European money managers will be facing higher charges to benchmark their assets against indexes should pan-European rules on the use of non-EU indexes come into play in their current form.
The EU Benchmarks Regulation — adopted by the European Union on June 30, 2016, and effective next year — is an effort to counter benchmark manipulation following the LIBOR scandal, in which financial institutions were found guilty of fixing the London interbank offered rate. The aim is to regulate non-EU-originated benchmarks that are often used to calculate the performance of managed assets and set fees.
The rules will reduce the number of indexes available to investors and money managers by increasing the cost of operating such benchmarks and complying with the new rules, sources said. And less competition will mean higher fees, they said.
"We will see third-country and smaller index providers stop providing benchmarks to users in the European Union, which — combined with the investments that index providers will have to make — will bring the prices of indexes up," said Tobias Sproehnle, consultant at specialist financial services regulatory consultancy Bovill Global in London.
Another source familiar with the regulation, who asked not to be identified, added that for some non-EU index providers from South Africa or Asia that have two to three clients in Europe, the regulation will make it difficult and costly to offer indexes to them.
Rudolf Siebel, managing director at BVI, the German investment funds association in Frankfurt, said: "Assuming a stock exchange in an emerging market which offers domestic indexes chooses not to register under this regulation, those money managers which offer a specialist EM fund with exposure to this country will lose access to the benchmark and will have to look for an alternative that may not be available."
Although the regulation is unlikely to bite into the business of large index providers, sources agree it will increase the cost of providing indexes. That could lead to more M&A activity in the sector, resulting in exchanges purchasing index companies, Mr. Sproehnle said. The recent sale of the World Government Bond index by Citigroup Inc. could be foreshadowing this new era, as investment banks are forced to focus on their core business.