Index Providers Comply As IOSCO Deadline Looms

July 17, 2014

The International Organisation of Securities Commission’s (IOSCO) principles for Financial Benchmarks will come into force at the end of the month, which means that index and other product providers will have to comply. We run through some of the biggest changes.

Published last July the document is intended to be a set of guidelines for benchmarks used in financial markets.

In summary, changes to index rules will include:

-      Governance: Which aims to protect integrity and address conflicts of interest.

-      Benchmark Quality: This aims to promote quality, integrity and continuity.

-      Methodology Quality: Which looks at promoting quality and integrity.

-      Accountability: This looks at complaints processes and evidence of compliance with principles and self-imposed rules. This effectively establishes the need to have complaints procedures, and independent internal or external audits.

However, one of the biggest changes for commercial index providers is likely to be accountability.

Alex Matturri, CEO at S&P, explained that in terms of the ISOCO rules they saw the review as a chance to check that everything was documented properly.

“We already have most of the rules in place and we now keep a record of who people spoke to, when they spoke to them and exactly what was said when our index committees meet. What is said there is now a formal process. Minutes were always taken, but now there is an audited and documented process that follows. It is about ensuring that there is proper record keeping in the offices now and everyone had to go through training for this.

“In the past it was assumed that someone would read a policy, now there has to be proof that someone has read that policy,” said Matturri.

As the deadline for compliance looms, several index providers have already announced their compliance with the guidelines, including:

Markit Armins Rusis, managing director and co-head of Information at Markit, said: “Our new compliance framework will help our customers and contributors to efficiently and comprehensively adhere to the IOSCO requirements. After extensive consultation with customers, we intend to apply the same approach to our custom index business which provides customers with indices of their own design.”

MSCI Baer Pettit, managing director and global head of MSCI’s index business, said in a statement: “We support the aims of the IOSCO Principles for Financial Benchmarks and are pleased to be able to publish our reports detailing our observance of the principles. Engaging PwC to do an assurance review further shows our commitment to these aims.”

FTSE Group Mark Makepeace, CEO of FTSE Group, commented: “FTSE is committed to promoting the highest possible governance standards within our industry. We fully embrace the IOSCO Principles set out in July 2013 and endorse its objectives to address conflicts of interest in the benchmark-setting process, enhance the reliability of benchmark determinations, and promote transparency and openness in all benchmark decisions.”

The IOSCO task force, which conducted investigations leading to the paper, was set up in September 2012 in the wake of the Libor scandal. It is headed up by Martin Wheatley, the Chief Executive of the UK Financial Conduct Authority, and Gary Gensler, the Chairman of the US Commodity Futures Trading Commission.

IOSCO is the first raft of indexing regulation to come into force since the LIBOR scandal.  In Europe, the EU Parliament elections in May saw the dissolution of the European Parliament’s Economic and Monetary Affairs Committee (ECON), which was dealing with the rules surrounding indexing, and it is now unclear whether the new committee will continue where its chair, Sharon Bowles, left off or start all over again.

According to its website, IOSCO regulates more than 95 percent of the world's securities markets, and its members include more than 120 securities regulators and 80 other securities markets participants (i.e. stock exchanges, financial regional and international organizations etc.).

 

 

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