'Invites scrutiny from regulators': Industry reacts to S&P Dow Jones Indices rebalance postponement

George Geddes

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Industry commentators have said S&P Dow Jones Indices' (SPDJI) decision to postpone the quarterly rebalance for its entire equity range highlights the power index providers have, something which investors may not have fully realised.

The postponement, which came last week, came after global markets suffered heavy losses and high levels of volatility due to escalating concerns around the long-term impact of the coronavirus.

SPDJI said in a statement the decision was taken to "best support our clients and manage our indices during this period of extreme global market volatility and market disruptions".

Many questions have arisen from this decision with some even suggesting regulators need to take a closer look at the power index providers wield.

Kenneth Lamont, senior ETF analyst at Morningstar, said this is an area of finance that has managed to avoid any implications from the regulators in the past, but this deserves to be looked at.

“The move invites scrutiny from regulators, in an area of finance which has traditionally flown under the radar, particularly in the US,” Lamont added.

While regulators are being called to review these actions, the decision would have been made by some of the most experienced professionals in the indexing industry.

According to Gareth Parker, chief indexing officer at Moorgate Benchmarks, the decision to postpone its quarterly rebalance would have come from a committee comprised of the firm’s most senior experts and decision-makers.

Following this decision, Parker, as well as much of the industry, questioned why there is not a more detailed guidance as to the reasons for this decision, what the next steps are and whether this is simply a one-off or a precedent.

He said all index providers will be faced with making the same judgement as problems in the market continue to unfold. This suggests there is a high chance of this happening again but with benefits and drawbacks for various parts of the market.

“Such a momentous decision has clear pros and cons, with significant real-world implications across markets and all participants,” he added.

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One area of the market that is impacted by the postponement are ETFs tracking the SPDJI's indices, however, ETF issuers are not disagreeing with the firm's decision.

Chris Mellor, head of EMEA ETF equity product development at Invesco, said: “As they make clear in their announcement, the constraints that enable capped indices to meet UCITS diversification requirements will be applied by the end of March.”

Invesco agrees with this decision as applying an index rebalance in a volatile market is likely to incur greater rebalance costs than under normal market conditions.

However, Mellor added: “This is unlikely to be in the best interests of the investors in the ETFs unless required to maintain diversification requirements.”

Given there has been a mixed reaction to the delay, it has highlighted index providers have a lot more discretion than the public probably realises.

Athanasios Psarofagis, ETF Analyst at Bloomberg, said how they have the decision-making power across numerous different areas such as defining factors or environmental, social and governance (ESG).

“We have seen active decisions like this before, like share class decisions for example, but this really enforces how much power index providers really have,” he said. “They decide what is a value stock, what is ESG and so on.”


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