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 .