Markets regulator Sebi on Tuesday proposed a set of compliance standards for index providers, which design and develop indices, in a bid to ensure quality and integrity of such gauges.
Sebi proposed that bourses should ensure that the index provider is compliant with 'Principles for Financial Benchmarks' set out by IOSCO.
Markets regulator Sebi on Tuesday proposed a set of compliance standards for index providers, which design and develop indices, in a bid to ensure quality and integrity of such gauges. The suggested framework is based on IOSCO (International Organization of Securities Commissions) principles, practices observed in the foreign jurisdictions and suitability for domestic markets, Sebi said in a consultation paper.
The regulator proposed that the index provider should be compliant with ‘Principles for Financial Benchmarks’ set out by IOSCO, both on initial and continuous basis. In addition, the index provider should immediately inform the exchange or Asset Management Company (AMC) of any change in status of its compliance with IOSCO principles.
In respect of indices which are constructed based on data provided by Indian exchanges, Sebi proposed that bourses should assess whether any product including derivatives based on such indices, available in a foreign jurisdiction hampers trading of a similar product in the Indian market. If the exchange is of the view that “such product available in a foreign jurisdiction hampers trading of a similar product in India, they shall terminate the existing agreement with such index provider.”
In cases where the exchange decides to continue with the existing data sharing agreement or enters into an agreement, post notification of these standards, Sebi proposed that the exchange will ensure the index provider licences indices to only those jurisdictions which fulfil certain conditions. The conditions include the jurisdiction being a member of the Financial Action Task Force (FATF) and those jurisdictions which have signed a Memorandum of Understanding (MoU) with Sebi for sharing and exchange of information.
“If any exchange traded derivative, based on such indices, is proposed to be made available in a foreign jurisdiction, the index provider shall seek prior approval from the concerned Indian stock exchange(s), giving appropriate justification how the product to be launched in a foreign jurisdiction would not hamper trading of any product in the Indian market,” Sebi proposed.
The justification should be assessed by the exchanges before according approval. Further, the index provider should on an annual basis confirm to the exchange of the status of its compliance with these conditions and such status should be disclosed on the bourse’s website.
Sebi said these conditions should not be applicable to issuance of any Exchange Traded Fund (ETF) or similar products on an index by any entity, subject to prior written permission of the Indian stock exchange. The regulator has sought public comments till January 7 on whether suggested compliance standards for index providers would provide for greater level of disclosure and transparency, promote the reliability of benchmark determinations, and address benchmark governance and accountability mechanisms.
Also, it sought views of public on whether such standards are sufficient to provide a broad framework for index providers managing or maintaining indices, including provisions for licensing indices in foreign jurisdictions and whether there is need for a formal regulatory framework for such index providers. In addition, the regulator sought whether it should specify certain indices as significant and apply the regulatory framework to only those indices as is done in some international jurisdictions. In respect of indices based on which any product, including derivatives, ETFs or market linked debentures (MLDs), are traded on Indian stock exchanges,
Sebi proposed that bourses should ensure that the index provider is compliant with ‘Principles for Financial Benchmarks’ set out by IOSCO. The index provider should get the IOSCO compliance certification from an independent third party (globally renowned audit firms or business consultant) on a bi-annual basis (once in two years) and the same should be available on its website. They should also enter into an appropriate agreement which, inter alia, provides for certain conditions including the index provider would immediately inform the exchange of any change in status of its compliance with IOSCO principles in case there are derivatives traded on stock exchanges based on the indices provided by the index providers.
In case of indices provided by the index providers that are used by mutual funds for benchmarking of funds performances or issuance of index funds, AMC should ensure that such index providers continuously comply with IOSCO Principles for Financial Benchmarks.
The major indices on the NSE are managed by NSE Indices, a NSE group company, which maintains indices comprising broad-based benchmark indices, sector indices and customised indices. At BSE, the major indices, including Sensex, are managed by Asia Index Pvt Ltd, a 50-50 joint venture between the exchange and S&P Dow Jones Indices Llc, the world’s largest provider of financial market indices.