18 TRADE & FINANCE
Dr Hartmut Graf, CEO, STOXX Ltd
IMPLICATIONS OF NEW
EUROPEAN BENCHMARK
LEGISLATION FOR ASSET
MANAGERS, INDEXING
COMPANIES, AND
INSTITUTIONAL INVESTORS
Following the Libor and Euribor
rate-rigging scandals, the
European Commission was
concerned that similar unethical
practices could occur with other
indices. It has therefore proposed
legislation that will compel
benchmark administrators to
comply with provisions regarding
the source of their data. Failure
to comply could result in
administrative measures, including
financial penalties.
The proposed regulations will cover indices
used as benchmarks for tradable financial
instruments or investment funds. Equity indices
such as the EURO STOXX 50 and DAX are
very unlikely to be exposed to manipulation,
however, as they are based on regulated
data from exchanges. With their transparent
methodology, these indices have no leeway for
manipulation. Furthermore, their daily use by
many market participants ensures the highest
level of protection for investors.
At STOXX, we are committed to transparency
and welcome all initiatives that benefit the end-
investors. We are not convinced, however, that
this legislation will achieve that.
Size over conflicts of interest
Under the proposed legislation, indices will
be divided into three tiers: critical, significant
and standard. The classification will be based
on the amount of financial instruments priced
against the index, with “critical” benchmarks
defined as those with over €500bn of assets.
This would mean, effectively, that newly
launched indices would be regulated less
stringently compared to established indices
based on regulated data. Therefore, we believe
that the better approach would be to classify
the indices, not accordingto their ‘size’, but
according to the potential conflicts of interest.
This would result in tighter oversight for smaller,
newly launched indices, which entail higher
conflicts of interest.
Global repercussions for asset managers and
index providers
Other aspects of the regulations pose serious
concerns too – particularly the clause regarding
the EU-market access for index providers
domiciled outside the European Union (EU).
Given that there will be only very few countries
globally where a similar legislation would be
implemented, it is rather unlikely that there
would be a harmonized regulatory landscape
across the board. As this applies in particular
also to the market participants in the United
States, we are concerned about global
disadvantages for EU providers.
Similarly, third-country authorization also
restricts fund managers’ use of indices
produced outside the EU to countries deemed
equivalent by the European Securities and
Markets Authority. This could be a major
problem. It would be difficult, for example, for
EU-based asset managers to use Hong Kong-
based indices that reference Chinese markets.