Sebi floats consultation paper on compliance standards for index providers

In addition to ensuring compliance by the index provider with the IOSCO principles, the stock exchange is also required to assess the impact of any product based on such indices on trading in the Indian market.To create an overarching framework of principles for benchmarks used in financial markets, the IOSCO, in 2013, put in place a framework of standards for financial benchmarks or indices based on international best practice.

Markets regulator Sebi on Friday said it has come out with a consultation paper on compliance standards for index providers to ensure quality and integrity of the indices. Based on IOSCO (International Organization of Securities Commissions (IOSCO) principles, practices observed internationally and suitability for domestic markets, the paper has provided a suggestive framework for index providers in India under three heads, Sebi said in a statement.

The framework has been suggested in respect of indices based on which any product, including derivatives, exchange-traded funds and market-linked debentures are traded on the bourses. Also, the guideline has been proposed in case of indices constructed based on data provided by exchanges as well as in respect of indices provided by the index providers that are used by mutual funds for benchmarking of fund performances or issuance of index funds.

For each of these heads, Sebi said that the suggested framework casts responsibility on Indian stock exchanges and asset management companies, as applicable, to ensure that the index provider is in compliance with IOSCO principles on a continuous basis. In addition to ensuring compliance by the index provider with the IOSCO principles, the stock exchange is also required to assess the impact of any product based on such indices on trading in the Indian market.

To create an overarching framework of principles for benchmarks used in financial markets, the IOSCO, in 2013, put in place a framework of standards for financial benchmarks (or indices) based on international best practice. IOSCO adherents are expected to either comply with the IOSCO principles or explain any non-compliance.

In addition, several foreign jurisdictions have articulated their own framework tailored to the requirements in their respective jurisdiction, Sebi noted. 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 the 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 a 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.

The consultation paper noted the varied practices internationally in respect of benchmarks or benchmark administrators from the regulatory perspective. It is observed that in most jurisdictions, the framework is similar to the IOSCO principles, however, in some jurisdictions, the requirements for benchmarks or benchmark administrators are binding in nature while in others, the requirements are limited to those benchmarks designated as significant.