August 1, 2014
European Securities and Markets Authority
103 Rue de Grenelle
75007 Paris, France
Re: Discussion Paper on MiFID II / MiFIR – Article 37 Benchmark Regulation
On behalf of the Index Industry Association (“IIA”), we appreciate the opportunity to provide our comments to the European Securities and Markets Authority’s (“ESMA”) Discussion Paper on the Markets in Financial Instruments Directive (“MiFID”) II and Markets in Financial Instruments Regulation (“MiFIR”). We confine our comments and input to the questions of the Discussion Paper addressing benchmarks—specifically, questions 411 to 449 relating to the open access requirements of Article 37—and additional questions throughout the Discussion Paper that touch upon these issues.
The 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 industry that strengthen markets and serve the needs of investors. Several of the leading index administrators in the world are members of IIA, including Barclays, the Center for Research in Security Prices, FTSE Group, Markit, MSCI Inc., NASDAQ OMX, Research Affiliates, Russell Investments, S&P/Dow Jones Indices, LLC and STOXX.
At its core, IIA members collect input data from a variety of sources, such as third party data providers, exchanges, and pricing services, and create index price level data for licensing and by other means. Our members have calculated indices since 1896 and, in the aggregate, the members of IIA calculate approximately two million indices for their clients, covering a number of different asset classes, including equities, fixed income, and commodities.
Key Concerns within the Discussion Paper
The index industry understands the goal of the open access requirements of MiFIR as a means of increasing competition in the marketplace amongst trading venues and CCPs. However, the Level 1 text addresses exclusivity of licensing benchmarks and not the distribution rights of such licenses. Therefore, we urge ESMA to recognize that the intended beneficiaries of Article 37 are trading venues and central clearing counterparties (“CCPs”) for the purpose of trading and clearing and that the provision of third party rights to other users is beyond the scope of the Level 1 text. As detailed further in our comment letter, IIA members are concerned that many of the positions taken by ESMA in the Discussion Paper go beyond the Level 1 text in ways fundamentally alter the licensing practices and rights to intellectual property of benchmark administrators.
Along these lines, we are also concerned that ESMA takes the approach in the Discussion Paper that the information currently provided to trading venues and CCP licensees is insufficient. We are particularly concerned that the conclusions reached in the Discussion Paper necessarily require benchmark administrators to provide more information than what is necessary for the purposes of trading and clearing to trading venues and CCPs. IIA members have been licensing benchmarks to trading venues and CCPs for decades, without issue, and very few trading venues or CCPs have ever asked for information included in the Discussion Paper, such as real-time data feeds or corporate action information, because such information is typically not required for trading or clearing. The IIA believes that ESMA’s prescriptive approach could compel benchmark administrators to provide information unnecessary for trading or clearing to all trading venues and CCPs. Such information may then be used by a trading venue or CCP for purposes other than trading or clearing.
Instead of this approach, the IIA fundamentally believes that the licenses currently in place with trading venues provide the necessary information for trading and clearing. In particular, the IIA notes that the Discussion Paper’s proposals for what should be included in Level 2 text goes well beyond the measures necessary to implement the Level 1 text by calling for the disclosure of information that has no relationship or relevance to trading and clearing in the vast majority of circumstances, such as underlying input data. Moreover, the IIA believes that there is no demonstrated market demand for such data, as current licensees do not need or request such information in their benchmark licenses.
In short, without a demonstrated market need, the IIA believes that disclosure of additional types of data not currently asked for or received by benchmark licensees would not benefit trading venues, CCPs, or their clients. However, mandating such disclosure would impose substantial costs on benchmark administrators and, in many cases, amount to an appropriation of valuable intellectual property. The data disclosure requirements contained in the Discussion Paper would also require benchmark administrators to provide access to information which a benchmark administrator may not even own or hold licenses which would make them market data vendors for the third party data.
