IOSCO Comment Letter May 2013

May 16, 2013

Mr. Alp Eroglu
International Organization of Securities Commissions
Calle Oquendo 12
28006 Madrid

Re: Public Comment on Principles for Financial Benchmarks (CR04/13)

On behalf of the Index Industry Association (“IIA”), we are pleased to respond to the International Organization of Securities Commissions’ (“IOSCO”) Consultation Report on Principles for Financial Benchmarks (the “Principles”). The Principles are the product of extensive dialogue between the IOSCO Task Force on Financial Market Benchmarks (the “Task Force”) and market participants resulting from the publication of IOSCO’s Consultation Report on Financial Benchmarks (the “Consultation Report”) earlier this year. The Principles reflect a set of standards relating to the benchmark calculation, methodology, and maintenance process and are a key step in strengthening confidence and integrity in financial markets, particularly with respect to survey and estimate-based benchmarks.

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 and the needs of investors by working with market participants, regulators, and other representative bodies to promote sound practices in the index industry that strengthen markets by advocating the highest level of ethics and integrity. 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.
IIA commends IOSCO for engaging in a thorough two step consultation process with stakeholders on formulating uniform standards for financial benchmarks and benchmark administrators. In so doing, IOSCO has correctly recognized that a “one-size-fits-all” approach is inappropriate for benchmarks, as the universe of benchmarks differs substantially with regard to methodology, sources of data, governance, existing regulation, and transparency. For example, the Principles highlight several areas, such as the content of methodology or a submitter code of conduct, where certain standards may be inappropriate or should not apply.

IIA shares IOSCO’s goal of ensuring the integrity of all financial benchmarks and developing uniform, high quality standards for benchmarks and benchmark administrators. 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, 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. In so doing, members of the IIA drew upon their extensive experience as the leading index providers in the world to develop a best practices framework for the index industry.

The Principles correctly focus on structural weaknesses associated with IBORs and should maintain their focus on ensuring that these benchmarks are held to the highest standards of quality and integrity. However, the IIA believes that a best practices framework tailored to benchmarks outside of the IBOR context would be an important complement to the Principles. Consequently, the IIA has developed the Index Industry Association Best Practices (the “Best Practices,” attached hereto).

The Best Practices establish high quality standards for indices that do not pose the same risks as those that came to light during the recent IBOR incidents. They represent a common agreement among independent index providers as to the standards that should apply to the administration, maintenance, and calculation of indices, the necessity of maintaining a strong governance body accountable for maintaining such standards, and the need to identify and address conflicts of interest arising in connection with index administration, calculation, and maintenance. The value of the Best Practices is its focus on promoting high quality standards that are specific to the index industry outside of the IBOR context.

The Best Practices represent a product of extensive and thorough deliberation by IIA members. IIA members and signatories to the Best Practices commit to meeting the high standards and principles of good governance required and promoted by the Best Practices and are required to adopt policies and procedures that effectuate the Best Practices.

Importantly, the Best Practices were designed with the goal of establishing an appropriate balance between prescriptive requirements for index calculation, maintenance, and administration and high quality standards to be followed by signatories to the Best Practices. We believe that the Best Practices have met this goal. As a result, adoption of the Best Practices by index providers mitigates the need for direct regulation of index providers and their calculation, maintenance, and administration activities.

We note that IOSCO specifically asks if the Principles should apply to equity indices given their diversity, transparency, and the existing regulation of its data inputs. We agree that several of the Principles are inapplicable to equity indices. IIA members have been calculating, creating, and maintaining indices since at least 1896, and the index industry has continually provided high quality equity indices since that time. No failure of equity indices akin to the recent IBOR benchmark scandals has occurred since then. This is largely due in part to the market’s demand for transparent, objective, and accurate equity indices, based on prices from regulated exchanges that leave little room for potential conflicts of interest or manipulation.

