State Street Corp., Bank of New York Mellon Corp., Northern Trust Corp., Nasdaq OMX Group and The Spaulding Group have created a set of best practices to improve transparency in index benchmark costs.
Also, Nasdaq agreed to license its global index family free to custodian banks that abide by the guidelines. It will be offered by State Street, BNY Mellon and Northern Trust as an option to its asset owner clients.
The principles are intended to disclose embedded fees for index data that ultimately will lower fees paid by asset owners, said David Spaulding, CEO of Spaulding Group, a performance measurement consulting firm, in an interview.
The three banks, which had combined assets under custody of $62.7 trillion as of Sept. 30, will disclose to asset owners and other clients the relative cost of benchmarks as well as the total cost of using benchmark data, including index provider licensing fees.
Other custody banks will be able to use the best practices if they publicly agree to abide by the disclosure principles.
“There's not as much awareness of these costs as one might expect,” Mr. Spaulding said. “The cost of creating a custom benchmark can be significant. While a custodian or asset manager might be able to easily craft one, the underlying index providers won't allow it unless they pay a lot of money.”
The idea came from Northern Trust in 2011, Mr. Spaulding said, but “it remained on the back burner” until Nasdaq joined in last year. “It's really snowballed since then,” he said.
Mr. Spaulding said other index providers could follow the best practices principles. “We're not reaching out to them right now, but it's very likely we will,” he said. “I think it'd be a good idea to have more index providers following this.”