Additional Concerns and Unintended Consequences
In addition to these fundamental points, the IIA has taken the view that many of the proposals to implement Article 37 of MiFIR in the Discussion Paper are too prescriptive and could reduce the availability, diversity, and low cost of benchmarks to the detriment of trading venues, CCPs, and their users. We are also concerned that the prescriptive nature of the Discussion Paper will result in several unintended consequences, including the following:
1. Competition-reducing impact.
The Discussion Paper’s requirements on unrestrictive disclosure of pricing and other information underlying a benchmark will hurt competitiveness among benchmark administrators and hurt licensees. In particular, mandating the provision of this type of information can create anticompetitive outcomes whereby benchmark administrators are required to give preferential treatment to trading venues and CCPs over other licensees. Moreover, the scope of a license to be provided to a trading venue or a CCP remains unclear and could create a perception of a conflict of interest to the extent information is being used for purposes other than trading or clearing.
2. Overly broad approach to recipients of information.
The Discussion Paper and the questions posed suggest that trading venue and CCP users will have the right to access “relevant information” underlying a benchmark by virtue of a license entered into between a trading venue and a CCP. There is no requirement in the Level 1 text that benchmark administrators should be required to license to trading venue and CCP users. Such a requirement fundamentally alters the ability of a benchmark administrator to choose its licensees for its benchmarks outside of the clearing and trading context, significantly impacting a benchmark administrator’s business model for a variety of users.
3. Overly broad disclosure.
The scope of information required to be disclosed under the proposals in the Discussion Paper covers information that is often outside the scope of Article 37 – i.e., such information is not currently being used by trading venues and CCPs for the purpose of trading and clearing. Trading venues and CCPs fundamentally require access to benchmark levels in order to assess the index price levels of assets, and derivatives to perform collateral management. They do not need access to other, often extraneous, information, such as risk management procedures of a benchmark administrator. Moreover, because a benchmark administrator’s license typically does not cover the information requested, such as input data underlying a benchmark, it may even be legally impossible to provide the information outlined in the Discussion Paper to a trading venue or CCP.
4. Jurisdictional competitiveness.
Uncertainties about the jurisdictional scope of the Level 1 text and the prescriptive requirements proposed in the Discussion Paper could incentivize globally-significant benchmarks to be licensed for use in financial instruments traded exclusively on non-EU venues. Such an outcome is clearly contrary to the goal of the open access provisions of MiFIR and would impact the availability, accessibility, and liquidity in the EU of many critical investment and hedging products for EU investors.
5. Failure to recognize differences in business models.
Several of the requirements listed in the Discussion Paper fail to recognize that that are times when a trading venue or CCP would want to provide unique or different pricing models. For example, waiving or reducing fees for a new product in order to make such products successful is a common incentive used in the industry. Such practices do not appear to be viable under the Discussion Paper.
Given the complexity of Article 37, let alone the entire Discussion Paper, we recommend that ESMA reconsider the scope of its proposals on methodology, licensing, and provision of data, perhaps through Level 3 text or additional questions and answers. Our responses reflect these concerns and, where appropriate, suggest alternative paths for ESMA as it begins to draft regulatory technical standards to specify the information that must be made available to a trading venue or CCP, the conditions under which access to a benchmark must be provided, and the standards by which a benchmark may be proven to be “new” as defined in the Discussion Paper.
Specific Responses to Discussion Paper
Q411-412: Do you agree that trading venues require the relevant information mentioned above? If not, why? Is there any other additional information in respect of price and data feeds that a trading venue would need for the purposes of trading?
IIA members have decades of experience licensing information to trading venues and CCPs and are intimately familiar with the types of information needed for the purposes of trading and clearing. We agree that the relevant information to be made available to a trading venue through licensing should enable the trading venue to assess the benchmark for purposes of trading. However, the open access objective of Article 37 should be balanced with countervailing considerations, including the right of benchmark administrators to protect and use their intellectual property rights. In particular, we are concerned that the Discussion Paper has proposed (1) the provision of information that is not necessary for the purposes of trading and clearing and (2) the obligation to license data underlying a benchmark which is either not owned by a benchmark administrator or provided by third-party data vendors in a competitive market.
