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New EBA/ESMA benchmarking guidelines have a serious blindspot


Nik Bienkowski, CEO of exchange traded products provider, Boost ETP, says the new EBA.ESMA benchmarking guidelines are a missed opportunity… 

There’s no little irony in the fact that a set of rules on benchmarking should miss the mark. The new framework quite rightly seeks to put clarity and transparency at the heart of the benchmarking process. 

But it is still a missed opportunity, as the new guidelines do nothing to prevent the clear conflict of interest that can occur when a bank-issued fund tracks the bank’s own index.

When the issuer is also the calculation agent, there is nothing to stop it dismissing an awkward market event as a "disruption" and providing whatever price it deems "fair".

And the guidelines’ insistence that benchmarks should be compiled with "observable" independent transaction data is also badly at odds with reality.

Many structured products continue to use opaque indices that do not publish either the data or the index rules – for example the grand-sounding UK 100 index.

These guidelines should have gone further to force greater transparency, and at least introduce greater risk warnings for products where the issuer and the index provider are one and the same.

No-one argues with the principle of ‘buyer beware’ – but this works when investors are made fully aware of the risks. And this is still not the case for sizeable numbers of funds that track in-house indices, including ETFs and ETPs. The new guidelines have a serious blindspot.

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