A recent article in The Economist has highlighted just how important the benchmarks market is to the financial sector. The statistics quoted in the article make for interesting reading: S&P Dow Jones claims that $4.2trn worth of assets are now invested in passive funds that use its indices, with $3trn worth of assets assigned to the S&P 500 alone; meanwhile, another $7.5trn worth of actively managed assets use its indices as benchmarks for financial instruments. According to the article, these figures are matched by the other major index providers.
The burgeoning index market is in part driven by the use of benchmark data by buy-side firms. This trend is now well understood: asset management firms must source, manage, process and report on an increasing volume of data that is also growing in complexity. Emerging in line with this data management challenge are concerns over the growing cost of data management. In fact, in this year’s RIMES Buy-Side Survey, we found that 48 percent of buy-side professionals see cost control as a primary data management priority in 2017.
With the implementation of the EU’s Benchmarks Regulation in January next year, it is likely this cost challenge will become more pressing. BMR puts in place a much more stringent compliance regime for benchmark Administrators, demanding they create oversight functions within their organizations to carry out annual audits on ‘Critical’ benchmarks. The significant costs that benchmark Administrators will accrue as a result of the Regulation may well be passed down to buy-side firms.
However, even if benchmark Administrators shoulder these costs themselves, buy-side firms will have their own BMR costs to manage. BMR mandates that buy-side firms check that each of the benchmarks they use in financial instruments are compliant with the Regulation and issued by authorized administrators. In effect, this rule demands that buy-side firms inventory all the indices they use to understand whether they fall within the BMR regime. Additionally, firms will need to ensure they have identified alternative benchmarks they can use in the event an existing benchmark is withdrawn from the market; another potentially expensive process.
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