The Hot Topic: Index Governance and Regulation

The Hot Topic: Index Governance and Regulation

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The question of index governance and the regulation of index providers has been in the news a lot recently.
ETFStream wrote on this subject yesterday, https://www.etfstream.com/features/do-index-providers-need-to-be-regulated/ (etfstream.com); Chris Flood (FT May 18th) and Robin Wrigglesworth (FT May 24th) also.

The broad thesis is the previously heard position that index providers are effectively acting as unregulated investment managers. The new aspect is a suggestion that the SEC is likely to move towards directly regulating index providers, most likely following the general benchmarks regulation model that has spread from the EU across the world. We would agree: we have recently assisted clients in their discussions with the SEC during various recent US ETF launches, from which we’ve seen the SEC is already “regulating by proxy”.

The general areas that appear to be coming into focus, both in the US and elsewhere, are:

Accuracy and the management of error controls
Conflicts inherent in the use of custom indices by index product issuers
Ensuring that indices properly reflect the underlying “economic interest” (i.e. the theme or strategy) that they claim to index

With respect to prospective US benchmarks regulation, it will be interesting to see whether the approach leans closer to the all-inclusive UK/EU regulatory approach, which regulates the providers of all benchmarks used within those jurisdictions, or the approach taken by regulators in Singapore, Australia and elsewhere, whose regulations only cover the administrators of locally-provided critical benchmarks. There are pros and cons to each approach.
In any event, Moorgate Benchmarks supports regulation that ensures investors have access to properly-constructed, properly-managed and properly-governed indices, and looks forward to continuing to work with regulators to ensure effective regulation of the industry.

Clearly our clients regularly discuss the impact of regulation and its best management with us in detail. We are always happy to do so: it’s a tricky area but not one that should dissuade prospective index product issuers or self indexers, whatever and wherever they’re planning on launching. We have negotiated these hurdles in the UK, EU, US and elsewhere.

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