Providing Unnecessary Information
It is important to again note that the Level 1 text of Article 37 only requires disclosure of information necessary for trading and clearing, and not information such as corporate action information. In addition, when examining whether price and data feeds are relevant for a trading venue or CCP, any potential regulation should focus on the actual needs of a trading venue or CCP in order to perform its trading and clearing functions, respectively. However, the types of information listed in the Discussion Paper include information that go beyond what is needed both for the purposes of trading and clearing and information outside of that context. One example of the latter includes corporate action information.
Instead, the IIA encourages ESMA to look at current market practice to determine what type of information is actually relevant for the purposes of trading and clearing. For example, in the case of trading venues, the relevant data required is the index price level. However, constituent and input data underlying a benchmark is not needed for the purposes of trading and should, therefore, not be mandated in the Level 2 text.
Moreover, the IIA is concerned about information that is required in order to allow a trading venue or CCPs’ users to form an investment judgment. This type of information very rarely extends beyond information that is currently provided by a benchmark provider. Even if more information is needed, benchmark administrators have been willing to provide access to additional licenses in those circumstances to the extent practicable.
Requiring Information Not Contained in a Benchmark License
We also believe that mandating specific data types, such as a feed of benchmark inputs, including a real-time feed of corporate action information, is too prescriptive and, in some cases, unworkable, especially because the obligation to provide such information falls upon “a person with proprietary rights to the benchmark.” Moreover, the requested information is available from competing data vendors. Benchmark administrators should not be put in the position of having to provide access to third-party owned information or grant rights because they legally cannot redistribute such information.
Given these issues, we urge ESMA to adopt a purposive, rather than prescriptive, approach in this area to take into account the unique relationships benchmark administrators have with data sources and a trading venue’s independent access to such information as it needs. We also recommend that ESMA not impose an obligation on a benchmark intellectual property owner to provide this information to a trading venue if such information is not actually licensed by a benchmark intellectual property owner or if such information is provided by several data providers in a competitive market.
Q413-414: Do you agree that CCPs require the relevant information mentioned above? If not, why? Is there any other additional information in respect of price and data feeds that a CCP would need for the purposes of clearing?
Similarly, the IIA is concerned that the scope of information that should be provided to a CCP is too broad and imposes obligations on benchmark administrators that can only be satisfied by the actual owners of the information requested. Moreover, some of the information that would be provided to a CCP according to the proposed outline in the Discussion Paper would be of little use to a CCP within the clearing context. For example, CCPs would not require information underlying a constituent of a benchmark in order to clear a contract. Instead, a CCP would most likely need access to benchmark values and closing values in order to perform their risk management obligations.
In certain circumstances, a CCP may require information regarding the composition of a benchmark to satisfy an underlying regulatory requirement regarding the product being tracked. IIA’s members have found that such circumstances are rare and are usually satisfied on the basis of a specific request from a licensee. Mandating overly prescriptive requirements for information relating to the composition, methodology, and inputs of benchmarks would provide unnecessary information to CCPs and place significant burdens on benchmark administrators to supply information that they may not own, and may be in breach of agreements with data providers if they furnish such data.
Q415-416: Do you agree that trading venues and CCPs should have access to benchmark values as soon as they are calculated? If not, why?
We agree that trading venues and CCPs should have timely access to relevant information in order to ensure compliance with their legal obligations and to ensure that their users understand the risks associated with trading a particular financial instrument. However, IIA also believes that trading venues and CCPs should receive such information at the same time and on the same conditions as all licensees so as not to create potentially new conflict of interest issues. Specifically, if a trading venue or a CCP were able to receive information on a new benchmark “as soon as it is calculated,” it would have preferential access to such data and, in advance of other market participants. As detailed later in our comment letter, it is also unclear to what extent a trading venue or CCP could redistribute that information to its users or clients, meaning that those parties would also have advantageous access to benchmark values.
