ESMA-EBA Guidelines

February 15, 2013
European Securities and Markets Authority
103 Rue de Grenelle
75007 Paris, France


European Banking Authority
Tower 42 (Level 18)
25 Old Broad Street
London EC2N 1HQ
United Kingdom




Re: ESMA-EBA Consultation Paper on Principles for Benchmarks-Setting Processes
in the EU

On behalf of the Index Industry Association (“IIA”), we are pleased to respond to the European Securities and Markets Authority (“ESMA”) and European Banking Authority (“EBA”) joint Consultation Paper on Principles for Benchmarks-Setting Processes in the EU (the “Principles”).  We believe that the IIA can provide ESMA and EBA with unique insight into the universe of indices and benchmarks; differences in transparency, governance, and accountability in those benchmarks; and what distinguishes IIA member indices from certain reference rate benchmarks that may be subject to abuse, conflicts of interest, or manipulation.

Founded in 2012, IIA is an independent, not-for-profit organization representing the global index industry.  The purpose of IIA is to represent the global index industry by working with market participants, regulators, and other representative bodies to promote sound practices in the index industry that strengthen markets and serve the needs of investors.  Several of the leading index providers in the world are members of IIA, including Barclays, FTSE Group, Markit, MSCI Inc., NASDAQ OMX, Russell Investments, and S&P/Dow Jones Indices, LLC.  Our members have calculated indices since 1896 and, in the aggregate, the members of IIA calculate over one million indices for their clients, covering a number of different asset classes, including equities, fixed income, and commodities.

As part of ESMA and EBA’s recent findings and recommendations to the European Banking Federation on strengthening EURIBOR, ESMA, and EBA have published the Principles for public comment to address the activities of reference-rate and other benchmark providers, administrators, publishers and market participants who submit data. The Joint EBA-ESMA Task Force on Principles for Reference Rates and other Benchmarks-Setting Processes in the EU (the “Task Force”) has been specifically established for this purpose.

The Principles should be considered as an important complement to current work being conducted by the European Commission (“EC”) on proposing a framework for the regulation of indices.  In addition, we note that the Principles will also be informed by the International Organization of Securities Commissions (“IOSCO”) recent Consultation Report on Financial Benchmarks.

IIA is committed to the development of indices with high levels of transparency and integrity.  A key motivation behind forming IIA was the desire by our members to agree upon and develop a best-practices framework for the calculation and dissemination of indices.  Since its formation in 2012, IIA members have continued to dialogue and collaborate on the contents of such a best-practices framework and how that framework can best meet the needs of market participants.

With this in mind, IIA is a natural supporter of appropriate and proportionate index industry standards. We agree with the Principles statement that a benchmark should adequately represent the market to which it refers and measure the performance of a representative group of underlyings in a relevant and appropriate way.  However, there are many different types of indices that capture and provide information for a number of different uses from various sources of information.  Some benchmarks rely entirely on estimates or surveys, such as LIBOR or EURIBOR, while others are tied to observable market data.  Moreover, for certain indices, observable market transaction data may not exist.  Some indices also serve as benchmarks in financial instruments and commercial and non-commercial contracts, while others are used to provide an investor with a representation of a particular market segment.

Given the substantial differences between LIBOR, EURIBOR, and indices, we believe that a one-size-fits-all approach is not appropriate when developing global principles for financial benchmarks.  That approach risks imposing substantial and additional layers of regulation on index providers that are unnecessary and at times excessive – especially given the nature of the index industry and the preexisting necessity to produce high-quality and reliable indices.  As we note throughout our response, indices that rely on observable market data or transparent methodologies must meet investor demands to reflect an underlying market.  This preexisting market expectation means that additional regulation would not add meaningful benefits to the quality of our indices.

Other regulators also agree that developing a single regulatory framework for all benchmarks poses serious implementation issues.  For example, the Wheatley Review points out that developing an overarching framework for key international benchmarks may be challenging because of the fundamental differences among benchmarks using various types of indices.

