evidence that:
• they include the Benchmark definition and Benchmark Methodology; and
• they are publicly available at www.ftse.com or at www.russell.com respectively.
We obtained a selection of the external Advisory Committee and the FTSE Russell Governance Board minutes and inspected for evidence that the Methodology documents for Key Benchmarks are reviewed on an annual basis.
We obtained a selection of the FTSE Russell Governance Board minutes and inspected for evidence that
modifications to the Methodology documents for a selection of existing Benchmarks have been approved.
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IOSCO Principle FTSE Russell Response Work performed by KPMG
b) Determination and Dissemination: Accurate and timely compilation and publication and distribution of the Benchmark;
b) The Methodology documents articulate FTSE Russell’s responsibilities for the determination of a Benchmark.
The responsibility for the dissemination of Benchmarks to its licensed direct clients and licensed intermediaries (such as data vendors) is defined within FTSE’s index licence and data service agreements and Russell’s agreements with clients, financial intermediaries and data disseminators.
For each Key Benchmark, we obtained the Methodology documents and inspected for evidence that they have articulated FTSE Russell’s responsibilities in the determination of a Benchmark.
For a selection of Key Benchmarks, we obtained FTSE index licence and data service agreements and Russell’s agreements with clients, financial intermediaries and data disseminators and inspected for evidence that they defined FTSE Russell’s responsibilities in the dissemination of the related Benchmarks.
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IOSCO Principle FTSE Russell Response Work performed by KPMG
c) Operation: Ensuring appropriate transparency over significant decisions affecting the compilation of the Benchmark and any related determination process, including contingency measures in the event of absence of or insufficient inputs, market stress or disruption, failure of critical infrastructure, or other relevant factors; and
c) Significant decisions affecting the determination of Benchmarks are relayed via:
• Technical Notices, and/or opening constituents, or tracker product files for FTSE Benchmarks and FTSE TMX Benchmarks; and
• Client Notices and product files for Russell indexes.
Examples of significant decisions which are publicly communicated include:
• Changes to index compositions as a result of conducting periodic index reviews as specified in the Methodology documents;
• Proposed treatment of forthcoming complex corporate events as set out in the FTSE Corporate Action and Events Guide for Market Capitalisation Weighted Indices; and
• Contingency measures in the event of absence of or insufficient inputs, market stress or disruption as set out in the FTSE Index Policy in the Event Clients are Unable to Trade a Market.
These event specific notices are supplemented by general policies that set out the course of action FTSE Russell would look to follow in certain scenarios.
Examples of these policies include the FTSE Russell Recalculation Policy and Guidelines, and the FTSE RussellIndex Series Decommissioning Statement.
These policies are available on the FTSE and the Russell websites.
For each Key Benchmark, we obtained the following documents as described in FTSE Russell’s response:
• A selection of FTSE Technical Notices and/or opening constituents or tracker product files;
• A selection of Russell Client Notices and/or Product Files;
• FTSE Russell Recalculation Policy and Guidelines;
• FTSE Russell Index Series Decommissioning Statement;
• FTSE Corporate Action and Events Guide for Market Capitalisation Weighted Indices; and
• FTSE Index Policy in the Event Clients are Unable to Trade a Market.
We inspected for evidence that:
• significant decisions affecting the determination of the benchmarks are documented in the technical or client notices/files;
• the general course of actions supplementing the technical or client notices/files are documented in the policies; and
• the technical notices/files and policies are publicly available on the FTSE website and significant decisions affecting the Russell index composition are communicated through the Russell website.
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IOSCO Principle FTSE Russell Response Work performed by KPMG
FTSE and Russell have Business Continuity Plans in place to cover disruptions to hardware and office locations. In addition, FTSE employs a follow-the-sun operations model from global hubs in New York, Hong Kong and London. Any one of these locations can cover for the other two should a location become unavailable.
This approach is being introduced for the Russell Benchmarks.
We obtained the FTSE and Russell Business Continuity Plans and inspected for evidence that:
• they are in place to cover disruptions to infrastructure;
• in relation to FTSE, it is in place to cover office locations across the different regions (New York, Hong Kong and London); and
• they state the activities required to allow the FTSE Russell business to continue to operate if there are any issues.
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IOSCO Principle FTSE Russell Response Work performed by KPMG
d) Governance: Establishing credible and transparent governance, oversight and accountability procedures for the Benchmark determination process, including an identifiable oversight function accountable for the development, issuance and operation of the Benchmark
d) The Boards are accountable for the determination of Benchmarks. Oversight of the development of Benchmarks lies with the FTSE Russell Governance Board as described in Section 4 of this Statement and the response to Principle 5.
FTSE and FTSE TMX:
Responsibility for the day to day dissemination of Benchmarks lies with the FTSE Service Management team. The maintenance and production of FTSE Benchmarks and FTSE TMX Benchmarks is the responsibility of the FTSE Operations team. Periodic reviews of the composition of FTSE Benchmarks are undertaken by the Index Review team. Oversight of the Service Management, Operations and Index Review teams is undertaken by the FTSE Russell Governance Board which receives reports on the satisfactory operation and dissemination of FTSE Benchmarks and FTSE TMX Benchmarks at its monthly meetings.
