RecentDevelopmentsinFixedIncomeIndexRegulation,OwnershipandConstituentPricing

WEBINAR|5TH DECEMBER2017|10AMEST

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Agenda

Welcome IanBlance |VoltaireAdvisors

1005- 1010 Introduction:UserSurveyResults|IanBlance,VoltaireAdvisors

1010- 1020 TheChanging LandscapeoftheFixedIncomeIndexMarket|GilesArbuthnott,Rimes

1020- 1030 BestPractices inIndexPricing|JRRieger,S&PGlobal

1030- 1040 Useof EvaluatedPricinginIndices|JaymeFagas,ThomsonReuters

1040 - 1100 AudienceQ&A

1100 CloseofWebinar

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Introduction:UserSurveyResults

IanBlanceManaging DirectorVoltaireAdvisors

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PrivateEquity&ConvertibleBonds

u InFall2017wepolledfundmanagementfirmswhoareusersoffixedincomeindicesinthreeregions– NorthAmerica,EuropeandAsia.

u Wereceived96responses(36NorthAmerica,32Europeand28Asia)

u Resultshighlights…

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KnowledgeofIndexPricing

43%

57%

Doyouhavedetailedknowledgeofhowyourindexispriced?

Yes No

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FamiliaritywithIOSCOPrinciples

31%

69%

AreyoufamiliarwiththeconstituentpricingrequirementsoftheIOSCOPrinciplesforFinancialBenchmarks?

Yes No

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FamiliaritywithEUBMR

37%

63%

AreyoufamiliarwiththeconstituentpricingrequirementsoftheEuropeanBenchmarkRegulation?

Yes No

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ConcernAboutPricing&Calculation

13%

59%

19%

9%

VeryConcerned SomewhatConcerned RelativelyUnconcerned NotConcernedAtAll

Howmuchwoulditconcernyouthatthepricingandcalculationagentsforanindexarethesamefirm?

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PreferenceforIndependence

82%

2%

16%

Yes No Don'tKnow

Wouldyoupreferindexpricingtobeindependentofcalculation?

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ExpectationsofConsolidation

46%

41%

13%

Yes No Don'tKnow

Doyouexpecttoseefurtherconsolidationintheindexmarket?

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MainChallengesinIndexMarket

72%

25%

19%

44%

7%

LicensingCosts RegulatoryOversight ConstituentPricing Coverage Other

Whatdoyouconsidertobethemainchallengescurrentlyfacingthefixedincomebenchmarkmarket?

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TheChangingLandscapeoftheFixedIncomeIndexMarket

GilesArbuthnott

ProductManager

RIMESTechnologies

© Copyright RIMES 2017 13© Copyright RIMES 2017

The Changing Landscape of the Fixed Income Index Market

5 December 2017

© Copyright RIMES 2017 14

The Chaning Landscape of the FI Index Market

About RIMES Provider Consolidation

Impact on Asset Managers

Future Activity Conclusion

© Copyright RIMES 2017 15

Index Provider Consolidation

• TMX (DEX) acquired by FTSE

• Bloomberg L.P. acquired Barclays Risk Analytics and Index Solutions Ltd. (“BRAIS”) from Barclays PLC

• HSBC has transferred the ALBI™, ADBI™ and AHBI™ indices to the Markit’siBoxx™ family of indices

• LSEG acquires The Yield Book and Citi Fixed Income Indices from Citi, including the World Government Bond Index (WGBI)

• Intercontinental Exchange (ICE), acquires the Bank of America Merrill Lynch Global Research division’s fixed income index platform

© Copyright RIMES 2017 16

The Chaning Landscape of the FI Index Market

About RIMES Provider Consolidation

Impact on Asset Managers

Future Activity Conclusion

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BestPracticesinIndexPricing

JRRiegerGlobalHeadofFixedIncomeS&PDowJonesIndices

Voltaire: Recent Developments in Fixed Income IndicesDecember 5th 2017 Copyright © 2017 by S&P Global.

All rights reserved.

Private & Confidential

What we look for from our independent bond data/pricing providers:

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• Broad market segment (pricing / terms & conditions) coverage• Timeliness of new issue coverage• Data integrity & transparency / pricing methodology• Quality assurance procedures / use of technology• Analytics capabilities• Depth of staff• End of day, intraday and/or real-time availability• Timeliness and consistency of delivery• Responsiveness regarding data/pricing challenges and questions• Broad use in the market place• Adherence to data submitters code of conduct as outlined in IOSCO

PrinciplesSource: S&P Dow Jones Indices LLC.

