18 August 2017
Ms. Rhonda Luo
Australian Securities and Investments Commission
Level 5, 100 Market Street
Sydney NSW 2000
Index Industry Association’s Response to Australian Securities and Commission’s Consultation Paper 292: Implementing the Financial Benchmark Regulatory Regime
On behalf of the Index Industry Association (“IIA”), we appreciate the opportunity to provide our thoughts and insights to ASIC in regards to ASIC Consultation Paper 292 Implementing the Financial Benchmark Regulatory Regime. IIA has provided its members’ expertise to benchmark regulation globally including the IOSCO Principles, EU Benchmark Regulation, and individual nations’ benchmark regulation. IIA’s members are committed to complying with the IOSCO Principles and IIA’s Best Practices.
The IIA is an independent, not-for-profit organization representing the global index industry whose purpose is to represent the 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. Many of the leading global index administrators are members of the IIA, including Bloomberg Indices, CBOE Holdings, the Center for Research in Security Prices, China Bond Pricing, FTSE/Russell Group, Ice Data Services, IHS Market, Morningstar, MSCI Inc., NASDAQOMX, S&P/Dow Jones Indices, SGX, STOXX, and Tokyo Stock Exchange. Our members calculate, administer, and/or maintain approximately 2 million indexes. All IIA members are independent index administrators meaning they neither trade to create prices in the underlying component securities of a benchmark nor do they directly create products for investors use. This model of independence alleviates the conflicts of interest by entities that do not separate these key functions.
B1Q1 Do you agree with our approach to maintaining international and cross border regulatory consistency?
Maintaining international and regulatory consistency, where regulation exists, are admirable goals of which IIA is supportive. Having consistency makes it easier for benchmark users and investors to understand the regulation and aids in the index users compliance efforts. Most investors seek as much consistency as possible because they use products based on benchmarks provided by global benchmark administrators. IIA feels The IOSCO Principles provide a framework for international consistency, but IIA is concerned there are a few areas where the proposed ASIC regulation may not accomplish those consistency goals.
In particular, the inclusion of “fair, reasonable, and non-discriminatory access” (FRAND) in Appendix 2, Rule 2.6.2 is not included in any other jurisdiction for a significant index especially based on regulated data benchmarks where numerous viable substitutes exist. There are numerous, very well constructed, very highly correlated benchmarks available to investors in the Australian equity market which makes the A&P/ASX 200 anomalous to the list of benchmark where FRAND would apply. History has shown price regulation has had numerous unintended consequences when introduced especially when substitutes exist. Australia has historically demonstrated its preference for free markets allowing for index administrators and their clients to negotiate licensing arrangements based on the clients need. Not every client requires the same services or level of support and allows clients to negotiate the best price for the services. The proposed rule could actually force higher prices on some customers paying for services they do not want or need. In the case where there are numerous viable alternatives, it seems price regulation is not needed where customers can choose another benchmark provider based on price, quality of service, and extent of services. Price regulation is usually introduced when harmful market failures or anticompetitive behavior exists. We are not aware of any cases that would warrant such a draconian requirement for regulated data benchmarks where substitute exist provided by independent administrators. Australia has demonstrated its ability to enforce regulation should anticompetitive behavior exist under its existing Australian law under the Competitive Council.
The proposed FRAND regulation also does not fairly take into account the value chain in the case of a regulated data benchmark. The index license is only one component of cost the investor will face with the vast majority of the fee investors pay going to the investment product provider not the administrator and there is not a FRAND provision on the product provider. Nor is there a FRAND provision placed on the input data where an index administrator has to pay for data. Placing FRAND on one piece of the value chain does not help investors since it is a very small percentage of the fees investors pay and is not fair to the index administrators since they are the only ones subject to price regulation in the value chain. The fees levied by equity benchmark administrators are very small especially compared to the value passive investing has brought to Australian investors/
B4Q1 Do you think we need to more clearly distinguish between types of benchmarks? If so, please give your reasons why.
It is clear that all benchmarks do not pose the same risk to investors and markets. This is why the IOSCO Principles, BMR, and other local regulations have provided for proportionality in their respective principles and regulation. In particular, it does not appear to IIA, Australia has taken this into account for regulated data benchmarks where substitutes exist. Australia’s proposed regulation is inconsistent with all other jurisdictions in this aspect. The regulated data nature, transparency in pricing data, and substitutability of benchmarks are critical issues in understanding risk and how moving a benchmark from one benchmark to another highly correlated benchmark could happen. A key tenet of the IOSCO Principles is proportionality and other jurisdictions have taken a different approach for significant benchmarks based on regulated data and where substitutes are available. For example, the issues surrounding the IBOR’s occurred because of the lack of transparency in pricing, unregulated nature of the trading, having no substitutes available, and not being independently administered leading to conflicts. None of these characteristics are present in the S&P/ASX 200.
C1Q1 Do you have feedback on the list of potential significant benchmarks based on the criteria in the draft regulation?
IIA finds the criteria set forth for inclusion is very vague and lacks any quantitative assessment of risk a benchmark may present to Australian investors and benchmark users. In fact, the broad criteria could potentially include any Australian benchmark and seems not to exclude any Australian index from inclusion. ASIC has never transparently provided rationale for including the benchmarks deemed as significant.
ASIC supports consistency with other proposed benchmark regulation or in effect in other jurisdictions. It is not clear certain enumerated benchmarks in Australia will be consistent with other regulations, e.g. EU specifically prohibits settlement prices from inclusion. As mentioned earlier, the FRAND provision proposed in Appendix 2 Rule 2.6.2 is not consistent with regulation for significant regulated data benchmarks in any other jurisdiction.
Most importantly, Australia does not seem to contemplate proportionality in regulated data benchmarks from independent administrators where substitute benchmarks exist. In particular, the S&P/ASX 200 has numerous very good, highly correlated substitute benchmarks available to asset managers and investors. Other jurisdictions have understood the negative unintended consequences of regulating regulated data benchmarks where substitutes exist and chosen to follow the proportionality doctrine in the IOSCO Principles.
IIA appreciates to opportunity to provide comments into the Australian benchmark regulation process. If I can clarify or answer any questions raised by our response, please feel free to contact: Richard Redding, CEO Index Industry Association at firstname.lastname@example.org