Russell:
Responsibility for the maintenance of Russell Benchmarks is undertaken by the Russell Index Production team. This team also co-ordinates with the third parties who provide hosting of the real time index calculations systems. Annual reconstitutions of the composition of Russell Benchmarks are undertaken by the Index Production team. Oversight of the Index Production team is undertaken by the FTSE Russell Governance Board which receives reports on the satisfactory operation and dissemination of Russell Benchmarks at its monthly meetings.
We obtained the FTSE Russell Governance Board Terms of Reference and inspected for evidence that the FTSE Russell Governance Board is responsible for the oversight of the development of the Benchmarks.
For each Key Benchmark, we obtained the FTSE Index Review timetable and the Russell Reconstitution schedule and inspected for evidence that periodic reviews over their composition and methodology have been performed by the FTSE Index Review and Russell Index Production team respectively.
We obtained the monthly reports submitted to the FTSE Russell Governance Board for review and inspected for evidence that the reports include operational statistics relating to the timeliness of the calculation of the Benchmarks and identified any operational events impacting Benchmarks.
Please also refer to KPMG’s responses to Principle 5.
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IOSCO Principle FTSE Russell Response Work performed by KPMG
2. Oversight of third parties
Where activities relating to the Benchmark determination process are undertaken by third parties - for example collection of inputs, publication or where a third party acts as Calculation Agent - the Administrator should maintain appropriate oversight of such third parties. The
Administrator (and its oversight function) should consider adopting policies and procedures that:
a) Clearly define and substantiate through appropriate written arrangements the roles and obligations of third parties who participate in the Benchmark determination process, as well as the standards the Administrator expects these third parties to comply with;
b) Monitor third parties’ compliance with the standards set out by the Administrator;
c) Make Available to Stakeholders and any relevant Regulatory Authority the identity and roles of third parties who participate in the Benchmark determination process; and
d) Take reasonable steps, including contingency plans, to avoid undue operational risk related to the participation of third parties in the Benchmark determination process.
This Principle does not apply in relation to a third party from whom an Administrator sources data if that third party is a Regulated Market or Exchange.
The respective Board of the Benchmark Administrator is responsible for all third party relationships involved in the Benchmark determination process. FTSE follows the Group Outsourcing Policy when entering into
arrangements with third party suppliers. This Policy is in the process of being extended to Russell.
Risk assessments of third party relationships are undertaken as part of the Russell and FTSE control frameworks. The output of this exercise is used to define any requirements for increased or wider controls or oversight of the third parties. The risk assessments are reviewed and ratified by the FTSE Audit, Risk and Compliance Committee (FTSE ARCC) and the FTSE ARCC reports on the assessments to the FTSE Board for the FTSE Benchmarks, the FRC Board for the Russell Benchmarks, and the FTSE TMX Board for the FTSE TMX Benchmarks. The risk assessments are reassessed annually by the FTSE ARCC.
The real time calculation of Russell US Indexes is due to migrate from NYSE to the FTSE platform during Q4 2015.
FTSE’s existing Service Management practices will then extend to include the Russell US Indexes.
FTSE Russell has categorised all the third parties involved in the Benchmark determination process as:
1. Software and technology infrastructure suppliers, 2. Data suppliers, and
3. Index partners.
We obtained the Group Outsourcing Policy and inspected for evidence that it outlines the process for entering into arrangements with third party suppliers.
We obtained the FTSE Russell third party relationship risk assessment and inspected for evidence that FTSE Russell has undertaken a risk assessment of its third party relationships, including software and technology, data suppliers and index partners.
We obtained the FTSE ARCC minutes and inspected for evidence that the risk assessment of FTSE Russell’s third party relationships has been ratified.
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IOSCO Principle FTSE Russell Response Work performed by KPMG
Taking each of the three categories in turn:
1. Software and technology infrastructure suppliers a) A master agreement is in place covering key terms of
the relationship.
b) Service quality review meetings are conducted with key suppliers.
c) and d) Software and technology infrastructure suppliers are not involved in the Benchmark determination process.
1. Software and technology infrastructure suppliers a), c) and d) For a selection of software and technology infrastructure suppliers, we obtained the master agreements and inspected for evidence that:
• key terms of the relationship are documented in the agreements; and
• the suppliers are not involved in the Benchmark determination process.
b) For a key software and technology supplier, we obtained a selection of the service quality review meeting minutes/call logs and inspected for evidence that the service quality has been discussed and documented.
2. Data suppliers
FTSE Russell obtains data from a range of sources that includes stock exchanges and long-established data vendors to minimise the dependence on a single source.
Prices for FTSE and Russell equity Benchmarks are sourced from regulated markets or exchanges via established data vendors.
Prices for the FTSE TMX Benchmarks are obtained pursuant to the information provider agreements referred to in FTSE’s response to Principle 14.