Moreover, mandating this type of access would put benchmark administrators in the awkward position of both having to comply with ESMA’s implementation of MiFIR while disregarding the laws and legal obligations applicable in other jurisdictions (including applicable selective disclosure laws). It would also run counter to benchmark administrators’ current practice of providing access to benchmark values at consistently defined time intervals to ensure parity of data access among licensees and to the markets.
Thus, a benchmark administrator would potentially breach its preexisting licenses with its customers and and/or violate applicable securities disclosure laws under the approach outlined by ESMA in the Discussion Paper.
The IIA believes that the Level 1 text does not direct ESMA to require the disclosure of such benchmark values as soon as they are calculated, since such information is not necessary for purposes of trading or clearing. Instead, the IIA recommends that this requirement remain purposive, not prescriptive, and respond to the needs of individual trading venues and CCPs and prevent preferential access to information underlying a benchmark.
Q417-420: Do you agree that trading venues and CCPs require the relevant information mentioned above? If not, why? Is there any other additional information in respect of composition that a trading venue would need for the purposes of trading or clearing?
As noted above, the IIA believes that providing trading venues and CCPs with information on the constituents of a benchmark would, in the majority of circumstances, require providing information that would not be useful to a trading venue or CCP. In particular, information beyond the index price level data, such as corporate action information underlying a constituent, may be superfluous in the hands of a trading venue or CCP for the purposes of trading and clearing. In addition, such information would be beyond the scope of a benchmark administrator’s license, which typically covers only index price level data. This type of information is currently not used for trading and clearing purposes, nor is it licensed by benchmark administrators for those purposes. For this reason, we also believe that this requirement also goes beyond the requirements of the Level 1 text.
There are also concerns that a mandate to provide composition data to a trading venue or CCP would require a benchmark administrator to provide proprietary and commercially sensitive information that is not reasonably required by trading venues and CCPs. Such information could also be redistributed by a trading venue or CCP after receipt, seriously damaging the intellectual property value of a benchmark.
We strongly recommend that ESMA clarify the scope of required information regarding the composition of a benchmark and clarify that disclosure of proprietary or sensitive information that would diminish the value of intellectual property held by a benchmark administrator not be disclosed to trading venues and CCPs.
Q421: Do you agree that trading venues and CCPs should be notified of any planned changes to the composition of the benchmark in advance? And that where this is not possible, notification should be given as soon as the change is made? If not, why?
IIA notes that benchmark administrators often rebalance and reweight benchmarks in order to provide an up-to-date reflection of a given market. For example, reweighting of a benchmark might be needed because of a change in shares outstanding of an issuer due to corporate events such as share issuances. Consequently, IIA members continually update their benchmarks to respond to corporate actions and market developments, including, but not limited to, company stock repurchases, private placements, tender offers, and corporate actions that make an issuer ineligible for membership in a given benchmark.
Requiring a benchmark administrator to provide advance notice of changes to the composition of a benchmark should be done at the time all licensees receive such information. As mentioned earlier in our response to this Discussion Paper, this information is not necessary for trading venues and CCPs for the purposes of trading and clearing and should not be granted before any other licensee. Providing access in advance to trading venue and CCP licensees would create anti-competitive advantages and potentially violate securities laws.
Given that the purpose of Article 37 is to increase competition, the IIA believes that providing advance notice of such changes to a trading venue or CCP would create the perception of conflicts of interest and undermine the objectives of fairness and equal access underlying MiFIR.
Instead, the IIA supports providing notification to licensed trading venues and CCPs of changes to the composition of a benchmark when that information is disseminated to all of the benchmark administrator’s licensees.
Q422-425: Do you agree that trading venues and CCPs need the relevant information mentioned above? If not, why? Is there any other additional information in respect of methodology that a trading venue would need for the purposes of trading or clearing?
As a general matter, the IIA believes a clear and public methodology for benchmark construction is essential. IIA members have agreed to follow the IOSCO Principles for Financial Benchmarks (the “IOSCO Principles”), which are also consistent with the IIA’s Best Practices, both of which establish high standards for the quality and transparency of benchmark methodologies. These standards include clearly documenting the methodology for each IIA members’ benchmarks and publishing such methodology to the extent practicable and without violating any agreements or applicable laws restricting such publication.
