Editor’s note: this is general educational information about how a UK equity index is constructed and reviewed, not investment advice. It is based on the published index ground rules, the index provider’s statement of principles and the legislation listed at the end.
Analysis: the discretion is real but it is fenced
The design separates two kinds of decision. Most of what determines membership is arithmetic performed on public inputs on published dates, and the Statement of Principles commits to methods capable of being readily understood and replicated by index users, using data in the public arena so far as possible. That is the part a fund manager can anticipate: the ranking date, the implementation date, the position bands and the constant constituent count together let anyone with the monitored list reconstruct the likely outcome before it is announced.
The other kind of decision is the exception, and the rules put a procedure around it rather than pretending it does not exist. An event the methodology does not cover, or a case where applying the methodology would be expected to distort the market, is handled under the Statement of Principles, reviewed by the policy team, approved by the Index Governance Board, and disclosed to the market at the earliest opportunity without setting a precedent. The same governance chain sits behind rule changes themselves, with advisory committee consultation feeding the governance board.
The screens are also worth reading as a statement about what the index is for. Requiring a Main Market listing, a minimum free float, and a liquidity test, and then weighting by investable rather than full capitalisation, all point at tradability rather than corporate size. That is why a company can rank high enough by full market capitalisation to enter the index yet carry a much smaller weight in it, as in the foreign ownership illustration, and why an issuer that sells a small proportion of its stock enters with the weight of the shares it actually sold.
What the ground rules do not settle is the market effect of any of this, and none of the cited documents measures how prices behave around a review. The observable items are dated and specific: the monitored list ranking at the cut-off, the announced changes, the implementation Friday, the fast-entry threshold published at each quarterly review, and whether a given constituent’s weight is being set by its free float, by a foreign ownership limit, or by the size of its original offering.
What the documents say
Membership of the FTSE 100 is not awarded. It is calculated. Four times a year a list of eligible securities is ranked by full market capitalisation, and companies that have crossed defined positions on that list move in or out on a published date. The rules governing that calculation are public, and so is the identity of the party applying them.
Who runs the calculation
FTSE International Limited is the benchmark administrator of the FTSE UK Index Series, using administrator in the sense given by the European Benchmark Regulation, Regulation (EU) 2016/1011 of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, as it applies through The Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019. The ground rules set out what that role involves: maintaining records of the index weightings of all constituents, making changes to constituents and weightings in accordance with the rules, carrying out the periodic reviews and applying the resulting changes, publishing those changes, and disseminating the indices. FTSE also monitors performance through the day and determines whether the status of each index should be firm, indicative or held.
Oversight sits alongside the calculation rather than inside it. FTSE Russell has established external advisory committees of senior market practitioners, including a Europe, Middle East and Africa regional equity advisory committee, an industry classification advisory committee and a policy advisory board. The ground rules are reviewed at least once a year, significant amendments go to consultation with those committees, and with other market participants where appropriate, and the feedback is considered by the FTSE Russell Index Governance Board before approval.
The rulebook also states what happens when it runs out. Where the ground rules are silent or do not specifically and unambiguously apply, decisions are based as far as practical on the Statement of Principles for FTSE Russell Equity Indices, and FTSE Russell must advise the market of the decision at the earliest opportunity, with such treatment not counting as an exception or a precedent. The Statement of Principles goes further: where it conflicts with the index methodology, or where applying the methodology may reasonably be expected to lead to market distortion, the Statement takes precedence and an exception is applied, reviewed by the FTSE Russell Policy Team and recommended to the Index Governance Board for approval. Its own first principle is that index composition will be reviewed periodically to remain investable and representative, set against the objectives of avoiding inconsequential changes and implementing updates efficiently.
What a company has to clear before it is ranked
Ranking comes last. Only equity shares listed on the Main Market of the London Stock Exchange count towards a company’s market capitalisation for these purposes, and companies are ranked by full market capitalisation, before any investability weighting is applied. Where a company has more than one listed class, secondary lines are included at the market price of that line, while unlisted specified weighted voting rights shares in a dual class structure are excluded from the ranking calculation.
Two screens sit in front of that. Constituents are adjusted for free float and, where relevant, for foreign ownership limits, and a security needs a minimum free float of 10% to be eligible, with new securities at or below 5% not eligible at all. The ground rules give a worked case: a new issue with a calculated free float of 9%, restricted by a 7% sovereign wealth fund holding subject to a 6-month lock-in, is deemed to meet the minimum because the float rises to 16% on expiry of the lock-ins within 12 months of first trading. A foreign ownership limit can cap the weight instead of the eligibility, as in the illustration of a non-UK incorporated company with a calculated free float of 62% that is included with an investability weight of 49%. The second screen is a median liquidity test, set out in a separate guide to calculation methods.
The quarterly mechanics
The calendar is fixed. The FTSE UK Index Series is reviewed quarterly in March, June, September and December, with a full review of the FTSE All-Share, FTSE All-Small and FTSE 350 Yield Indices in June. Reviews use data in the FTSE UK Monitored List, the universe of eligible equity securities listed on the Main Market, at the end of day on the Tuesday before the first Friday of the review month. Changes are implemented after the close of business on the third Friday of the review month, following the expiry of the ICE Futures Europe futures and options contracts.
The thresholds are bands, not a single line, which is what keeps the index from churning on small moves.
A company is inserted into the FTSE 100 at the periodic review if it has risen to 90th or above, and deleted if it has fallen to 111th or below. The FTSE 250 uses 325th and 376th on the same pattern. Companies deleted from the FTSE 100 will normally join the FTSE 250, and companies promoted out of the FTSE 250 leave it. A constant number of constituents is maintained for the FTSE 100, the FTSE 250 and the FTSE 350, so where more companies qualify for insertion than for deletion, the lowest-ranking existing constituents are deleted to balance the two, and where more qualify for deletion, the highest-ranking non-constituents are inserted.
A large new listing does not have to wait for a review. Fast entry requires the company’s full market capitalisation to rank at position 225th or above in the FTSE UK Monitored List and the security’s investable market capitalisation to be at least GBP one billion; if the company ranks 90th or above it goes into the FTSE 100, otherwise into the FTSE 250. The fast-entry capitalisation requirement is set and published at each quarterly review using data from the close of business on the Tuesday before the first Friday of the review month.
For a new issue, eligibility is tested on the closing price on the first day of official non-conditional trading, and only the shares offered in the offering count towards the investable capitalisation test and the initial index weight. The ground rules illustrate this with a company offering 18% of its shares of which 3% go to cornerstone investors locked in for 180 days, giving an initial investability weighting of 15%, against a company offering 20% with no restricted holders, which enters at 20%.