The Best Practices address the transparency, governance, confidentiality, and data quality standards listed in the Principles and, consequently, reduce the need for direct regulation of index providers as suggested by the Principles. As a result, we do not believe that the Principles should apply to index providers that adopt the Best Practices. However, in response to Question #1, we note that the following principles in particular should not apply to equity indices and equity index providers:

1. Principle 2 – Oversight of Third Parties. The Principles envision that benchmark administrators will be responsible for oversight of third parties with respect to their data collection activities. We note that equity index providers primarily rely on regulated exchanges to provide the data underlying an index. It may be inappropriate or impossible to require exchanges to be overseen by an index provider given their preexisting regulatory requirements and the nature of the data submitted to index providers.

2. Principle 5 – Internal Oversight. The Principles require benchmark administrators to share potential conflicts of interest with stakeholders, subscribers, and submitters. The case for sharing such information is strong for IBOR benchmarks based on surveys or estimates, where such information can be manipulated. However, since equity indices are highly transparent, users of equity indices may not gain any appreciable benefits from such additional disclosure. Instead, we recommend that conflicts of interest, to the extent they even arise, should be identified and addressed by an index provider at each step of the index calculation and maintenance process.

3. Principle 10 – Content of the Methodology; Principle 11 – Changes to Methodology. 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. While we agree that the methodology underlying an index should be clearly documented and publicly available, such methodology should only be published to the extent practicable and without violating any agreements or applicable laws restricting such publication.

We invite IOSCO and the Task Force to provide their feedback on the Best Practices and continue the discussion on appropriate and proportionate index industry standards. The IIA will also continue to solicit feedback from other key stakeholders to improve and refine the standards established by the Best Practices. The IIA is obtaining valuable input from key stakeholders and hopes, along with comments received from key governmental and regulatory authorities, to finalize the Best Practices in the near term.

In closing, we note that the Best Practices are an important step for the IIA and its members in establishing a common, high quality set of standards for the index industry. The Best Practices properly distinguish between IIA member indices and benchmarks that pose manipulation or conflicts of interest risks while also recognizing the preexisting incentive of IIA members to produce and maintain the integrity of their high quality indices. We hope that IOSCO will join us in promoting the Best Practices and IIA’s mission to establish uniform, global, and high quality Best Practices for the index industry.


/s/ Rick Redding

Rick Redding
Executive Director, Index Industry Association



The members of the Index Industry Association (IIA) have prepared and adopted these Best Practices (the Practices)and are the original signatories to them.   The Practices apply only to activities, policies, and structures of an index provider (an IP) associated with the administration, maintenance, and calculation activities with respect to its indices.  To the extent that an IP conducts any subset of the foregoing activities the Practices will apply to those activities.  The Practices do not apply to any business activities by an IP or its affiliated entities.

In addition to the original signatories, an IP may adopt the Practices by becoming a signatory to the Practices and by stating publicly that it has signed the Practices and confirming its compliance with the Practices (as they may be amended from time to time).

These Practices are available to the public without charge on the website of the IIA and each signatory to them.

From time to time, the Practices may be updated to reflect changes in market, legal, and regulatory circumstances.  Any revision to the Practices will require the approval of the majority of the IIA board and the consent of not less than two-thirds of the IIA members.



Indices are administered, maintained, and calculated by IPs, including IIA members, are widely used to provide a representation of a particular market segment or index objective.  The IIA recognizes that the high quality, reliability, and timely availability of those indices are important and the Practices seek to promote the integrity and efficiency of processes and controls related index administration, maintenance, and calculation.


Definition of Index

As used throughout the Practices, an index means a number, calculated by reference to a theoretical collection of assets, market indicators, securities, or derivatives, whose absolute level or periodic difference relate to the performance of the theoretical collection over that period.

Third parties may be involved in the administration, maintenance, or calculation of an index.  To the extent that an IP relies on a third party for the administration, maintenance, and/or calculation of an index, the IP should establish clear roles and responsibilities for that party and receive adequate assurances that the party’s index-relevant activities facilitate delivering the index according to its methodology.



The purpose of these Practices is to set forth standards developed by the IIA that are resigned to ensure the high quality and integrity of their indices administered, maintained, or calculated by IPs. Adherence to the Practices demonstrates that an IP has committed to meet the high standards and principles of good governance required and promoted by the Practices.  IPs that wish to claim compliance with the Practices must adopt policies and procedures that effectuate the Practices, but IPs remain free to take measures which go beyond those addressed by the Practices.

