Increasing regulation is making index businesses less attractive to big banks but data providers and stock exchanges are well placed for acquisitions
An index is a benchmark showing the performance of a particular market or an asset class and is used by:
Index businesses were initially developed by large investment banks using data from their internal trading and research operations. This extended to stand-alone indices businesses as the industry developed.
While indices remain core to active investment products, the continuing move from active to passive management has made index businesses increasingly attractive. Exchange traded funds and products (ETFs, ETPs), managed “passively” to follow the index, have grown at a compound annual growth rate (CAGR) of 19% over the last decade, with global assets under management now in excess $4 trillion (according to ETFGI consulting firm).
In response to the LIBOR scandal, index providers will be required under regulation, due in 2018 (the EU Benchmark Regulation and MiFID II requirements), to demonstrate that they can produce robust indices that can be relied on by third parties. While benchmarks underpinning assets of €50 billion or more will be under particular scrutiny, this requirement will increasingly become the market expectation for all index providers. It will therefore be increasingly difficult for firms to manage conflicts between both creating and managing an index and selling or trading index linked products.
Large banks are now looking to simplify their business models and many do not see index business as core. In contrast, data providers and exchange businesses see significant benefits from these assets and are able to unlock substantial cost and revenue synergies through economies of scale and cross-selling. For example, The LSE Group (LSEG) cited over $100m of revenue and cost synergies from the acquisition of Russell Indices, over 1x the original EBITDA of the business (according to a LSEG presentation dated 26 June 2014).
There has been significant M&A activity in the space over the last 36 months, where Bloomberg, Markit, Thompson Reuters, LSEG and ICE have acquired several indices from the large banks. The most recent transactions, announced in Q2 2017, saw LSEG acquire the Citi Fixed Income Indices ($685 million, according to a LSEG announcement on 30 May 2017) and ICE acquire the BAML Fixed Income, Currency and Commodity Indices (undisclosed).
While most of the obvious assets have now been traded, the banks still manage more esoteric and second level indices where the full impact of the new regulation has potentially not yet been fully assessed or understood. Data providers and stock exchanges remain in the hunt.