February 28, 2015
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”) Consultation 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 involving and addressing benchmarks—specifically, question 87, which relates to Draft Regulatory Technical Standard (“RTS”) 10 on providing information for the purposes of transparency and other calculations, and questions 157 to 159, which relate to Draft RTS 24 on access in respect of trading venues (“TVs”), central counterparties (“CCPs”), and benchmarks. We have also separately attached an annex containing our recommended changes to RTS 24.
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.
The IIA expresses its appreciation for ESMA’s consideration of the feedback submitted to the MiFID II and MiFIR Discussion Paper released last year, to which the IIA also responded. In particular, the IIA believes that ESMA has taken significant steps to help ensure changes to Article 37 protect intellectual property and ensure all licensees receive information on a non-discriminatory basis. ESMA also has recognized some of the challenges index administrators face when providing certain benchmark information to trading venues (“TVs”) and central counterparties (“CCPs”), mainly as a result of contractual and legal prohibitions from doing so. Some concerns relating to the potential for preferential access to information by TVs or CCPs have also been resolved. However, we believe that there are still significant issues with the draft regulatory technical standards (“RTS”) released for public comment.
In instances listed below, we find that the Level 2 measures proposed by ESMA extend far beyond the Level 1 text mandate. This appears to stem from an overly broad interpretation of the objective of Article 37 of MiFIR as well as an overly inclusive list of information to be provided to TVs and CCPs for the purposes of trading and clearing. Moreover, while the recitals of MiFIR and RTS 24 note the importance of balancing the disclosure of information from a benchmark administrator against whether such information is actually needed for the purposes of trading and clearing, RTS 24 often requires the dissemination of more information than is actually required.
In particular, the IIA notes the following key areas of concern:
1. Unwarranted Disclosure of Information Not Needed for Trading or Clearing.
The information disclosed pursuant to Article 37 should only extend to such information that is necessary for a TV or CCP to fulfil its trading and clearing obligations. IIA members have and will continue to provide relevant information for regulatory purposes. However, in several instances, RTS 24 goes well beyond what is required for those purposes or even what is necessary for the interoperability of TVs and CCPs, such as Article 21(2)’s requirement that the rationale for adopting a particular methodology be provided. We urge ESMA to carefully examine current market practice, which has worked for decades, to determine what information is actually required for the purposes of trading and clearing.
2. Potential Significant Impact on Non-EU TVs and CCPs.
One of the unintended consequences of RTS 24 may be its global impact. ESMA must recognize that by dictating the license terms for EU TVs and CCPs in RTS 24, such standards may alter the global indexing rights to all licensees, well beyond the mandate of Article 37.
3. Continued Concerns on Required Information Disclosure.
ESMA took significant steps towards narrowing the scope of information to be provided to a TV or CCP by eliminating unnecessary information under Article 37 to be disseminated, such as marketing and due diligence information. However, the draft RTS continue to require an index administrator to provide information that it may be prohibited from providing, either contractually or by operation of law. This is particularly true in the case of data providers, which often require index administrators to sign standardized contracts without negotiating the terms and conditions of such contracts.
4. Access to License Versus Price Regulation.
The IIA believes that Article 22 of RTS 24, as currently written, confuses the requirement of Article 37 of MiFIR to provide nondiscriminatory and fair access to a license with requirements on how a license should be priced. In particular, requiring that any price differences be “objectively” justified goes beyond the mandate of the Level 1 text and essentially dictates licensing models to index administrators. Moreover, Article 22 also requires that licensing model frameworks be provided to any TV or CCP upon request, irrespective of whether the TV or CCP is a licensee or would use such information for the purposes of trading and clearing. We believe that such requirements would create competition distortions and would impact an index administrator’s entire client base, not just EU trading venues and CCPs.
We strongly urge ESMA to revisit whether Article 22 is even necessary and, if so, how provisions should be narrowly tailored so as not to interfere with the free negotiation of licensing agreements between index administrators and TVs and CCPs. We also urge ESMA to evaluate whether requirements are consistent in light of domestic, EU, and international rules relating to selective disclosure and the misuse of non-public material information.