Accordingly, any regulatory framework seeking to address transparency or governance concerns relating to financial benchmarks should only include benchmarks that are based on estimates and surveys and subject to manipulation.  In particular, we recommend distinguishing between survey-based benchmarks, where contributing firms provide an opinion, estimate or view, and contribution-based indices, where contributing firms provide a specific number or price that is derived from various inputs.  The Principles should not include indices based on observable market transactions or indices with transparent methodologies that do not pose the same risk of manipulation as benchmarks based on panel or survey based estimates.  This distinction in regulatory treatment recognizes that many indices do not pose a risk of manipulation or conflicts of interest concerns, are representative of their underlying market, and are constructed in a credible manner.  Moreover, inappropriately regulating these types of indices could potentially reduce investment, innovation, and add barriers to entry for new types of indices to the detriment of investors and the capital markets with no appreciable benefits.

We have endeavored to provide the Task Force with our insights on how to develop a workable and informed regulatory structure for financial benchmarks.  That framework should improve the transparency, accountability, and integrity of financial benchmarks, while avoiding unnecessary or duplicative measures that would hurt investors and the global markets.

We provide our response below with brief remarks about the role and importance of indices, followed by responses to the specific questions posed by the Principles.

The Role of Indices in the Capital Formation Process

As modern investing and portfolio management theories have evolved, it is important to note that investing on the basis of indices has dramatically grown in popularity.  This is because of the overall perception of the relative poor performance of actively managed funds and because of the growing awareness of academic work such as the efficient market hypothesis, the random-walk theory, and the capital asset pricing model.1 As an example of the growing popularity of index investing, according to the Investment Company Institute the amount invested in U.S. index mutual funds grew from $27.46 billion at the end of 1993 to $1.09 trillion by the end of 2011.2  It is estimated that indexed assets now exceed $4 trillion globally.

An index fund investment product in whatever form (e.g., mutual funds, exchange traded funds, UCITS funds, etc.) often consists of a portfolio designed to reflect the composition of some market index by holding securities or other instruments in the same proportion as the index itself.  This type of investing is sometimes referred to as passive management and typically results in administrative costs for securities analysts, portfolio managers, and others that are considerably lower than for actively managed funds.  Index funds also derive their low-cost structure from their low turnover, or costs associated with the buying and selling of securities, such as commissions and bid-ask spreads.  With a low turnover rate, index funds are able to reduce their trading costs and maximize total returns realized by investors in a fund.

The growing popularity of index funds has played a role in the overall decline in average fund expense ratios paid by investors.3 As of 2011 the average expense ratio for index funds is 13 basis points, compared to an average expense ratio of 93 basis points for actively managed equity funds and 66 basis points for actively managed bond funds.4  Moreover, from 1997 to 2011 the average expense ratio of index equity funds fell by 13 basis points, compared with a decline of 11 basis points for actively managed funds.5

Institutional investors are also attracted to index investment strategies because they are low-cost investment alternatives that often outperform actively managed funds.  A 2012 mid-year survey conducted by S&P/Dow Jones Indices found that, for the period between 2007 and 2012, 65.44 percent of actively managed large-cap funds were outperformed by the S&P 500, 81.57 percent of mid-cap funds were outperformed by the S&P MidCap 400, and 77.73 percent of the small-cap funds were outperformed by the S&P SmallCap 600.6 Index investment strategies thus have a track record of providing investors with a low-cost method of obtaining greater returns than actively managed fund alternatives.

In short, index funds permit investors to pursue diversification and asset allocation strategies on a cost effective basis.  Such products have become so popular among institutional investors and investment advisors that they now form the “core” of many investment portfolios and they have thereby contributed greatly to the capital formation process, retirement security, and other worthwhile public policy objectives.  However, it is important to emphasize that any issues raised by index investing are separate and distinct from the questions of accuracy, integrity, governance and transparency with respect to the indices themselves that are raised by the Principles.

We note that it is the Task Force’s explicit goal to focus on principles guiding reference rates.  Bearing this in mind, we believe that the Task Force should clearly delineate differences in the regulatory treatment of reference rate benchmarks that rely on surveys, estimates, or other subjective methodologies and indices that rely on observable market data or have transparent methodologies when developing its Principles.