With this in mind, the list contained in ESMA’s discussion paper of relevant information for the disclosure of methodology is too prescriptive, yet vague. For example, the inclusion of “all criteria and procedures used to develop a benchmark” could extend well beyond the enumerated list in the Discussion Paper to details that would be of little relevance to a trading venue or CCP for trading and clearing purposes.
Instead, the IIA recommends that a benchmark administrator be required to provide information regarding methodology in a manner that is both public and consistent with the current needs of benchmark users. Benchmark administrators should be allowed to publish benchmark methodologies and include a description of the objective of the benchmark and how the benchmark is calculated and maintained, described in sufficient detail to allow users and potential users to assess the objectives of the benchmark and the relevance and suitability of the benchmark to their purposes on an ongoing basis.
Q426: Is there any information in respect of the methodology of a benchmark that a person with proprietary rights to a benchmark should not be required to provide to a trading venue or CCP?
We note that Level 1 text simply calls for disclosure of methodology and not the level of disclosure being proposed in the Discussion Paper. We also note that the IOSCO Principles specifically do not call for full disclosure of proprietary information and that summary information and key features may be disclosed to comply with those principles. We believe that the Level 2 requirements should track the requirements and objectives of the text agreed upon at Level 1 and remain faithful to the broad based international agreement made through the IOSCO Principles.
Moreover, we again note that any disclosure of information underlying a methodology that would violate any agreement or applicable laws restricting such publication should not be required to be provided to a trading venue or CCP.
Furthermore, the IIA believes that disclosure of information underlying a methodology should be balanced against the extent to which a methodology is already transparent and whether such information would be useful to a trading venue or CCP. For example, information regarding frequency for internal reviews and approvals of methodologies are likely to be of little use to a trading venue, a CCP, or its users. It should be sufficient that trading venues and CCPs should know the benchmark administrator is compliant with the IOSCO Principles on these matters.
Other potential relevant information listed in the Discussion Paper could subject a benchmark administrator to legal liability to the extent that such disclosure is inaccurate for reasons outside of the benchmark administrator’s control. For example, the requirement that a benchmark administrator identify potential limitations of a benchmark, including its operation in illiquid or fragmented markets and the possible concentration of inputs, puts a benchmark administrator in the impossible situation of identifying all possible issues with a benchmark and representing that no other such circumstances exist. This requirement is commercially unreasonable and could potentially provide trading venues and CCPs with legal grounds upon which to terminate a benchmark license agreement.
Q427-432: Do you agree that trading venues and CCPs require the relevant information mentioned above (values, types and sources of inputs, used to develop benchmark values)? If not, why? Is there any other additional information in respect of pricing that a trading venue and a CCP would need for the purposes of trading and clearing, respectively? In what other circumstances should a trading venue or CCP not be able to require the values of the constituents of a benchmark?
As noted above, the IIA is concerned about the scope of information to be provided to a trading venue, both from the standpoint of a benchmark administrator’s ability to provide such information and whether such information would actually be useful to a trading venue or CCP. Information such as the values, types, and sources of inputs are either not often owned by a benchmark administrator or are separately licensed. Moreover, providing such data could cause benchmark administrators to breach confidentiality obligations regarding sources of input data, privacy laws, the intellectual property rights of data providers, and raise competition law concerns in certain contexts.
As the Discussion Paper notes, relevant information, such as real-time and end-of-day benchmark data, is provided by competing data vendors. The IIA believes that trading venues and CCPs only require such data on benchmark levels in order to assess the price levels of assets or derivatives or perform collateral management.
Q433-434: Do you agree that trading venues and CCPs require the additional information mentioned above? If not, why?
The IIA’s Best Practices commit its members to high standards of quality and transparency of data collection. For example, benchmark administrators are required to establish and follow consistent procedures designed to ensure that it selects reputable, reliable vendors or institutions as sources of data used in calculating benchmarks. Benchmark providers must also, 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 benchmark calculation process as appropriate, and taking appropriate remedial actions where practicable to minimize the possibility of recurrence.
