Photographer: Dario Pignatelli/Bloomberg

Rules May Bar Europeans From Trading Asian Indexes

  • Firms may cut back investment in Asia, according to Asifma
  • More than 55 non-European gauges are affected by changes

New European rules may prevent the continent’s investors from buying or selling instruments linked to some of Asia’s best known indexes, according to an industry group.

The so-called EU benchmarks regulation, which comes into force next month, requires more than 55 non-European gauges, including the Hang Seng Index and Nikkei 225 Index, to register with European authorities. But even with a two-year grace period allowing registration by 2020, it’s unclear whether this will be achieved, according to a report published by the Asia Securities Industry & Financial Markets Association and law firm Herbert Smith Freehills LLP.

Failure by Asian index administrators to register their products with the world’s biggest economic bloc could mean European investors shy away from the region, said Wayne Arnold, head of policy and regulatory affairs at Asifma. In the longer term, it may see a shift away from some of the traditional indexes and into new offerings.

“Banks and investors may be forced to either scramble into benchmarks they believe likely to win EU approval or simply cut back investments in the region,” Arnold said in a joint statement by Asifma and Herbert Smith Freehills on Wednesday. “We’re already seeing a drop in benchmark availability, and this is likely to be amplified by the new regulation.”

More Transparency

The rules aim to create more transparency about how values are set for everything from credit-default swaps to mortgage rates. Failure to comply with the regulation, which covers millions of indexes, could mean a fine of as much as 2 percent of a parent company’s sales.

The changes have global implications, Rick Redding, chief executive officer of the Index Industry Association, said in an interview before the Asifma report was published.

“A lot of Asian providers, a lot of the U.S. providers, haven’t paid as much attention to this and it will start to impact them very, very soon,” he said. “This will fundamentally change how index providers operate and how asset managers work with index providers.”

A July survey of Asia benchmark administrators by Asifma and Herbert Smith Freehills showed that three-quarters of respondents had gauges affected by the rules. While more than half intended to seek EU recognition, very few had set plans to do so, Will Hallett, partner at the law firm, said in the joint statement.

Thirty-six percent of the survey participants consider the process for seeking registration unclear or too complex. One respondent felt that the three options to win approval were not defined clearly, while another said that they are “difficult and costly.”

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