IOSCO Benchmark Principles Spark Mixed Reactions

The Principles for financial benchmarks published earlier this week by the International Organization of Securities Commissions (IOSCO) have sparked mixed reactions from the sector with one market participant arguing that the rules around transparency are too lenient.The final report, which is published after two consultation periods in January and April this year, is intended to act as a set of guidelines for benchmarks used in financial markets and gives providers 18 months to comply.

However, the paper has prompted mixed reactions from the industry.

Frederic Ducoulombier, Director at EDHEC Risk Institute–Asia, said: “This is a dark day for transparency. IOSCO has taken a very broad and lenient approach to transparency in the equity index space and missed an opportunity to promote a high level of investor protection as well as information-based competition in the industry.”

IOSCO’s report provides that minimal disclosures (“summary information” and “key features”) are sufficient for compliance with the principles.

Ducoulombier said: “The level of transparency required by IOSCO under these principles is one that allows would-be users to have a broad understanding of an index’s methodology and perform a rudimentary scan of indices against their objectives and constraints – it is not enough to allow for the verification of the integrity of an index’s track record or to perform to perform advanced quantitative analyses to assess indices’ relevance and suitability.”

However, other market participants argue that the Principles offer a reasonable solution.

“There are no surprises in the IOSCO principles and we feel that they have been very wise in their approach to transparency offering a solution of flexibility as opposed to new and intrusive rules,” said Elliot Cohen, Associate General Counsel at Russell Investments. “We welcome the Principles. The Index Association has come out with a set of best practices and this is consistent with what IOSCO have done.”

Other concerns from the report are that the Principles will create additional costs for smaller providers trying to tap into the market, creating barriers to entry.

Ducoulombier said:  “These principles are heavy on governance and light on transparency, which means increased costs for everyone. Many of the governance bells and whistles are already in place at large commercial index providers, so the added costs will weigh more heavily on smaller players and newcomers.”

And Cohen agrees that the cost of governance may well rise for some of the smaller players who are trying to tap into the market. “We welcome competition, but new providers need to be able to provide a high level of oversight and operational excellence. If you can’t afford this or comply with it then you are not giving the market what it wants,” he says.

But investors are positive that the Principles are a step in the right direction.

Peter Sleep, senior portfolio manager, at 7Investment Management said: “These are only guidelines and not legally binding. But investors seem happy about this move and there is a sense of Schadenfreude from me as an investor.”

He said: “At the moment index providers can effectively charge what they want for their services. You only have to go to MSCI’s 10K (the annual filing US companies make with the SEC) to see how profitable the business is.  Transparency helps keep the market competitive and index providers under pressure. There has to be a change at some point because at the moment the cost for index services is enormous and becomes a major expense for a small firm like ours.”

Ducouloumbier adds: “We maintain that investors have to be given enough information to make informed decision about their investments. This not only comprises clear summary information disclosing an index’s objectives and its key construction principles but also complete information on the index construction and calculation methodology as well as historical data on constituents and weights.”

“The IOSCO Principles represent a regression in terms of transparency relative to the high standards established by European Securities and Markets Authority (Esma) for the use of indices by UCITS,” Ducoulombier concludes.

  • Luke Handt

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