Nowadays we have more indices than we have stocks in this world, because the use of indices has changed. The challenges are about meeting the regulatory requirements but at the same time still delivering for the end consumer and they want to generate returns.

Challenges arising from new regulation will impact the entire process of unboarding new data sources and cooperating with data providers, and bring consolidation to the market, according to panellist during the Innovations in Indexing at the 15th Annual Europe Structured Products & Derivatives conference at the Etc.venues, County Hall, in London on February 8.

The new EU Benchmarks Regulation (BMR) was published in June 2016 and most rules entered into force as of January 2018 and follow the recommendations of the Iosco and Esma EBA Principles. The panel discussed the implications of the new regulation and whether the index is best housed with a bank or an index provider.

"We need to impose additional controls on any extra providers we receive data from within the construction of indices and there may be certain data points we use for our construction of our ESG indices may come from an external provider," said Jan-Carl Plagge (pictured), MD and head of research with Stoxx. "That will make some aspects of the index development cycle more difficult and more complex but the main challenge arises from the complexity of the products."

The market and the clients need more education as it is not just about developing indices but about understanging the differences between them. "One value index can be completely different to another value index," said Plagge. "Just because the definition of value may change a bit. So this is going to be a challenge going forward, we have to invest more in educating the market just because the complexity of indices increased. If I compare the world of indices we are in now with the way it used to be 10-15 years ago a lot really changed. Back then there were indices or the main purpose of them was just to be picked markets."

Barclays' director of its markets legal division, Vinay Reddy, has no complaints about the regulation as it will benefit investors and the industry in general. "Because we had the benchmark business already we had to set up a new index division but we already had the set up and lot of the thinking had already been done," said Reddy. "What the benchmark regulation is going to do is to make a new regulator act that doesn't give the same level of flexibility. There are a few more things we have to comply with which will add a little bit of work but if you look at that from an investors perspective that is fantastic because if you get a benchmark statement with a clearer message that is great from an industry and investor perspective, so I have no complaints on that."

Barclays outsourced its fixed income indices (legacy from Lehman) to Bloomberg but the proprietary indices were retained and remain an important sopurce of underlying for the bank's products, according to Reddy. "These indices where developed by the growth of the derivatives business and were multi-asset class indices where we had a lot of Barclays products linked to and we were also hedging those so we thought it was probably better we managed these ourselves provided we could set ourselves up independently and that's what we have done," said Reddy.

The panel agreed that no matter where the index is housed as it ultimately comes down to how the indices are managed and the infrastructure behind. "If an investment bank wants to provide the index the bank needs to invest heavily and have the infrastructure for it," said Reddy.

However, there is a constant need to get feedback from clients to discuss the ideas and indices cannot be developed from an 'ivory tower' that at the end of the day no one needs, according to Plagge. "We always stay in control of the entire development process," said Plagge, adding that all Stoxx's indices are strictly rules based and the calculations 'adhere to all the standards that are imposed upon us'. "The BMR is to a certain extent new and to a certain extent different compared to other regulations such as Iosco's principles that is more principled based. At the end of the day the processes are there and we are Iosco compliant and there isn't a drastic change now caused by the BMR."

Despite the regulatory challenges the future of indexing will revolve around innovation, complexity, transparency and consolidation.

"We (Barclays) got simple indices at one range but I think there is going to be more and more innovation and as long as we comply with regulation and transparency and keep robustness, that is not a bad thing," said Reddy.

Paul Alakija, director, asset owner group, FTSE International, noted that the market is moving towards "full disclosure and transparency" which will demanded not just by the regulator but the end investor. "It should be straightforward to disclose what your benchmark is," concluded Alakija.

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