With these commitments in mind, IIA members do notify trading venues and CCPs of any inaccuracies in the calculation of a benchmark value or changes in the technical features of a data feed at the same time as other licensees of a benchmark. This is particularly important in the case of error corrections, where such corrections have to be executed uniformly to prevent multiple values of a benchmark being in circulation.
Q435-436: Is there any other information that a trading venue or a CCP would need for the purposes of trading or clearing?
No. Furthermore, as discussed in detail above, the IIA believes that the Discussion Paper’s scope of information for which disclosure would be required is overly broad, as adoption may require benchmark administrators to breach their contractual obligations with respect to separately licensed information or information that the administrators do not otherwise currently license. We believe that Level 2 requirements should carefully track the requirements and objectives of the Level 1 text and should align with the IOSCO Principles, which specifically provide that disclosure of summary information and key features, rather than the in-depth requirements set forth in the Discussion Paper, is sufficient for compliance.
Q437-440: Do you agree with the principles described above? If not, why? Do users of trading venues need non-publicly disclosed information on benchmarks? Do users of CCPs need non-publicly disclosed information on benchmarks? Where information is not available publicly should users be provided with the relevant information through agreements with the person with proprietary rights to the benchmark or with its trading venue / CCP?
The IIA believes that ESMA should recognize the effect that the Level 2 text will have on the entire benchmark industry and not solely the effect it may have on the provision of licenses to trading venues and CCPs. For several decades, IIA members have been licensing benchmarks without issue to a wide variety of constituencies, including trading venues and CCPs, and have been providing the information requested by such licensees. The Discussion Paper’s proposal to provide licenses to users of trading venues and CCPs is a serious encroachment on the rights of benchmark administrators to choose to whom they provide a license outside of the trading and clearing context and may also damage the intellectual property value of a benchmark. In fact, ESMA agrees that such licensing should not damage the intellectual property of a benchmark administrator, as the Discussion Paper recognizes that the use of intellectual property by a trading venue or CCP licensee “may not cause damage to the licensor, nor diminish the commercial value of said intellectual property.”1
Instead, the IIA urges ESMA to recognize that the intended beneficiaries of the Level 1 text are trading venues and CCPs only. By broadening the scope of who may be entitled to a license in the Level 2 text, the Discussion Paper proposes to provide a license to valuable intellectual property to a universe of potential users outside of the trading and clearing context. IIA members are in the business of providing benchmark licenses to a variety of licensees, including users of trading venues and CCPs. Providing this type of “pass-through” license would have a serious effect on the business models of benchmark administrators.
In addition to the fact that such licensing is not required under the Level 1 text, the IIA does not understand what public policy objective would be achieved by providing users of trading venues and CCPs with a pass-through license and how providing such a license would serve the purposes of trading and clearing. Instead, the Level 1 text clearly states that such information as relevant to trading and clearing should be provided to such users when, by definition, trading venues and CCPs will be performing the trading and clearing function for a user, respectively. The IIA believes that the Level 1 text does not address broadening the granting of licenses beyond trading venues and CCPs.
The IIA also believes that it is inappropriate to detail the terms of license agreements in the benchmark industry, particularly given the complexity and variety of participants, business models, how the underlying products based in benchmarks will be used, and benchmarks in the market. Moreover, we believe that ESMA will not achieve the policy aims of the Level 1 text by detailing the terms on which licenses should be granted by a benchmark administrator. Instead, such requirements may be promoting inflexible standardization of the commercial and legal terms of a mandatory licensing arrangement that could materially disadvantage the benchmark administrator, a trading venue, or a CCP. Trading venues and CCPs may prefer differing business terms.