The standards contained in the Practices are designed to ensure not only high quality and integrity but also to do so in a way that fosters improvement, innovation, and vigorous competition in all aspects of the index industry.  Signatories to the Practices reaffirm their commitment to abide by the antitrust and competition laws of all jurisdictions in which they do business, a commitment embodied in the IIA Antitrust Guidelines.


Scope and Interpretation

The Practices apply in full to any IP that becomes a signatory.  IPs may not choose to adopt only a portion of the Practices, except to the extent obligations imposed by the Practices conflict with other legal or regulatory obligations.

Where relevant, the standards prescribed in the Practices are intended to apply equally to all persons employed or otherwise engaged by and operating under the control of an IP to the extent they are involved in the administration, maintenance,  or calculation of indices.

The Practices are comprised of a number of standards, each of which is set out below in bold text. Following each standard are additional guidelines, the purpose of which is to provide guidance on how each of the standards may be interpreted and how IPs may achieve compliance with them.

It is expected that an IP will consider the guidelines in interpreting all of the standards set out below.


Monitoring Compliance

As set forth in Standard 10 below, each IP should provide for periodic reviews of its compliance with the requirements of the Practices. The first such review should be completed within one year of the IP’s becoming a signatory.  Subsequent reviews should take place periodically to ensure continuing adherence to the Practices.


No Third-Party Beneficiaries

Neither the IIA nor any IP assumes, nor may it be inferred that any of them assume, any obligation, duty, or liability to any third party by virtue of becoming or being a signatory to the Practices or by making the Practices available to the public. Nor shall the Practices create any contract with any third party or create third-party rights to enforce any provision of the Practices (directly or indirectly, contractual or otherwise) against an IP.  Nothing in the Practices shall constitute a representation for legal purposes.



1.    STANDARD 1: Governance

An IP shall maintain robust governance arrangements, including a clearly defined management structure with transparent lines of reporting and appropriate allocation of authority and responsibility.

1.1           An IP’s Board, the senior management of the IP, its ultimate corporate parent, or equivalent body should appoint and empower a governance body accountable for the administration, calculation, or maintenance of its indices (the Governance Body).  The nature of the Governance Body may vary depending on the type of index and may comprise a formal board, a dedicated committee, or an individual manager.  In all instances, however, it is essential that there be a single identifiable authority within the IP with specific accountability for the governance of the index.

1.2           The Governance Body should provide oversight designed to ensure that:

(A)            The IP’s senior managers within the governance function have the requisite skills, capacity, knowledge, and experience to perform the duties assigned to them.

(B)            Relevant employees of the IP are allocated specific duties and responsibilities in relation to oversight and control functions, including a compliance infrastructure regarding index services, and have sufficient resources to be able to perform those duties and responsibilities effectively; and

(C)            The IP continues to act in compliance with the Practices, as certified through periodic reviews.

1.3           An IP should have in place appropriate reporting lines and organizational structures to facilitate effective checks and balances and transfers of management information to appropriate senior managers in the IP’s organization.

1.4           If an IP engages a third party as its agent to administer, calculate, or maintain an index, or it enters into a joint venture, partnership or other similar arrangement for the administration, calculation, or maintenance of an index, the IP should establish clear roles and responsibilities for that party and receive adequate assurances that the party’s index-relevant activities facilitate delivering the index according to the IP’s methodology.

1.5           If an IP jointly owns an index with another partner, the IP should establish clear roles and responsibilities for the partnership and design clear standards for its activities to facilitate delivering the index according to the IP’s methodology.

1.6           An IP should conduct regular training for staff on the relevant policies and procedures in relation to its index operations, such as the handling of confidential information, conflicts of interest, personal account dealing, editorial independence, data integrity, and business continuity and disaster recovery plans.

2.    STANDARD 2: Quality and transparency of index methodologies

An IP shall publish or otherwise make available the index methodologies for indices that are intended for commercial use and shall ensure sound administrative review if its index methodologies and the processes related to their calculation and maintenance.

