27 Sep 2018 Market Evolution in the Fast-Growing Index Industry

The global index industry saw impressive growth in 2017, with total industry revenues surpassing a record $2.7 billion for the year, as revenue grew double-digits across all revenue segments (Subscriptions, Asset-Based Fees and Other). Since 2012, the index industry has posted a revenue CAGR of 12.2%.

A number of factors are contributing to industry growth including new regulatory mandates, M&A activity, strong equity markets, a shift towards passive investing strategies, and pricing model and indexing innovations.

Regulation Driving Market Evolution

The European Benchmark Regulation (“EU BMR”), published in June 2016 with most of its provisions becoming effective on January 1, 2018, is a regulatory framework that seeks to combat the risk of benchmark administration arising from conflicts of interest in the wake of the LIBOR and EURIBOR scandals. The increased regulatory scrutiny on benchmarks has played a key role in inducing banks to divest their fixed income index businesses to market data vendors and exchanges seeking to expand their index offerings.

M&A Activity Shaping the Industry

Over the last ten years, M&A activity in the industry has transitioned from consolidation, to product extension, and most recently to selective acquisitions of fixed income index complexes from banks. There have been twelve highly notable M&A transactions completed within the industry during the past decade with the majority occurring within the last five years, according to Burton-Taylor research.

The recent trend of fixed income index business M&A activity is driven by increased regulatory pressure to eliminate conflicts of interest in the administration and contribution of data to financial benchmarks. Bloomberg acquired UBS’ Australia bond index business in 2014 and Barclays Risk Analytics and Index Solutions (“BRAIS”) in 2016. In 2016, HSBC transferred Asia bond indices to Markit. In 2017, the London Stock Exchange Group acquired The Yield Book and Citi Fixed Income Indices from Citigroup and Intercontinental Exchange acquired the fixed income index business from Bank of America Merrill Lynch.

Strong Equity Markets and the Growth of Passive Investing Fueling Asset-Based Fee Revenue Growth

The shift towards passive investment strategies and strong equity market performance has supported growth in assets under management (AUM), especially in exchange-traded funds (ETFs) benchmarked to popular indices. Global ETF assets and the number of ETFs has grown considerably over the past ten years reaching approximately $4.66 trillion by the end of 2017, according to ETFGI data. Due to these factors, Asset-Based Fee revenues for index providers increased 23.1% in 2017 compared to 2016. The Asset-Based Fee segment is currently the largest and fastest growing revenue segment in the industry.

Pricing Model and Index Creation Innovation Supports Emerging Index Providers

A sustained bull market and shift towards passive investment strategies has encouraged emerging index providers to develop disruptive pricing models and launch new index products in niche segments. Solactive employs an aggressive pricing model which includes charging clients a flat fee rather than charging a basis point fee tied to assets under management. Morningstar launched its Morningstar Open Indexes Project in 2016, opening up access to more than 100 of their global equity indices for free. A number of emerging index providers, such as S-Network Global Indexes, ERI Scientific Beta, and Indxx, have gained traction launching ESG, Smart Beta, and thematic indices.

First Annual Market Sizing & Segmentation Report

As the industry evolves, Burton-Taylor International Consulting will continue to track the trajectories of the market participants and the industry at-large to deliver timely, contextualized analysis to those following the space. Burton-Taylor International Consulting recently published its first annual Index Industry Global Share & Segment Sizing 2018 report analyzing the global Financial Index Industry. The report provides unique perspective on the index industry, examining the trends and drivers behind the impressive double-digit growth in the space. For more information on this report, please click here.

David Tabaka is an Analyst at Burton-Taylor International Consulting, part of TP ICAP group, where he is responsible for research, analysis and report generation covering Exchange Operators and Index Providers.

Andy Nybo is a Director at Burton-Taylor International Consulting, part of TP ICAP group, where he is responsible for its Exchange vertical, focusing on how competitive pressures are forcing shifts in business models and strategic initiatives of exchanges.