Industry bodies are calling on regulators to curb rising fees charged by providers of financial benchmarks, which are driving up asset managers’ costs.
Industry bodies are calling on regulators to curb ongoing rises in fees charged by providers of financial benchmarks, which are driving up asset managers’ costs.
Asset managers’ use of benchmarking data has grown rapidly in recent years, driven by the rise of exchange-traded funds (ETFs), which rely on benchmarks to construct portfolios targeting specific indices. Benchmark data is also fundamental to active managers, who use it to construct portfolios and measure performance.
However, benchmark data providers implement “regular, sometimes massive” fee hikes, according to a joint memo from European Fund and Asset Management Association (EFAMA) and International Council of Securities Associations (ICSA).
“Financial benchmark data is often provided by natural monopolies and oligopolies such as stock exchanges, rating agencies and large benchmark providers or data vendors with a dominant market position, which ultimately leads to competition issues,” says Tanguy van de Werve, Director General of the European Fund and Asset Management Association (EFAMA).
The index market is dominated by three firms, FTSE Russell, S&P Dow Jones, and MSCI, which represent three-quarters of the market between them, according to research from BT Consulting.
According to the memo: “Over the last few years, investment managers have suffered double-digit price increases imposed directly by benchmark administrators and indirectly by market data distributors (MDD) distributing the information.”
Global index industry revenues increased by 8 per cent in 2019, reaching a record USD3.7 billion, according to Burton-Taylor International Consulting. Index license fees based on assets under management saw the fastest growth, at 9 per cent.
Meanwhile the majority, 71 per cent, of asset managers cite managing data costs as a key priority, according to a RIMES Buy-Side survey in 2020.
“The use of financial benchmark data has therefore been subject to regular, sometimes massive, price increases and the imposition of increasingly complex and arguably overpriced data licenses, which effectively cover all types of use along the whole value chain of the financial services industry,” write EFAMA and ICSA.
In addition to hiking prices, benchmark providers have introduced more complex license models. This includes splitting existing licenses along the whole value chain of an asset manager, making licenses more restrictive, and charging multiple licensing fees for the same data if used for separate activities.
The market power of large benchmark providers has made it more difficult for asset managers trying to negotiate, according to EFAMA and ICSA. They cite instances of “retaliatory” fee increases, threats to cut off data delivery, and terminating a contract early in order to impose a higher price for renewal.
“These companies have great market power and can unilaterally set conditions, since their financial services clients usually cannot easily operate without the dominant benchmarks from their products without jeopardising their own business due to investors’ or, even regulators’ pressure,” reads the memo.
Similar concerns were raised by The UK’s Financial Conduct Authority last year, when it analysed the dominant market position of index providers and found that competition may not be working well in the provision of benchmarks.
In the European Parliament’s competition policy annual report, it called for “resolute action” to address “abuse of dominant positions by suppliers with investors and consumers of financial data”. The EU’s existing Benchmarks Regulation was introduced in 2018, but did not tackle the costs and licensing issues for EU users of financial benchmarks.
Peter Eisenhardt, Secretary General of ICSA, said: “The lack of suitable alternatives for certain market data products has led to these higher costs and weakens incentives for providers to innovate or improve the quality of their products. Addressing these challenges are consistent with sound financial market regulation.”
EFAMA and ICSA’s memo outlines the need for regulation to “restore competition and to guarantee a fair and transparent pricing structure” from benchmark administrators and data providers.
The industry bodies recommend that regulators ensure all administrators of benchmarks and indices take adequate steps to guarantee that licenses are provided on a fair, reasonable, transparent and non-discriminatory basis.
Any benchmark data license costs should in principle be based only on the cost of providing or distributing the data service, plus a reasonable profit margin, say EFAMA and ICSA.
They recommend that users of benchmarks have access to adequate written information to ensure transparency on costs and prices, and reduce disputes related to licensing fees.
EFAMA and ICSA conclude in the memo: “Excessively high benchmark data fees decrease international market integration and deteriorate the diversity and stability of the financial benchmark markets. Overall, excessive fees result in decreased economic productivity and diminished diversity and stability of markets.”