Insist On Full Index Transparency, Warns Edhec-Risk

Last Updated: 31 January 2023

Regulators should insist on the full transparency of financial benchmarks to allow index users to assess the risks they incur, Edhec-Risk, the financial research centre of France-based Edhec business school, said today in a press release.

Full index transparency is also the most powerful tool to mitigate conflicts of interest in the indexing business, Edhec-Risk says.

The think tank warned in December that the business of providing financial indices generates multiple conflicts, particularly when an index provider belongs to an entity that trades for its own account or manages portfolios, or if a single firm offers index provision and the provision of stock listing services.

Edhec-Risk’s latest outspoken comments come in response to a recent public statement from the European Securities and Markets Stakeholder Group (SMSG), a consultative body that provides guidance to Europe’s securities market regulator, ESMA.

In its statement, released in late February, the SMSG argued that regulators should settle on an approach to index regulation that balances the need for increased transparency with the protection of the intellectual property rights of index providers.

The SMSG proposed a dual approach to the regulation of index firms, whereby smaller companies could be forced to reveal details of their indices’ make-up and methodology, but larger index firms might be permitted to follow a so-called “governance-based” regime.

Such a governance-based framework would involve an independent committee overseeing the production of indices and benchmarks, with committee members including financial product issuers and investors, suggests the SMSG.

However, says Edhec-Risk, such a dual approach to index regulation risks letting larger benchmark providers off the hook and leaving investors with inadequate information.

“The [SMSG’s guidance] is in total contradiction with research results which show clearly that the efficiency and integrity of a market are directly related to the quantity and quality of the information available,” argues Edhec-Risk.

“The position of the SMSG appears…to contrast starkly with the commitment to transparency rightly demonstrated by ESMA in its recent Guidelines on ETFs and other UCITS issues,” Edhec-Risk continues in its press release.

Index providers should be forced by regulators to guarantee “full transparency of both methodology and historical information on a fair, non-discriminatory basis and at reasonable cost, including include the values, constituents, and weights of indices as well as documentation describing the basis for each discretionary decision and change of methodology,” Edhec-Risk argues. Currently, most index firms don’t disclose such information, Edhec-Risk says.

For index providers concerned about the protection of their intellectual property, regulators could allow time lags in the release of the underlying data, which would greatly reduce the opportunities for third parties to duplicate the index and avoid paying licensing fees, Edhec-Risk proposes.

But if regulators fail to insist on index transparency they may facilitate future market abuse by participants in the index business, Edhec-Risk warns.

“Opacity increases the scope for conflicts of interest to play out as abuse and, worse, practically denies the public the ability to assess the relevance and suitability of indices; it should not be tolerated as blanket protection against intellectual property infringements,” the think tank argues.


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