Based upon that distinction, several recommendations in the Principles could be modified or refined.  These include the role of a benchmark administrator, the role and regulation of contributing firms, requirements on data integrity, and suitability requirements for the provision of indices.

Going forward, the importance of indices to investors and the markets should be carefully considered when developing a financial benchmark framework.  Index-based products play a fundamental role in investment diversification by providing a low-cost means for individual investors, asset managers, banks, hedge funds, and pension funds to diversify their holdings in a simple and cost-effective manner.  Market participants benefit from transparent, straightforward, and reliable indices to serve their investment needs.  Duplicative, unnecessary, or costly regulation would reduce or perhaps even eliminate these benefits, particularly in today’s low-yield environment.

Consequently, the Principles should be tailored to specifically benefit investors and capital markets or geared towards those benchmarks that would be improved by new or additional regulation.  They should also be carefully designed not to apply unnecessary or excessive regulation, particularly for providers of indices based on observable market data or transparent methodologies.

Response to Questions


Question 1: Definition of the activities of benchmark setting

Do you agree with the definitions provided in this section? Is this list of activities complete and accurate?

At the outset, we note that the definition of “benchmark” is fundamental to the Principles, as well as any possible regulatory framework governing financial benchmarks.  A definition that is not carefully crafted could potentially capture many types of indices that are not subject to manipulation or conflicts of interest concerns.  Applying certain governance, transparency, and accountability reforms to these indices may impose substantial costs on index users without any appreciable benefits.

As stated in the Principles, the definition of benchmark includes any commercial index or published figure that (1) is calculated entirely or partially by the application of a formula or an assessment of value of one or more underlying assets, prices, or certain other data, including estimated prices, interest rates or other values, or surveys; and (2) by reference to which the amount payable under a financial instrument or the value of the financial instrument is determined.  This definition of benchmark would benefit from additional clarification and modification, particularly when considered in the context of the Task Force’s goal of focusing on reference rates and other benchmark setting processes.

First, as a general matter, we note that the proposed benchmark definition will include several indices that are easily distinguishable from interest-rate benchmarks and other reference rates that are the subject of the Task Force’s attention.  IIA members generate indices on the basis of observable market data, and, for those certain asset classes where underlying or observable market data is not available, members calculate indices on the basis of robust methodologies.  These indices should not be included in the Principles because they are easily distinguishable from interest-rate benchmarks, which are opaque, based on surveys and estimates, and do not reflect observable market information.    .

Second, and along similar lines, the proposed definition should be narrowed to focus on assessments, estimates or surveys of underlying values.  The concerns associated with reference rate and other interest-rate benchmarks stem in large part from their use of subjective data that is highly dependent on a benchmark administrator or benchmark calculation agent’s untempered judgment.  Other indices, however, are based off of observable market data or transparent methodologies and, therefore, do not pose the same risks as interest-rate benchmarks based on surveys or estimates (e.g., LIBOR and EURIBOR).  Consequently, a framework that mitigates the risks of benchmark manipulation or abuse should focus on those benchmarks that are subject to conflicts of interest and manipulation, and not on those that do not.

Accordingly, we recommend that the definition of benchmark only apply to certain interbank lending benchmarks, such as LIBOR and EURIBOR, which are currently based on nonpublic surveys or estimates of underlying data that is typically not verifiable.  To that end, we believe that the definition of benchmark should specifically exclude indices that are based on transparent methodologies or observable market information, where available.  We understand that the line between indices that fall within and outside of this category may be difficult to draw.  We would be pleased to further discuss this issue with the Task Force to determine an appropriate definition of benchmark that removes these types of indices from the scope of any potential regulatory scheme informed or influenced by the Principles.

If the definition is not amended, we encourage the Task Force to develop Guidelines that apply appropriate levels of oversight and transparency to the various different types of commercial indices or other published figures with due regard to indices that do not pose appreciable risks of manipulation.

Question 2: Principles for benchmarks

Would you consider a set of principles a useful framework for guiding benchmark setting activities until a possible formal regulatory and supervisory framework has been established in the EU?

