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An objective benchmark for the money market

By Hartmut Graf
CEO Stoxx Ltd

 The financial crisis has disillusioned investors in many ways. One painful experience was that some institutions that were once trusted, now no longer have investors’ trust. For example, commonly used benchmarks, such as money market rates for the euro – Euribor – and the British Pound – Libor – lost their reputation as an accurate measure of short-term interest rates when they were manipulated. However, neutral index providers have developed solutions that address these lessons learned from the financial crisis. One of them is the secured money market that has been growing dynamically since the financial crisis, and provides an alternative to interbank trading. Based on this market, sound and objective benchmarks have been developed that provide a new, accurate and objective metric for the money market.

 The suspected manipulation of key money market benchmarks during the financial crisis triggered regulators to define criteria for the calculation of all indices independent of the asset class and markets they replicate. The proposals by the European Securities and Markets Authorities (ESMA), the European Banking Authority (EBA), the European Commission and the International Organization of Securities Commissions (IOSCO) include a wide range of considerations, among them the scope and definition of benchmarks, the establishment of control and oversight as well as rules for the administration and reporting of benchmarks. Of course, the key focus should be the avoidance of any conflicts of interest, as this is the main driver for all manipulations. Neutral index providers are by nature best positioned in this respect, as they, by definition, are not subject to conflicts of interest – they are not a user of the index. Needless to say, well-established indices from neutral index providers for equity markets have never been subject to manipulations.


Regulators however do not differentiate between subjective and objective benchmarks but also apply the same rules to strictly rules-based indices that are created based on transaction data from exchanges (“objective indices”). Subjective benchmarks, such as money market rates, are typically not based on market data but on contributions from a panel or other non-market data. Thus they are less transparent and more likely to be manipulated. In contrast, objective indices usually already provide the key characteristics essential for stable and reliable benchmarks in the interest of all market participants. Firstly, the indices are calculated in a reliable and transparent manner as the index methodology is disclosed. In addition, their sources are publicly available and transparent as these indices are based on market data. Secondly, conflicts of interest are prevented, since neither the data provider nor the index provider benefits in any way from the index. As a result, independent index providers have no incentive for any manipulation, which would put their business model – which is based on reliable data and the trust of market participants – at stake. Finally, many innovative benchmarks are based on such objective and strictly rules-based indices and help improve the efficiency of financial markets and support investors in many of their key challenges.


One of the most recent examples of such innovative benchmarks is the STOXX GC Pooling index family that provides investors with a money market rate based on reliable market data and addresses the key requirements regulators have outlined for sound indices. The newly introduced STOXX GC Pooling index family is independently calculated based on an objective and transparent methodology. Moreover, the indices reflect the development of a very liquid market and thus provide an accurate metric for the overall money market. The underlying GC Pooling market has grown in recent years to a volume of up to 180 billion euros with on average 3,000 transactions on the platform. More than 120 market participants from 14 countries are connected to the platform. The secured money market is attracting volume from the unsecured money market as it addresses key concerns raised during the financial crisis. Firstly, trading on the GC Pooling market takes place via a central counterparty (CCP), i.e. each participant is only trading with the CCP, and thus counterparty risks that were one reason for the breakdown of interbank trading during the financial crisis are mitigated. Moreover, the CCP nets all positions in the settlement process and thus helps reduce transaction costs. The obligatory collateralization of each position that is centrally and automatically managed also reduces credit risks. There are three different baskets of securities eligible for collateralization, two of them reflecting requirements of the European Central Bank (ECB), which can also be used for refinancing directly with the central bank.

In late 2014, the first financial instruments based on the STOXX® GC Pooling EUR Deferred Funding Rate will become available. A new futures contract listed on Eurex will support the risk management of banks and other market participants. This is a good example of how independent index providers can create innovative solutions, which meet high regulatory standards and investors needs in a business environment altered forever by the financial crisis. 


 Dr. Hartmut Graf, CEO, STOXX Ltd

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