Index provider Framework

Index provider Framework

Subject :Economy

Context:

Sebi proposes a regulatory framework for index providers for governance and administration of the financial benchmarks or indices in the domestic securities market.

About the Framework:

• The proposed regulation shall be applicable to index providers (both domestic and foreign) if the users of the index/products based on index are located in India
• Under the framework, the index providers offering indices for use in India will be required to register with Sebi for obtaining authorization for introduction of indices in the country.
• Index provider shall be a legal entity incorporated under Companies Act in the country of origin and should have a minimum net worth of Rs 25 crore.
• The index provider will have to constitute an oversight committee for reviewing existing index design and  changes to benchmark methodology.
• Index providers must have policies and procedures to manage conflicts of interest and to protect the integrity and independence of various functions performed in connection with determination of indices.
• In case an index provider is engaged in any other activity, the activity of the index provider must be completely ring-fenced to prevent sharing or leakage of any sensitive information.
• Index providers must document and make available publicly the methodology for index calculation.
•  The index providers must be assessed by independent external auditors to evaluate adherence to International Organization of Securities Commissions (IOSCO) principles once in two years.

Concept:

• In the stock market, an index is essentially a method of measuring a change in value of a group of securities forming part of such an index.
• It performs several functions such as assisting the investors in understanding the health of the market and also enabling them to study the market sentiment, enabling performance measurement and benchmarking.

Index provider:

• Index providers are companies that design and calculate indexes.
• They have the responsibility to set the rules that decide what securities to include in each index, how the index will be managed and how securities will be added or removed from that index over time.
• In this process they also usually determine how stocks can be classified, e.g. is a particular stock a Healthcare or an Oil & Gas stock, or is it a Developed or Emerging market stock.
• Index providers license (sell) the rights to use their designs and calculations to ETF issuers who then copy the index as closely as they can to create a passive ETF.
• EXAMPLES OF INDEX PROVIDERS: 
  • MSCI
  • Standard & Poors
  • FTSE Russell
  • Solactive

International Organization of Securities Commissions (IOSCO):

• Founded: April 1983
• Headquarters: Madrid, Spain
• IOSCO Asia Pacific Hub is located in Kuala Lumpur, Malaysia.
• It is the international organization that brings together the world’s securities regulators, covering more than 95% of the world’s securities markets, and is the global standard setter for the securities sector.
• It works closely with the G20 (Group of Twenty) and the Financial Stability Board (FSB) in setting up the standards for strengthening the securities markets.
• The IOSCO Objectives and Principles of Securities Regulation have been endorsed by FSB as one of the key standards for sound financial systems.
• IOSCO’s enforcement role extends to matters of interpretation of International Financial Reporting Standards (IFRS), where IOSCO maintains a (confidential) database of enforcement actions taken by member agencies.
• IFRS is an accounting standard that has been issued by the International Accounting Standards Board (IASB) with the objective of providing a common accounting language to increase transparency in the presentation of financial information.
• Objectives:
  • To cooperate in developing, implementing and promoting adherence to internationally recognized and consistent standards of regulation, oversight and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risks;
  • To enhance investor protection and promote investor confidence in the integrity of securities markets, through strengthened information exchange and cooperation in enforcement against misconduct and in supervision of markets and market intermediaries; and
  • To exchange information at both global and regional levels on their respective experiences in order to assist the development of markets, strengthen market infrastructure and implement appropriate regulation.