20 trade & finance
Neutral index providers are an asset for financial markets
Hartmut Graf, Chief Executive Officer, STOXX Limited
The rigging of LIBOR prompted regulators to scrutinise benchmarks used by the financial industry, particularly those benchmarks based on surveys, OTC market data and indicative quotes
Indices are probably among the most well-known‘ financial instruments’- and they also have a quite impressive history to look back on: The Dow Jones Industrial Average, the world’ s most prominent stock market index, was already created in 1896. But it was not the world’ s first market index. That distinction belongs to an 1884 predecessor of what is today called the Dow Jones Transportation Average. Even 130 years ago, the Dow Jones Transportation Average was not only a gauge of the market but a yardstick of the broader economy. Nowadays, an index is an aggregation of market data of financial instruments- stocks, bonds commodities- used either as a basis to create financial products or as a benchmark to evaluate the performance of financial investments.
The indexing industry, in terms of products and players, has grown immensely in the past century. Index providers such as MSCI, S & P Dow Jones, FTSE, STOXX, Russell and others play a vital role by providing reliable, transparent indices that allow for efficient and global capital allocation. Reliable, objective indices created by the providers named above are constructed based on a rules-based methodology, and in general from traded prices of liquid instruments from a regulated trading venue. These indices hold the possibility of full replication and are fully available to professional investors and product providers. The sell side of the market- issuers of financial products, such as ETFs- and the buy side- asset owners and managers- use such market indices.
The rigging of LIBOR prompted regulators to scrutinise benchmarks used by the financial industry, particularly those benchmarks based on surveys, OTC market data and indicative quotes. The European Commission, the International Organisation of Securities Commissions, the European Banking Authority and the European Securities and Markets Authority- all motivated by the LIBOR scandal- are mulling initiatives that are likely to change the landscape for the indexing business, with calls for more oversight and the suggestion that index providers offer their data free of cost. In the midst of this regulatory blitz, regulators need to draw clear distinctions between a benchmark such as LIBOR( which is a reference rate and is based on a panel’ s subjective decision) and indices, which may be used as benchmarks but are based on objective data and clear methodologies.
One of the biggest concerns regulators have about benchmarks is the potential conflict of interest of parties providing data used for the calculation of indices, and simultaneously using these indices for the construction of financial instruments.