For these reasons, we are concerned that the Discussion Paper is setting forth an approach that will permit users of a trading venue or CCP to be entitled to a “pass-through” license, as the Discussion Paper notes that the Level 1 is silent as to whether such a right exists. We believe that the basis for Article 37 is to provide open access to trading venues and CCPs for the purposes of trading and clearing and measures taken beyond that objective are inappropriate and beyond the intent of the Level 1 text. By definition, because trading venues and CCPs are responsible for trading and clearing, trading venue and CCP users would be using such information for purposes other than trading and clearing.
The IIA strongly encourages ESMA to recognize the fact that benchmark administrators already provide direct licenses to a wide variety of users, including trading venues and CCPs. Mandating pass-through licenses to these users through trading venues and CCPs would eliminate this business practice in the name of providing users of trading venues and CCPs with access to information for “trading and clearing purposes,” when such information would, in fact, be used for a variety of other purposes. This is a significant issue within the Discussion Paper. If included in the Level 2 text, this issue warrants additional discussion, either through Level 3 text, Q&A’s, or other means.
In these circumstances, a required pass-through license would amount to a misappropriation of valuable intellectual property to a user of a trading venue or CCP. Moreover, given that the terms of the pass-through license would be determined on the basis of a benchmark administrator’s license with a trading venue or a CCP, the trading venue or CCP would be in the position to determine the terms of a pass-through license provided to a user. Such users may be using the data for means other than for trading and clearing purposes.
In addition, we also note that it may be impossible to know or identify all of the users of a trading venue or a CCP. Regardless of this fact, a benchmark administrator would still be required to ensure how such users will receive “relevant information” in a license agreement with a trading venue or CCP. This requirement imposes a significant burden on a benchmark administrator to provide information to an unknown or unknowable set of users and provide them with information that will most likely be used for purposes other than trading or clearing.
With regard to non-publically disclosed information, we note that there are several situations where such information is covered by confidentiality provisions that could be breached by mandated disclosure of nonpublic information to users of trading venues and CCPs. There are certain circumstances where such nonpublic information is disclosed to a trading venue or a CCP, such as compliance with local securities law, and does not violate the confidentiality provisions of a license. However, providing the same information to a user of a trading venue or CCP would not be covered by such provisions and could, in some cases, violate the licensing agreement between a benchmark administrator and a data provider. Moreover, we believe that under no circumstance can a user of a trading venue or a CCP be empowered to require disclosure of nonpublic information that would not otherwise be needed for the purposes of trading or clearing.
Q441-445: Do you agree with the conditions set out above? If not, please state why not. Are there any are other conditions persons with proprietary rights to a benchmark and trading venues should include in their terms for agreeing access? Are there any are other conditions persons with proprietary rights to a benchmark and CCPs should include in their terms for agreeing access? Which specific terms/conditions currently included in licensing agreements might be discriminatory/give rise to preventing access? Do you have views on how termination should be handled in relation to outstanding/significant cases of breach?
Again, the IIA notes that there is a divergence between the requirements of the Level 1 text and the potential for prescriptive requirements in Level 2, as proposed in the Discussion Paper. The IIA strongly believes that ESMA has been asked only to draft Level 2 text that would address exclusivity concerns in benchmark licensing. Other requirements, including determining the terms of a license agreement, go beyond the mandate of the Level 1 text and are unnecessary.
To be clear, the IIA believes that trading venues and CCPs should have access to benchmarks on the same terms and conditions that exist for similarly situated current licensees, with due consideration to differences in product and usage.
The Discussion Paper fails to recognize that trading venues and CCPs may not want access based on the same terms as others, either because of differences in business model or in fields of use. In fact, this is the very reason that a benchmark licensing industry, with different providers, terms, and products has arisen – in order to meet market demand for a variety of products being used for multiple purposes. Therefore, ESMA should recognize that the existing licensing regime meets the individual needs of benchmark licensees and that the result of this system is a marketplace with different products, pricing, and terms. The goal of open access should not interfere with the basic right of a benchmark administrator to meet the needs of an existing or potential licensee seeking a tailored or particular product.