Many of the recommendations contained in the Principles are a useful framework for guiding benchmark setting activities.  Indeed, many of them are already in place as a matter of market necessity.  By continuing a discussion about the possible oversight of benchmarks through a non-binding framework, industry participants and regulators can further discuss the benefits and costs of additional regulation on the entire industry.

However, given the fact that the Principles will inform, and be informed, by other benchmark regulatory framework workstreams (such as those being conducted by IOSCO and the EC), we stress the importance of ensuring that the Principles recognize the inherent differences between interest-rate benchmarks based on surveys and estimates and indices based on observable market data or transparent methodologies.

The Principles take several steps in this direction.  A few examples include the following:

  • “The existence of a large number and a spectrum of different benchmarks is broadly recognised.” (Bullet 21, Pg. 6).
  • “The range of inputs used to calculate the different benchmarks is diverse.” (Bullet 23, Pg. 7).
  • “Especially in the case of market indices and commodity market benchmarks, methods of data collection and calculation are highly heterogeneous and vary widely.” (Bullet 25, Pg. 7).

While these examples demonstrate some of the differences between benchmarks and indices, we note that the Principles will still apply many of the same standards to indices based off of observable market data or transparent methodologies as interest-rate benchmarks subject to surveys or estimates.

Accordingly, while the Principles serve as a useful tool for furthering a dialogue on financial benchmark regulation, we hope that the Principles do not determine that all indices pose the same risks as interest-rate benchmarks based on surveys or estimates, which would influence other regulators to come to the same conclusion.  Instead, the Principles should clearly define which benchmarks pose regulatory risks, how those benchmarks pose regulatory risks, and what standards should be applied to those benchmarks.  This distinction is especially important with regard to IIA member indices, which do not pose the same types of regulatory risks as interest-rate benchmarks based on surveys or estimates because index users require IIA members to produce indices that reflect an underlying market.


Question 3: General principles for benchmarks

Do you agree with the principles cited in this section? Would you add or change any of the principles?


IIA agrees that a benchmark should reflect the key characteristics of the underlying interest it seeks to measure, and transparent methodologies are critical to ensuring that those interests are properly reflected in an index.  IIA members strive to provide users with clear explanations of the methodology underlying the calculation of an index.  We also agree that actual market data, where appropriate and available, should as a matter of preference be used as a basis for a benchmark.  However, we note that mandating specific methodological requirements for index production may reduce competition among index providers and result in less choice for index users.

In the marketplace of indices with transparent methodologies, index providers by necessity are highly competitive.  In order to gain an advantage over a competitor, index providers must discover new methods of compiling and disseminating data through indices in a way that delivers value to their clients.  Requiring certain new methodological requirements, such as periodic scrutiny of a methodology or verification controls, could reduce the push for innovation or even discourage index providers from providing existing indices.  That would result in less investor choice and access to indices and limit opportunities for investors to explore new investment options.

Accordingly, the Principles should not prescribe specific methodological requirements with respect to indices based off of observable market transactions or transparent methodologies.  Instead, they should state that, as a general matter, benchmarks should reflect market conditions.


IIA agrees that effective governance and accountability is a vital element of a credible benchmark, especially when a benchmark is subject to the discretion and judgment of an information provider or administrator.  However, we also agree with the Wheatley Review’s finding that the degree of, and balance between, governance and oversight and formal regulation will depend on the type of benchmark, how it is derived, and the risk of manipulation of a given benchmark.

By necessity, IIA members produce clear indices that reflect economic realities and are not subject to manipulation or potential conflicts of interest.  Any possible manipulation or conflict of interest would be recognizable by market participants and would discredit the integrity of an index provider.  Given the highly competitive and substitutable nature of our indices, IIA members cannot afford to allow their indices to be subject to conflicts of interest or manipulation.  This is in stark contrast to certain benchmarks, such as interest rate benchmarks that are opaque, based on surveys and estimates which do not reflect observable market information, and are not easily substitutable.