2.1           An IP should clearly document the methodology for each of its indices and, subject to those qualifications set out below in Standard 2, for each index intended for commercial use, publish the methodology on its website, to the extent practicable and without violating any agreements or applicable laws restricting such publication.  Published index methodologies should include a description of the objective of the index and how the index is calculated and maintained,described in sufficient detail to allow users and potential users to assess the objectives of the index and  the relevance and suitability of the index to their purposes on an ongoing basis.

2.2           Material changes to index methodologies should be rigorous and updated in a timely manner.  Substantive amendments to an established methodology should be made according to a clear and documented process.

2.3           An IP should periodically review its indices methodologies to ensure that they continue to be designed to meet the stated objectives of the index.

2.4           An IP should consider feedback received from subscribers, data contributors, and other market participants in the context of any review of its index methodologies, as appropriate.

3.    STANDARD 3: Quality and transparency of data collection

An IP shall take appropriate steps to utilize reliable sources of data and shall maintain clearly defined policies and processes for collecting, evaluating, and utilizing relevant data in connection with index calculation.

3.1           An IP should specify I its internal records the criteria that define the sources of data which are or may be used in connection with index calculation.

3.2           An IP should establish and follow consistent procedures designed to ensure that it selects only reputable, reliable vendors or institutions as sources of data used in calculating indices.

3.3           An IP should establish, implement, and maintain adequate internal controls designed to ensure that data utilized in index calculation are robust and dependable.

3.4           An IP should, commensurate with a risk-based analysis of its data providers, and to the extent practicable, establish policies and procedures for identifying anomalous data received from sources, excluding such data from the index calculation process as appropriate, and taking appropriate remedial actions where practicable to minimize the possibility of recurrence.

3.5           An IP will maintain records of the sources of data used in connection with index calculation to the extent practicable and without violating any agreements or applicable laws for the purpose of enabling the verification of the calculation of the index.

3.6           IPs should construct indices using data that are best suited to measure an index’s objectives.  Such date should reflect an existing underlying market based on prices, rates and price assessments derived from price evaluation sources, other data anchored in market-observable information or, where appropriate, valuations using expert judgments.  The sources should be separate from the index maintenance functions to ensure all prices used in calculation of the index are anchored by arms-length or other market-observable validation or, where appropriate, valuations using expert judgments.

4.    STANDARD 4: Index calculation and verification

An IP shall ensure that its indices are calculated in accordance with its methodologies.

4.1           An IP should establish policies and procedures to ensure that its indices can be calculated on a consistent, regular, and timely basis.

4.2           Where practicable and commensurate with a risk-based analysis of its data providers, an IP should implement processes to validate incoming data.

4.3          Any demonstrable failure by IP staff or third parties engaged as agents to adhere to published index methodologies or processes in calculating indices should be subject to internal review. and, as needed, a remediation process.

5.    STANDARD 5: Timely publication

An IP shall ensure that information about its indices is published or otherwise made available in a timely manner, as appropriate to each index.

5.1           An IP should establish policies and procedures to ensure the well-controlled and timely dissemination of indices that it has agreed to publish.

5.2           An IP should establish policy and procedures to ensure that any material changes to indices or index methodologies are published or otherwise made available in a timely manner.

5.3           An IP should establish policies and procedures to ensure that any corrections to information published about an index (in accordance with its stated policies) are disseminated promptly after it is determined that a correction will be implemented with appropriate transparency and breadth of distribution.

5.4           An IP should maintain appropriate policies and procedures to govern its public announcements concerning its indices.

6.    STANDARD 6: Conflicts of interest

An IP shall take appropriate steps to identify and address conflicts of interest arising in connection with index calculation and maintenenance.

6.1           An IP should adopt and maintain appropriate policies to address conflicts of interest.  A conflict of interest framework should seek to mitigate existing or potential conflicts of interest created by the IP’s ownership structure or control, or due to other interests in the IP’s staff or wider group may have in relation to index calculation and maintenance.  To this end, a conflict of interest framework should establish clear boundaries between index calculation and maintenance with in an IP and other business/commercial functional areas within the IP or its broader organizational framework and what action should be taken if any potential/actual conflicts of interests arise.

