Index and Benchmark Data what are we doing?

Whether you are a Wealth Manager benchmarking, illustrating, and comparing investment performance, an Institutional investor measuring performance, or a fund manager running a low-cost index tracker fund, index data has become an essential but increasingly costly asset.

Investors are becoming more sophisticated, calling for more complex investment funds with a focus on relative performance and cost. This is driving both a growing requirement for index and benchmark data through demand for index tracker funds as well as fund performance relative to index and benchmark data.

With the increased demand for more sophisticated digital client reporting, does index data provide client value?

The volume and variety of indices and benchmark data used has been growing significantly, which presents the industry with higher costs as well as management and compliance challenges associated with the use of numerous providers and growing number of indices.

Market data costs are becoming a burden for an industry focussed on providing both performance and value. ESMA recently published guidelines on MiFID II / MiFIR obligations on market data which tackles many of the market data cost issues. eFAMA have taken a keen interest and is championing on behalf of the fund industry.

Index and benchmark data is priced at a premium. Care needs to be taken to ensure that the choice of index and benchmark data represents value to all categories of clients, including retail investors. It may be appropriate to explore alternatives to the most expensive indices and benchmarks, to ensure value is being prioritised.   

Are you sure you are compliant with the licence terms of the data vendor contract?

Market Data vendor contracts place many restrictions on the use of data. You pay your money and get a "right to use". But what exactly are you allowed to do? Or more importantly, what are you not allowed to do and what are the potential financial and reputational risks?

The specific terms and conditions of 'use' described in the data licence contracts with the data vendor and original publisher are complex and vary considerably. Often they include specific restrictions on derived data and redistribution to other legal entities and restrictions on distribution to private individuals, for example, redistribution being permitted to private individuals for their personal "view-only" consumption. Content owners may restrict the use of derived data to protect other commercial data products they license. Providers may also restrict whether data can be stored and used for historical analytics. Some usage in wealth management may interact with many of these restrictions.

As an example, using market or index data in an institutional client's Solvency II report or retail customers reporting and fund marketing material, may be restricted by derived content, tick storage and redistribution clauses in the vendor contract.

The challenge is not just a procurement task of sourcing the data at the lowest price with limited ability to negotiate, or simply reducing the volume of indices, there is also the requirement that the use is compliant with the data  providers contract terms. The third-party vendor risk has the potential to be both financial and reputational, the settlement of license breaches can amount to multi-million pounds. 

The traditional approach would be to organise the problem by putting in place strict data governance and sourcing processes without including business functions or legal representation. This approach separates the business from the data commercial considerations and does not serve the business adequately, frustrating the business innovation that lies at the core of leading fund management teams. The procurement task needs to involve commercial contract lawyers who are familiar with vendor data and business use. 

Addressing the business need first

A holistic end-to-end approach to index and benchmark data that puts the needs of the business first and presents an iterative approach to finding a solution that matches the business need while effectively managing cost and usage, is essential.

The fund investment approach must include a strategy for measuring and tracking fund performance that provides value and credible metrics. A firm will typically have a family of investment funds or multiple families of funds. Within these, it would make commercial sense to use the same sets of indices and benchmarks wherever possible. If a fund is tracking a sector index it may make financial sense to use the same family of indices to measure the performance of other actively managed funds.

Gaining Control and reducing costs

Placing the selection of the indices and the associated costs strategically with the committees constructing the funds and investment portfolios, supported by the market data manager and procurement team, delivers better outcomes for the organisation and investors.

This is a step beyond the traditional role of a market data manager, procurement manager, or the legal department. It requires a skill set that extends to the understanding of market data contracts and the specific use cases for market data across the business.

Leading with a strategic business-driven approach that provides checks and balances to choosing the right data and supplier and then implementing oversight and governance provides a cost-effective solution.

Starting the cost transformation

The key to success is transforming the approach and embedding that in the business process.

The most effective organisations put in place a governance team that not only includes sourcing, investment management, IT and market data subject matter experts but most importantly, legal representation that is familiar with the complex market data licencing and contract terminology and is also empowered by the firm to take control of the costs and risks.

The team then needs to firstly gain an in-depth understanding of the current business and usage by performing a full analysis of the business requirement, identifying the purpose, vendor agreements, invoices, usage and costs.

Armed with this information the team is then able to build a multi-step strategy to place the organisation in control of the costs and third-party vendor risk.

Control will then become a normal data governance and change management process.

So what are you actually allowed to do with the data?

The answer to the question clearly lies in understanding the market data contracts and having well informed advice from a knowledgeable market data lawyer. Know your rights under the agreement and make sure you have the third-party vendor risk under control and you will then be empowered to extract the most value from your index and benchmark assets.