Accordingly, some governance proposals in the Principles relating to conflicts of interest or an allocation of responsibility for oversight activities are inapplicable to IIA member indices.  The Principles should clearly state where additional governance standards are appropriate.  The case for additional governance regulation is strong for interest-rate benchmarks based on unsubstantiated surveys or estimates that are capable of being manipulated, but users of indices based on observable market data or transparent methodologies may not gain any appreciable benefits from additional governance proposals.  Index users would, however, bear additional costs if the Principles’ governance recommendations were applied such indices.


For the reasons listed above, we do not feel that supervision standards, including additional oversight, are appropriate for indices based on observable market data or transparent methodologies.

In particular, sanctions against an index provider for “improper conduct” are particularly objectionable when applied to IIA members.  IIA members are neutral providers of indices and have no self-interest in manipulating an index.  They also maintain robust internal compliance procedures to ensure that no conflicts of interest arise at the employee level.  IIA members take the responsibility of producing high-quality indices seriously, because market participants would cease to use an index if it was not representative of its underlying market.

Moreover, as a best practice, IIA members “firewall” data information exchanges and employees involved in index development, calculation, and maintenance from commercial functions.  Many of our members also maintain strict global codes of ethics designed to mitigate or eliminate these and other conflicts of interest.  Thus, IIA members take the necessary steps to ensure that conflicts of interest do not influence the index calculation and dissemination process to the extent that such conflicts arise.

Without a desire to manipulate an index and with strong firewall protections for index provider employees, we do not feel that an additional supervisory or sanctioning system would benefit the integrity of indices based on observable market transactions or transparent methodologies.


Transparency is a fundamental element of IIA members’ business models.  The use of market data, where appropriate and available, is a central part of our role as index providers.  IIA members produce high quality, substitutable indices, which in most cases are calculated according to transparent index methodologies on publicly accessible websites.  When available for a particular asset class, data are most often generated by retrieving inputs publicized by a regulated exchange or from actual traded prices, actual bids and offers or other observable market activities.

For indices where underlying market data is not exchange-traded, IIA members provide index users with transparent methodologies to educate them about the index calculation process.  Such methodologies also mitigate the potential for conflicts of interest or the capability of an index to be manipulated.

We think it is essential for index providers to provide high-quality benchmarks.  However, we stress that indices are inherently competitive and private goods and any new regulatory framework should recognize the attendant effect of additional regulation on the index industry.  Index providers continually invest in intellectual property underlying their indices to provide the best products possible to their clients. Those investments have allowed investors to benefit from access to an unprecedented number of new markets and opportunities.

Index providers can continue to provide new and innovative indices so long as their investments and efforts are protected by strong intellectual property rights and not undermined by requirements to provide granular information that would be of no benefit to an index user, particularly when an index’s methodology is transparent and observable market data is used in the calculation of an index.  Thus, any new financial benchmark regulatory framework should consider (1) the potential impact on investors resulting from disclosure of key intellectual property rights and (2) whether such disclosure would actually be useful to an investor.

Accordingly, when determining the appropriate level of transparency applicable to a methodology, the extent to which the underlying data must be disclosed and the investments made by an index provider in a methodology should be carefully considered.  The best balance between these two goals is achieved when an index provider provides index users with a clear and thorough understanding of the methodology underlying an index.  We also support the use of observable market data, to the extent that such information is available for an asset class.


Question 4: Principles for firms involved in benchmark data submissions

Do you agree with the principles cited in this section? Would you add or change any of the principles?

We generally agree that data providers that are contributing firms to index providers should ensure the integrity of submitted data through adequate governance, internal controls, and high levels of transparency.  However, we note that any onerous regulation placed on contributing firms may discourage them from providing full access to underlying market data.  This would cause indices to become less robust and subject to outliers and erroneous prices.

Accordingly, we encourage the Task Force to consider the trade off between the costs and benefits of imposing new regulations on contributing firms that provide observable market data, especially for indices that do not have the same risks associated with submissions that interest-rate benchmarks like LIBOR and EURIBOR do.  For example, it may be inappropriate or unhelpful to require stock exchanges and other providers of observable market data to comply with the principles for contributing firms listed in the Principles given their preexisting regulatory requirements and the nature of the data submitted to index providers.

