FTSE price hikes decision to play out Monday

Memo to FTSE Russell, one of the world’s three largest providers of index-based products, which has a dominant presence in Canada’s fixed income market: Don’t prod the bear.

As every Canadian knows bears are best left alone in their natural habitat — but when challenged can engage in some not so friendly behavior.

The latest reaction to FTSE’s mid-2016 decision to impose dramatic fee hikes for its indexes, will play out Monday at a meeting scheduled for the offices of the Investment Industry Association of Canada (IIAC).

At that meeting, before IIAC’s debt markets committee, four data providers (understood to be Bloomberg, FTSE, Markit, and S&P) will present their proposals aimed at trying to bring some order to the industry rocked last year when FTSE levied price hikes that were, in some cases, four times the previous fees.

“The dealers and buy side are looking for guidance from the IIAC as to which vendor, or vendors to endorse,” noted one market participant familiar with the process. “The problem is that FTSE has hurt everybody so badly.”

Because of that hurt, the other data providers believe an opportunity has been created to offer bond indexes to asset managers. To achieve that goal, the providers need access to data, information that’s “owned” by the dealers. If arrangements can be worked out between the providers and the dealers, then indexes could be built, which would offer some competition to FTSE.

“The investment community is looking for a competitor to FTSE because of the price hikes,” added another participant who’s also aware of the meeting.

“The idea is to combine the data from the dealers, provide a consolidated price which would them be used to calculate an index,” said the participant, adding that to be successful the new indexes require the support of the buy side. “They have to adopt them.”

Other sources indicated Monday’s meeting is more akin to an education session at which the data providers will present their current technology offerings and give an indication as to what lies ahead.

For its part, FTSE achieved its Canadian fixed income index dominance when it formed a joint venture with TMX’s bond indexes in 2013 acquisition. The TMX acquired the indexes that were started seven decades ago by McLeod Young Weir, now Scotia Capital, in the mid-1980s. The TMX still owns a 24 per cent stake in the joint venture.

Much is at stake at Monday’s meeting because fixed income is a huge asset class with more than $1 trillion under management. And virtually all managers need to buy an index and the associated analytics for investment management and measurement purposes.

When FTSE hiked its fees last year, it said its “primary focus is to deliver best-in-class products and services to our clients through ongoing engagement, research and innovation.”

That comment, made in an email statement, noted the indices “are a core part of our fixed-income and multi-asset strategy and we continue to invest in improving the operational platform and the governance processes.”

By “innovating and developing the analytics and indices offering in line with market developments (the aim is) to deliver increased value to end investors,” added the statement. “We apply a clear and transparent commercial framework across our global client base, with a tiered pricing system directly linked to a customers’ individual usage.”

Maybe, but the domestic managers — just like some of their counterparts in other parts of the world — did engage in some push-back. While some of proposed hikes have been scaled back or deferred, there is residual anger that may open the door for others to offer a cheaper product of comparable quality.

On Thursday, FTSE said: “We continue to work with and listen to clients and markets participants to deliver the best value and quality possible.”

Financial Post

bcritchley@nationalpost.com

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