We also note that ESMA agrees that a person with proprietary rights to a benchmark can legitimately charge different CCPs, trading venues or any related persons different prices for access. However, rather than qualify pricing on the basis of “reasonable commercial grounds,” ESMA should recognize that the terms of such licensing agreements are already differentiated as appropriate and to meet a licensee’s demands. We request that ESMA drop this requirement for contract differentiation, as it would replace an objective, market-based reason for differentiation among contracts with prescriptive legal requirements instead.
We also believe requiring differences in service between two trading venues or CCPs to be “objectively justified” is a somewhat problematic provision, as it suggests that services provided to all trading venue or CCP are largely the same. On the contrary, ESMA should recognize that licensing contracts are commercial agreements that are not standardized. Further, licensees will often request specific commercial arrangements that reflect their individual circumstances. For example, one CCP/trading venue might prefer paying the relevant licensing/data fee upfront while another would rather enter into a revenue sharing agreement, without any upfront payment.
Q446-449: Do you agree with the approach ESMA has taken regarding the assessment of a benchmark’s novelty, i.e., to balance/weight certain factors against one another? If not, how do you think the assessment should be carried out? Do you agree that each newly released series of a benchmark should not be considered a new benchmark? Do you agree that the factors mentioned above could be considered when assessing whether a benchmark is new? If not, why? Are there any factors that would determine that a benchmark is not new?
Article 37(1) of MiFIR enumerates cumulative criteria guiding how a benchmark may be proven to be new, namely if (i) it is not a mere copy or adaptation of any such existing benchmark, the methodology, including the underlying data of the new benchmark is meaningfully different from any such existing benchmarks; and (ii) the new benchmark is not a substitute for any such existing benchmark. However, the factors listed in the proposal of the Discussion Paper do not provide clear guidance to benchmark administrators on the circumstances in which a benchmark will or will not be considered new.
For example, while the IIA agrees that with ESMA that, in cases where a benchmark releases a new/further series on a periodic basis, a benchmark is a continuation of the prior benchmark and each newly released series of a benchmark should not be considered new. We also agree that the frequency at which benchmarks are calculated is a less important factor when determining whether the benchmark is new.
However, we are deeply concerned that about ESMA’s view that “any adaptation to an existing benchmark, whether material or not, would not constitute a new benchmark.” There are certain adaptations to user groups or formats that have material effect on a benchmark and those who use it, and we believe such adaptations should play a meaningful role in ESMA’s determination of whether a benchmark is “new.”
We also note that our experience has shown that any trading venue will need a period of exclusivity to have sufficient time to structure the benchmark product, establish commercial agreements, and generate sufficient interest from its clients. In this respect, more significant efforts and time will typically be required if the trading venue targets a new user group as they will need time to familiarize themselves with product. This will be the case even if composition and/or methodology of the benchmark are similar to an existing product. Trading venues and CCPs may make a significant investment in making product traded or cleared successful on their exchange or market place. Trading venues and CCPs may waive their fees or provide incentives to make new products successful. Any regulation that no longer makes that viable will harm or make it impossible for new products to be successful.
In sum, the IIA agrees that it is important to balance the factors against one another in order to make an appropriate assessment for the purposes of Article 37(2). Additionally, it is important to note that the way in which factors are weighed against one another may vary on a case by case basis.
The IIA appreciates the attention ESMA has given to the issues contained in the Discussion Paper and the questions on how best to implement the open access requirements of trading venues and CCPs in the EU per Article 37 of MiFIR. The IIA is concerned that there are several fundamental differences between the mandate of Article 37 and the scope of disclosed information and potential licensees proposed in the Discussion Paper. However, we appreciate the opportunity to begin this dialogue on these important issues and to provide our input on how best to craft Level 2 text for Article 37. We hope to continue this discussion and would be happy to be of service to ESMA as it moves forward on this important issue.
/s/ Rick Redding
Chief Executive Officer, Index Industry Association
 European Securities and Markets Authority, Discussion Paper: “MiFID II / MiFIR (ESMA/2014/548)”, Paragraph 46, iii (Pg. 368) (May 22, 2014).