Question 5: Principles for benchmark administrators

Do you agree with the principles cited in this section? Would you add or change any of the principles?

IIA shares the Task Force’s commitment to ensuring that index providers operate with high levels of transparency and integrity.  As discussed above, a key motivation behind forming IIA was the desire by our members to agree upon and develop a best-practices framework for the calculation and dissemination of indices for index providers.  Since its formation, IIA members have continued to dialogue and collaborate on the contents of such a best-practices framework.

Accordingly, we believe that, for index providers providing indices on the basis of observable market data or transparent methodologies, many of the goals listed in the Principles would be better met by adherence to a best-practices voluntary code of conduct.  This is especially true because market discipline essentially requires that IIA indices remain representative of an underlying market, which requires transparent methodologies and adequate internal controls to mitigate any conflicts of interest to the extent that they arise.

Furthermore, it should be noted that IIA members also employ advisory committees to periodically review external factors affecting the index industry.  IIA members also use specially trained analysts to monitor data quality and to notify managers of an index if a discrepancy emerges, although we note that such discrepancies would result in portfolio performance differences that would also be recognized by index users.  We believe that this practice is necessary to ensure the objective nature of our indices.

Accordingly, several of the principles highlighted in this section should not apply to IIA members.  As discussed above, IIA members have no self-interest in manipulating an index, and they maintain firewalls and other internal compliance policies to ensure that employees do not unduly influence or manipulate an index.  Therefore, proposals calling for independent governance or compliance committees are unnecessary.  Moreover, our commitment to transparent methodologies reduces the need to adopt new policies to fully disclose the mechanics of a methodology.  Finally, we believe that other regulatory bodies, like national securities regulators, are in the best position to regulate the information provided by contributing firms such as exchanges and broker-dealers.  That task should not fall on index providers.

Question 6: Principles for benchmark calculation agents

Do you agree with the principles cited in this section? Would you add or change any of the principles?

IIA members typically do not rely on third party benchmark calculation agents for the production of indices.  Additionally, for our indices, the calculation of indices has not been subject to conflicts of interest or concerns about manipulation.  To the extent that IIA members rely on third party benchmark calculation agents, we agree that adequate controls should be maintained to ensure the integrity of the index calculation process.

As indicated above, our internal index calculation process is subject to rigorous internal controls and internal compliance policies to ensure that employees do not unduly influence or manipulate an index.

Question 7: Principles for benchmark publishers

Do you agree with the principles cited in this section? Would you add or change any of the principles?

We generally agree with the recommendations requiring that (1) benchmark publishers have clearly accountable individuals responsible for benchmark publication and (2) implementing systems ensure consistent and timely benchmark publication.  However, in the case of indices based on observable market transactions and transparent methodologies, there is no need to obtain confirmation from an index provider that the submission and calculation validation procedures have been followed.  Such verification or validation procedures would not produce any appreciable benefits for users of such indices and therefore should not apply to providers of indices based on observable market transactions and transparent methodologies.

Question 8: Principles for users of benchmarks

Do you agree with the principles cited in this section? Would you add or change any of the principles?

We reiterate that IIA members employ advisory committees to periodically review external factors affecting the index industry.  Given our reliance on observable market transactions and indices based on transparent methodologies, our indices are always reliable and suitable for use by index users.

We would also note that, as opposed to other benchmarks, IIA indices are client driven.  Indeed, index users understand the components of an index and use them as tools to track the performance of a market in which they choose to invest.  By considering the suitability of a benchmark, the Principles suggest that certain restrictions should be attached to the use of indices, possibly including a determination of suitability by an index provider or index-based product provider.  While this may be an issue for certain exotic financial benchmarks, we note that users of our indices already have all of the information necessary to understand the methodology underlying a given index.

Moreover, a wide variety of users depend on index-based products, including individual asset owners, active asset managers and passive fund managers, broker-dealers, banks, and exchanges.  Given these varying uses, it is not advisable to restrict the use of indices.  IIA’s members are committed to constructing analytically sound indices that reflect a given market segment.  Certain investment product developers may then use our indices to develop products for use by other investors.  Therefore, to the extent that the use of benchmarks should be restricted, regulators should focus on the suitability of an investment product linked to an index for a given investor, rather than the suitability of a given index for an investor.  In short, suitability determinations are best left to regulated providers of investment services, which are already subject to a variety of regulatory regimes.