6.2           I addition, an IP should:

(A)           ensure that personal interests or business connections do not compromise the IP’s performance of its functions;

(B)            establish a segregation of reporting lines within the IP, where appropriate, to clearly define responsibilities and prevent unnecessary or undisclosed conflicts of interest or the perception of such conflicts;

(C)            put in place effective procedures to control the exchange of information among staff engaged in activities involving a risk of conflicts of interest or between staff and third parties, where that information may reasonably affect any index calculation and maintenance activities;

(D)            establish appropriate remuneration policies for those responsible for index calculation and maintenance to ensure that those policies do not create conflicts of interest; and

(E)            adopt policies regarding the proper use of material non-public information and compliance with applicable anti-bribery and anti-money laundering laws and regulations.


7.    STANDARD 7: Business Continuity and Disaster Recovery

An IP shall maintain reasonable business continuity and disaster recovery plans to ensure that, as far as practicable, indices can continue to be calculated and published in an orderly and timely manner notwithstanding the occurrence of disruptive events.

7.1           An IP should develop plans designed to ensure continuing index calculation and publication in the event of extreme weather, natural disasters, or other events that could affect the IP’s offices.

7.2           An IP should develop and maintain appropriate security and recovery measures designed to protect its computer networks against viruses, hackers, and other intentional efforts to disrupt or compromise its operation.

7.3           An IP should develop plans designed to ensure continuing index calculation and publication in the event of the incapacity or unavailability of key business personnel.

8.    STANDARD 8:  Confidentiality and Record Keeping

An IP shall maintain appropriate and up-to-date records in connection with index services and implement and maintain appropriate safeguards to protect confidential information.

8.1           An IP should maintain adequate internal records in connection with index services, such as official publications, evidence of supervisory reviews or approvals, any material complaints, and any methodology changes.  Such records should be maintained for at least five (5) years (or otherwise in accordance with applicable laws or corporate record keeping policies).

8.2           An IP should adopt appropriate control systems and procedures to preserve the confidentiality of sensitive information.  An IP should consider such measures an as email and document encryption policy, network firewalls, and restrictions on physical and electronic access to confidential information.

9.    STANDARD 9:  Responding to complaints

An IP shall maintain written policies and procedures for promptly and appropriately responding to complaints about its indices.

9.1           An IP should ensure that there are appropriately documented procedures for the communication, management, and timely resolution of complaints related to its indices or third parties engaged as data suppliers or calculation agents.

9.2           If the cause of the complaint is fairly attributable to an IP’s third-party supplier of data or calculation agent, the IP should provide prompt written notice of the complaint to the relevant third party.

9.3           If the cause of the complaint is systematic or likely to recur, an IP should consider appropriate remedial measures to reduce the likelihood of such complaints arising in the future.

10.    STANDARD 10: Internal controls and reviews

An IP shall establish an appropriate internal control framework to support its compliance with the Practices; its compliance shall be subjected to appropriate review on a periodic basis.

10.1        An IP should allocate appropriate resources, and have in place adequate control systems, so that the IP, its staff can comply with the Practices.

10.2        An IP’s executives and  staff should be held to high professional standards of integrity and propriety.

10.3        In accordance with local law, an IP should maintain appropriate escalation policies and procedures for members of staff to raise concerns regarding inappropriate or unlawful practices relating to the indices (for example, a “whistleblowing policy” or an “insider dealing” policy).

10.4        An IP’s compliance with the Practices should be reviewed periodically as appropriate given the IP’s organizational structure.

10.5        If material deficiencies in compliance are identified in the course of any such review, an IP should implement remedial measures promptly.

10.6       The IP’s Board, senior management, or the senior management of its ultimate corporate parent, should be able to confirm that (i) periodic compliance reviews of the Practices have been conducted, (ii) any necessary remedial measures have been taken, and (iii) appropriate parties have been advised as needed of matters arising from the review.

10.7        Following each periodic review of the IP’s control framework, an IP should consider the detailed findings of that review, and, when remedial measures are necessary or appropriate to address the findings of that review. and, when remedial measures are necessary or appropriate, implement those measures to address the findings of the review.  An IP will document all reviews of its control framework, the work papers underlying those reviews, the details and summaries of the results of those reviews and the IP’s responses to those reviews in accordance with the Practices and any applicable law or regulation.