5. New Benchmark Regime.
We believe that Article 23 of RTS 24 requires significant clarification. In particular, Article 23(2) makes it less likely that a benchmark is new if any of the enumerated factors are present. At minimum, we believe that this language should be clarified such that a benchmark will be less likely to be new if all of the factors apply to a benchmark, as there are circumstances when one factor may be present but a benchmark is not actually “new.” Moreover, there are several circumstances in which indexes with underlying assets in seemingly unrelated asset classes or sectors could trigger a finding that a benchmark is “new” under the proposed criteria.
Another alternative for determining when a benchmark should be deemed to be new is included in the annex being submitted separately. The approach suggests that a determination of a “new” benchmark should be based on factors such as whether the universe of input data is objectively new.
6. Impact on Property Rights, Competition, and Relation to Other EU and International Law.
Without addressing the above concerns, the IIA remains concerned that ESMA’s implementation of the Level 1 text will have a significant impact on the property rights of index administrators and may be inconsistent with EU competition law and other international obligations, such as the World Trade Organization’s General Agreement on Trade in Services (“GATS”) and the Agreement on Trade-Related Intellectual Property Rights (“TRIPS”). In particular, we note that Recital 40 of MiFIR provides explicitly that “(t)he licensing duties under [MiFIR] should be without prejudice to the general obligation of proprietary owners of benchmarks under Union competition law, and Articles 101 and 102 TFEU in particular, concerning access to benchmarks that are indispensable to enter a new market.”
We also note the importance of maintaining consistency and avoiding conflict between the regulatory technical standards adopted pursuant to Article 37 of MiFIR and the International Organization of Securities Commissions’ (“IOSCO”) Principles for Financial Benchmarks (the “IOSCO Principles”). The IOSCO Principles overlap in certain instances with the obligations of RTS 24, particularly with respect to disclosure of the content of methodology, notification on changes to methodology, and the benchmark determination process. We also have similar concerns with respect to consistency between RTS 24 and the European Commission proposal for a regulation on indices used as benchmarks in financial instruments and financial contracts (the “Benchmark Regulation”), which is the subject of ongoing negotiation.
The IIA appreciates the attention ESMA has given to the issues contained in the Consultation Paper and the questions posed on how best to implement the open access requirements of Article 37 of MiFIR. We hope to continue this discussion and would be happy to be of service to ESMA as it moves forward on these important issues.
/s/ Rick Redding
Chief Executive Officer, Index Industry Association
Q87: Do you agree with the proposed draft RTS in respect of implementing Article 22 MiFIR? Please provide reasons to support your answer.
While the majority of our comments are geared towards RTS 24 and associated questions 157-159, the IIA believes that it is important to comment on the aspects of RTS 10 dealing specifically with frequency of data requests and response times for TVs and reporting requirements for TVs. As noted further below, there are domestic, EU, and international laws and regulations on the selective disclosure and misuse of material non-public information. As such, to the extent that a TV is required to provide data to a competent authority that is linked to an index licensed by an index administrator, we believe it is important to bear in mind that selective disclosure is not permitted and that TVs may only receive information when it is released to the market and not beforehand. This could be contrary to existing securities laws and create new conflicts of interest. Given these pre-existing legal requirements, there should not be differences in the timing of disclosure by an index administrator to the public and TVs by operation of RTS 10.
We also believe it is important to underscore that any information provided by a TV or CCP to ESMA or a national competent authority (“NCA”) be limited to use by ESMA or an NCA. Such information should not be provided to other governmental actors or private parties, including other index administrators.
Q157: Do you agree with the elements of the draft RTS that cover relevant benchmark information? If not, please explain why and, where possible, propose an alternative approach. In particular, how could information requirements reflect the different nature and characteristics of benchmarks?
Our response to this question is aimed at Articles 20 and 21 of draft RTS 24. However, as a preliminary matter, we note that ESMA has acknowledged that it is important to balance the regulatory goal under MiFIR of providing TVs and CCPs with non-discriminatory access to benchmarks against the proprietary rights held by the owner of the benchmark.
Indeed, Recital 40 of MiFIR supports this balance by explicitly stating that
…where commercial and intellectual property rights relate to financial services related to derivative contracts, licenses should be available on proportionate, fair, reasonable and non-discriminatory terms.