© S&P Dow Jones Indices LLC, a part of S&P Global 2017. All rights reserved. Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”), a part of S&P Global. Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Trademarks have been licensed to S&P Dow Jones Indices LLC. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. This document does not constitute an offer of services in jurisdictions where S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates (collectively “S&P Dow Jones Indices”) do not have the necessary licenses. All information provided by S&P Dow Jones Indices is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. Past performance of an index is not a guarantee of future results.It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. S&P Dow Jones Indices makes no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor, and S&P Dow Jones Indices makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made by of the statements set forth in this document. 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S&P DOW JONES INDICES PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Dow Jones Indices Parties be liable ty for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages.S&P Dow Jones Indices keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P Dow Jones Indices may have information that is not available to other business units. S&P Dow Jones Indices has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.In addition, S&P Dow Jones Indices provides a wide range of services to, or relating to, many organizations, including issuers of securities, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address.

20Private & Confidential

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UseOfEvaluatedPricinginIndices

JaymeFagasGlobalHeadofValuations&TransparencyThomsonReuters

Jayme FagasGlobal Head, Valuations & TransparencyThomson Reuters

Use Of Evaluated Pricing in Indices

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Independent Prices for Index PricingIndex pricing should be based on independent evaluated prices

• Overwhelmingly consistent survey response – 82% of the respondents believe this to be the case• No surprise as this aligns to why independent pricing is already required for many existing use

cases:– Portfolio valuation– NAV calculation– Risk assessment– Price validation and verification

• Indices should follow this lead• Perhaps the “surprise” is how long it took us to get here?

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Pricing TransparencyAway from independence of prices and regardless of the source, pricing transparency is just as critical

• Insight into methodology and observable inputs is required• While “real” transaction prices are often the preferred source, certainly in Europe based on BMR,

trade prices are not always available• When using an independent evaluated price, full disclosure and transparency is required

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New Rules – IOSCO and EU Benchmark RegulationThe main goal of the new rules is to eliminate potential manipulation

• Independent pricing providers address this issue (assuming they are truly independent)• Using TRPS, an independent pricing provider, as an example:– TRPS follows the rule of 1 price per 1 instrument per day– Every TRPS client receives the same individual price whether that client is a fund admin, custodian, bank,

academic client or INDEX– Even true for the one TR Fixed Income index which uses TRPS pricing – TR Convertible Bond Index– TRPS is not “unjustly” influenced to change a derived price – while we do make adjustments if presented

with valid and verified market information, this is an exception not a rule– TRPS has “no skin in the game”

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New Rules – IOSCO and EU Benchmark Regulation (continued)Terms used in the new rules / aspects of the new rules

• “Anchored” on observable, arms-length transaction prices in a competitive market– All TRPS prices are derived in part through the use of observable trade prices

• Trade prices are not the only acceptable prices for Indices; when combined with Expert Judgement, bids, offers and extrapolations can be used when trade prices are unavailable– This aligns directly to the “very definition” of Independent Evaluated Pricing

• At a first glance it appears that Index pricing and Independent evaluated pricing could be a “perfect marriage”

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More on Pricing Transparency and Full DisclosureIt’s not that simple – there is more to think about with respect to Pricing Transparencyand Full Disclosure

• Trade prices are often unavailable– Only 2% to 3% of Fixed Income instruments trade on a given day– Access to adjunct trade data must be available– Hierarchy of market data inputs must be evident in the pricing methodology (with trade prices at the top)– Expert Judgement must be clear and disclosedo Methodologies cannot be hiddeno Data inputs and how they are used allows one to understand how a price was derived

and how to understand the use of “Expert Judgement”

• Pricing procedures and processes – Insight into these procedures and processes must be made available– Pricing procedures and processes must be consistent– Pricing vendors like TRPS who have a SOC 1 Type 2 in place may have a head start on this front

as the SOC 1 Type 2 report confirms the existence of a sound, consistent pricing environment

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More on Pricing Transparency and Full DisclosureContinued…

• Benchmark Regulation (BMR) goes one step further – Verification– BMR admins have their work cut out for themselves especially given the limited amount of

observable trade prices available on any one day– Independent pricing will surely be required for the rest and this will likely result in

significant amounts of price verification work– Vendors who are fully transparent with their methodologies will hopefully be a big help

for the Benchmark administrators– However, the actual methods of work regarding how this verification will be done have

not yet been established

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Time Will Tell…

January 2018 is less than 30 days away…

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AudienceQ&A

ThankYou!

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ContactUs

VoltaireAdvisorsLLP

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USA UK

+18003171932+448006771694

info@voltaireadvisors.comwww.voltaireadvisors.com