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Who Should Blend Your Benchmarks?

With institutional asset owners continually seeking more customized, multi-asset solutions to achieve their investment objectives, blended or customized benchmarks have and will continue to be required tools in the asset management kit.

One of the elements that firms need to consider when blending benchmarks is who should carry out the actual cross-family blending. Specifically, firms may wish to ensure that there is distance between the team blending the benchmark and the investment team using the benchmark.

In some areas, regulators suggest a preference for such distance. For example, in its regulations relating to 40 Act Funds, the Securities and Exchange Commission (SEC) states that “an ‘appropriate broad-based securities market index’ is one that is administered by an organization that is not an affiliated person of the Fund, its investment adviser, or principal underwriter, unless the index is widely recognized and used”.1

Brett Schechterman, Head of Product for North America at RIMES, commented: “Some clients are outsourcing benchmark blending entirely. Recently, for instance, one of the world’s largest investment managers asked us to calculate its blends – the first time it has turned to a third party for this service. This was ostensibly in order to meet SEC mandates for third party calculation for prospectus/reporting. We expect that more and more institutional investors and asset servicing organizations will look to RIMES managed services for its industry leading index coverage and expertise of best practices regarding calculation and management of blends.”

The EU’s Benchmark Regulation (BMR), which comes fully into force next year, also impacts asset managers’ use of benchmarks. The regulation stipulates that firms must put in place compliance controls around the benchmarks they use in their operations, including those that eventually comprise customized blends, to ensure they are from approved benchmark administrators.

Simon Green, Head of Compliance at RIMES, shared his thoughts: “With BMR, regulators will want to see how firms manage the regulatory perimeter, such as how they differentiate between what is, and what isn’t a benchmark as well as analyze how firms deal with specific elements, such as the calculation and maintenance of blends. For the very reason that blends may be seen as a lower risk area under BMR, it wouldn’t surprise me if they come under particular scrutiny”.

RIMES’ Fully Managed Benchmark Data Service for Blends offers a strategic and flexible managed solution for blended benchmarks across multiple asset classes. Contact us to learn more.

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1 United States Securities and Exchange Commission Washington, DC 20549, Form N-1A

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