Recitals 19 through 21 of RTS 24 also specifically recognize the balance envisioned by Article 37. In particular:
“This Regulation, therefore, does not prescribe an exhaustive list of the types of information that should be provided by a person with proprietary rights to a benchmark to trading venues and CCPs, but allows CCPs and trading venues to request access to information, provided it is required for trading or clearing purposes.” (Recital 19, emphasis added)
“Depending on the type of benchmark concerned, a person with proprietary rights to a benchmark may need to take particular considerations into account that will require the information provided to trading venues and CCPs to be modified appropriately.” (Recital 20, emphasis added)
“…a trading venue must be able to make an initial assessment of the characteristics of the benchmark, market the relevant product and support on-going market surveillance activities, and a CCP must be able to perform appropriate risk management…in order to assess whether it has an appropriate level of margin in accordance with requirements set out in Regulation (EU) No 648/2012.” (Recital 21)
We also note that Article 37(1) makes a distinction between information from a benchmark for which access must be provided for the purposes of trading and clearing and all other information. Article 37(1) notes that non-discriminatory access must be provided to “relevant price and data feeds and information on the composition, methodology and pricing of that benchmark for the purposes of clearing and trading” (Article 37(1)(a)) and “licenses” (Article 37(1)(b)). MiFIR purposefully bifurcates non-discriminatory access in this way and implies that information not listed in Article 37(1)(a) should be accessed through a license per Article 37(1)(b). IIA believes that this fundamental distinction – between information for which access must be provided and information that should be addressed through a license – should be carefully considered when finalizing RTS 24.
In light of the above, it is important for ESMA to affirm the specific mandate of the Level 1 text, determine whether information to be made available is truly necessary for trading and clearing, and assess the impact of disclosing such information on the commercial and intellectual property rights of an index administrator.
Under Article 20, we are concerned that the draft RTS language requires an index administrator to “supply” relevant information by a TV or CCP. We believe that non-discriminatory access means that such information should be “licensed” to a TV or CCP rather than “supplied,” in line with the Level 1 text. We also note that disclosures of information to the market are already governed by laws and regulations relating to selective disclosure and the misuse of material non-public information, and the RTS should not act to interfere with those laws and regulations.
We support the requirement in Article 20(2) that TVs and CCPs explain the reasons why requested information is needed for trading and clearing purposes. However, we believe that the intent of this provision can be strengthened by requiring TVs and CCPs to justify why such information is needed and how it will be used for trading and clearing purposes. We also believe that reasonable costs should be permitted with respect to requests of such information.
We further note that Article 20(6) provides rights to parties other than a TV or CCP, which is beyond the mandate of the Level 1 text. Certain confidentiality restrictions or contractual limitations may prohibit an index administrator from providing the requisite information to a TV or CCP, as envisioned under Articles 20(7).
We support the requirement in Article 20(8) that an index administrator does not need to supply information to a TV or a CCP when such information is publicly available.
Under Article 21, the IIA believes Article 21(1) should be significantly modified to reflect information that is appropriately required for the purposes of trading and clearing. For example, historical benchmark values should only be provided to the extent that such information is consistent with values given to other data clients. Notifications of inaccuracies in benchmarks should also be provided according to an index administrator’s rulebook, with which customers of an index administrator will already be familiar. Changes may be different based on asset classes because of the source of the input data will vary and be very fact dependent. Article 21(2) should also be amended to only include information required for the purposes of trading and clearing.
Q158: Do you agree with the elements of the draft RTS that cover licensing conditions? If not, please explain why and, where possible, propose an alternative approach.
Our response to this question is aimed at Article 22 of RTS 24. We believe that it is reasonable to ask index administrators to provide standard license agreements, models, and index level data for trading and clearing purposes to TVs and CCPs, in line with the requirements of the Level 1 text. However, several of the requirements of Article 22 transcend the access requirements of Article 37 and instead dictate the pricing terms of contracts with licensees. This is a significant issue that, if left unaddressed, would seriously interfere with the free negotiation of licensing agreements between index administrators and TVs and CCPs and would impact the licensing agreements of all their clients, clearly beyond the remit of RTS 24. We again draw attention to Recital 40 of MiFIR and Recitals 19 through 21 of RTS 24, which specifically note the importance of balancing contractual and intellectual property rights with the need for information required for the purposes of trading and clearing.