2. Data suppliers
a) Standard contracts from third parties are reviewed by the Content Acquisition, Data Management and Legal teams to ensure the data will be fit for purpose and that restrictions on usage are acceptable to FTSE Russell. These are signed by a member of the ISMT or their delegated alternate.
Data agreements entered into by Russell before the integration into the combined FTSE Russell process were signed by an authorised signatory.
a) For a selection of data suppliers, we obtained the contracts and inspected for evidence that they have been signed by a member of the ISMT or their delegated alternate.
For a selection of Russell data suppliers, we obtained the contracts and the authorised signatories’ list and inspected for evidence that the contracts had been signed by an authorised signatory.
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IOSCO Principle FTSE Russell Response Work performed by KPMG
b) Vendor feeds are monitored by FTSE’s Enterprise Support Solutions team. Any service-impacting issues are considered by the Data Steering Committee. Formal annual reviews of key data vendors are conducted by the Data Management team and the results are considered at the meetings of the Data Steering Committee.
b) For a selection of data suppliers, we obtained the Data Steering Committee meeting minutes and inspected for evidence that the service provided by the suppliers and quality of the key data vendor feeds have been reviewed annually.
c) A list of data vendors is maintained and available on request by any Regulatory Authority.
d) To minimise the third party operational risk, wherever possible, FTSE Russell sources data from multiple suppliers. Please see FTSE Russell’s response to Principle 7 for further information.
c) and d) We obtained the list of data suppliers and inspected for evidence that the list is maintained and updated throughout the year.
Please also refer to responses to Principle 7.
3. Index Partners
As part of its risk assessment FTSE distinguishes between two types of index partners:
• stock exchange Benchmarks where input is at the design stage of the Methodology, with limited or no ongoing contribution to or involvement in the Benchmark determination process; and
• thematic Benchmarks where input is related to the Benchmark determination process.
Co-operation agreements are in place with all index partners.
3. Index Partners
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IOSCO Principle FTSE Russell Response Work performed by KPMG
a) The co-operation agreement defines the obligations of the index partner and those of FTSE in further detail.
Such co-operation agreements cover:
• formalisation of the working practices between FTSE and the associated party;
• scope of processes /service delivery;
• schedule of any periodic data provisions;
• management of client service queries; and
• daily and escalation contacts.
b) In relation to the accuracy of supplementary data supplied by index partners, FTSE has a documented procedure in the co-operation agreement to challenge the data provided to enable FTSE to be satisfied with the quality of the data to the relevant Benchmark.
a) and b) For a selection of index partners, we obtained the co-operation agreements and inspected for evidence that:
• they are in place and address areas as described in FTSE’s response;
• the obligations of FTSE and such parties are defined and documented in the agreements; and
• they contain the procedure detailing FTSE’s facility to challenge the quality of the data provided.
c) Where an index partner has contributed, or continues to contribute, to the design and/or determination of a Benchmark, that party’s involvement is disclosed to stakeholders on FTSE’s website through Methodology documents and factsheets.
c) For a selection of index partners, we obtained the Methodology documents and factsheets from the FTSE website and inspected for evidence that the
involvement of the index partners is disclosed.
d) For the daily management of Benchmarks with index partners, FTSE is responsible for sourcing and verifying the data inputs. Where FTSE utilises data from index partners for the purposes of determining index
eligibility, the results of index reviews are considered at meetings of the relevant external Advisory Committee before their publication. Where the partner data is used to determine the weights of index constituents, FTSE conducts turnover analysis to identify any significant constituent weight changes and makes the analysis publicly available.
d) We obtained a selection of turnover analysis notices and analysis documents and inspected for evidence that turnover analysis for constituent weight changes are publicly available.
There are no index partners for the Russell Benchmarks.
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IOSCO Principle FTSE Russell Response Work performed by KPMG
3. Conflicts of Interests for Administrators
To protect the integrity and independence of Benchmark determinations, Administrators should document, implement and enforce policies and procedures for the identification, disclosure, management, mitigation or avoidance of conflicts of interest. Administrators should review and update their policies and procedures as appropriate.
FTSE Russell has implemented a conflicts of interest framework consisting of a conflicts of interest policy, an annual conflict risk assessment and related internal controls.
We obtained the Russell Indexes Conflict of Interest Policy, and the FTSE Conflict of Interest, Inside Information and Dealing in Securities Policy, and the FTSE, FTSE TMX and Russell Conflicts Registers and inspected for evidence that FTSE Russell performs an annual conflicts risk assessment.
FTSE has reviewed and ratified the LSEG Conflict of Interest Policy and has documented a supplementary policy (FTSE Conflict of Interest, Inside Information and Dealing in Securities Policy) to address situations specific to FTSE’s business where conflicts of interest may arise. Both policies are subject to an annual
FTSE has reviewed and ratified the LSEG Conflict of Interest Policy and has documented a supplementary policy (FTSE Conflict of Interest, Inside Information and Dealing in Securities Policy) to address situations specific to FTSE’s business where conflicts of interest may arise. Both policies are subject to an annual