Question 9: Practical application of the principles

Are there any areas of benchmarks for which the above principles would be inadequate? If so, please provide details on the relevant benchmarks and the reasons of inadequacy.

We again encourage the Task Force not to take a “one-size-fits-all” approach in finalizing the Principles.  Other groups, such as the IOSCO Task Force on Financial Benchmarks and the Wheatley Review, agree that a “one-size-fits-all approach may not be appropriate for the universe of Benchmarks.”  We agree that such an approach would be problematic and potentially ineffective because indices, rates, and other figures are diverse products that have varying degrees of transparency, accountability, and governance.  Further, users of IIA member indices have access to the methodology underlying those indices, while this may not be the case for users of certain benchmarks and other figures.  Accordingly, the Task Force should evaluate whether applying its methodology, transparency, governance, and other proposals to indices such as those produced by IIA members would provide a benefit to consumers and investors or only result in additional and unnecessary costs.


Question 10: Continuity of benchmarks

Which principles/criteria would you consider necessary to be established for the continuity of benchmarks in case of a change to the framework?

We note that the Principles are geared towards reforming interest-rate benchmarks based on unsubstantiated surveys and estimates, such as EURIBOR, and suggestions relating to changes in a benchmark’s framework may relate to concerns about the transparency, governance, and accountability of EURIBOR contributing firms and benchmark administrators.


In some cases, a belief that an index is no longer credible and could not be revised to be credible would necessarily require a loss of faith in the underlying data itself.  This would mean that the investors would need to believe that the producer of such data, such as an exchange, is no longer reporting accurate transactions.  When these events have occurred in the past, market participants have been alerted almost instantaneously of these events and have adjusted their investment strategies accordingly.


Accordingly, we do not believe that a continuity plan is necessary for IIA member indices.  IIA members are independent from the data generation process and thus the continuity of an index is more dependent on the regulation applied to data providers.  In the context of IIA member indices, the Principles should focus on the ability of a data provider to continue providing the information necessary to calculate an index to an independent index provider, although this should be balanced against the costs of any new regulation and the benefits of imposing those new requirements.  Data providers faced with unwieldy or expensive regulatory transition plans may be reluctant to provide data to index providers as a result of such regulation, thus harming the quality of a given index.



IIA has been pleased to provide its response to the Task Force, EBA, and ESMA on its Principles.  The index industry is strongly committed to providing indices that provide reflections of the marketplace and that can ultimately be used by investors to diversify their risks and increase their investment returns.  Our members are committed to providing high-quality and reliable information to index users that can be used to pursue their unique investment needs.


In our response to the Principles, we have endeavored to identify why indices based on observable market data or transparent methodologies do not pose the same risks as other financial benchmarks and why the same concerns about fragility, manipulation, and conflicts of interest would be misplaced.  Proposals for the oversight of financial benchmarks should therefore concentrate on benchmarks that would benefit from increased transparency, governance, and accountability.

We appreciate the opportunity to provide our comments to the Principles and look forward to collaborating with EBA and ESMA on addressing regulatory concerns in the financial benchmarks industry.




/s/ Rick Redding


Rick Redding

Executive Director, Index Industry Association


[1] Donald D. Fischer and Ronald J. Jordan,  Security Analysis and Portfolio Management 589 (Prentice-Hall, Inc., 1983) (1975).

[2] 2012 Investment Company Fact Book, Investment Company Institute, Washington, DC,

[3] 2012 Investment Company Fact Book at 73.

[4] Sean Collins and Emily Gallagher, Trends in the Expenses and Fees of Mutual Funds, 2011, ICI Research Perspective 18, no. 2 (April 2012),

[5] Id.

[6] Aye Soe, S&P Indices Versus Active Funds (SPIVA ®) Scorecard Mid-Year 2012, S&P/Dow Jones Indices,