In particular, we are concerned that differences in conditions pricing must be “objectively justified according to parameters such the quantity, scope or field of use” per Article 22(2). Instead, we draw attention to the requirement under Article 37 that a license must be provided on a “fair, reasonable, and non-discriminatory basis,” which falls far short of dictating that differences in pricing should be justified according to a set of criteria. Instead, the IIA believes that the remit of Article 37 is to ensure that TVs and CCPs have equal access to the comparable terms and conditions offered to other licensees, particularly with regard to TVs and CCPs in the same category of licensees.
We are also concerned that the “objectively justified” test interferes with Recital 40 of MiFIR and Recital 20 of RTS 24. Recital 40 requires that licenses be made available on “proportionate, fair, reasonable, and non-discriminatory terms.” Similarly, Recital 20 of RTS 24 states that a person with proprietary rights to a benchmark “may need to take particular considerations into account that will require the information provided to trading venues and CCPs to be modified appropriately.” However, the “objectively justified” test appears to create a “one-size-fits-all” approach, which could extend to terms such as contract duration and payment structures (see, e.g., Article 22(5)(d), (f), and (g)). That approach is inconsistent with the Recitals to MiFIR and RTS 24 and has the potential to seriously disrupt a competitive trading and clearing environment.
We also believe that the list of conditions included in Article 22(5) and (7) is unnecessary and beyond the scope of the Level 1 text, as the inclusion of such conditions is not necessary for the purposes of trading and clearing. This includes information such as the definition of confidential information, termination, governing law, dispute resolution, and general communication. Additionally, ESMA also recognizes that such conditions in licenses are usually based on “international standard terms and share, to a considerable extent, a common structure,” which undercuts the need for ESMA to prescribe such terms through regulation (Pg. 478, Consultation Paper). Instead of a prescriptive list of information, we recommend that sufficient information be disseminated to allow a venue to trade or clear an instrument based on a licensed benchmark.
Moreover, as noted above, the IOSCO Principles overlap with several areas listed in Article 22, including contingency planning under Article 22(5) and Article 22(6) regarding notification processes. There is a significant risk that the Benchmark Regulation, when finalized, will also contradict and conflict with Article 22.
Additionally, with regard to Article 22(3), categories of licensees should not be disclosed in order to protect the goal that MiFIR create a competitive trading and clearing environment. Instead, such information could be confidentially provided to ESMA, if requested
Ultimately, our concerns with Article 22 stem from the fact that RTS 24 sets parameters on the conditions for licenses and prescribes those parameters, which is beyond the mandate of the Level 1 text. That approach has the significant potential of stifling competition amongst index administrators and free negotiation between index administrators and licensees.
Q159 Do you agree with the elements of the draft RTS that cover new benchmarks? If not, please explain why and, where possible, propose an alternative approach.
Our response to this question is aimed at Article 23 of RTS 24. As a preliminary matter, the text of Article 23 is unclear and could have unintended consequences by having the potential to capture indexes as “new benchmarks” that are unrelated but could have high correlation, which is a significant risk and has the potential to undermine what ESMA is trying to achieve.
As currently drafted, Article 23 seems to indicate that the presence of any of the enumerated factors listed under 23(2) will make a benchmark less likely to be new. For example, Article 23(2)(a) is ambiguous in that CCPs can offer substantial netting or cross margining on seemingly non-related assets so long as there is positive correlation across asset classes or sectors. Another example is Article 23(2)(c), which would find that a benchmark is less likely to be new if the values of the relevant benchmarks are highly correlated even when none of the underlying assets are in the same asset class.
We believe that clarifying that the presence of each factor in Article 23(2) should make a benchmark less likely to be new and recommend redrafting the section so that it is conjunctive, rather than disjunctive. Our annex also includes an alternative method of approaching how a benchmark could be “deemed” to be new based whether at least one of the following features of an index methodology is objectively new: (1) the universe of input data; (2) the model to identify and approximate input data; (3) algorithms used to filter, rank, select and weight components and to calculate the index, or (4) periodic review/rebalancing of the index composition.