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How to better understand index vendors' commercial models and interpret cost increases

Every now and then financial organizations are questioning their vendors’ commercial models. Most of the time, the trigger is a sudden leap in charges for services rendered. Usually, associated costs go up and are unaccounted for.

What has happened in recent years?

  1. Vendors with must-have services, realizing the added value of their services, have changed their commercial models, thereby taking client processes into account and making these chargeable insofar as their perceived intellectual property is involved.

  2. Other vendors, realizing at some point they were charging numerous times for the same item, changed to a simpler pricing methodology: assets under management, for example - including all assets.

  3. Consolidation has taken place, for example, due to regulation.

The result is a patchwork of vendors, vendor services and increasingly complex commercials that few could have imagined, say pre-2010.

The index vendor landscape

A textbook example of all three developments above is the consolidation of the index vendor landscape, associated products and commercial models, including a wide array of license types each with different terms and conditions. See also figure 1.

Index vendor-administrator landscapeFigure 1 Index vendor landscape

Recent developments

With vendors – sometimes exchanges – being confronted with lower trading income, new sources of revenue are sought. One of these new revenue sources is data. In 2019 a vendor came up with a 13-pager commercial document, including charges for rates. Now, in 2020 we are seeing a wave of new vendor chargeables, such as swap rates, benchmark rates and pass-through fees. We have seen fees passing by for the use of NIBOR, CIBOR, WIBOR, and AONIA - to only mention a few. For now, 24 hours delayed data is available free-of-charge in most cases. However, intraday data will become increasingly fee liable.

TRG Screen initiative

More and more, we at TRG Screen find that clients want to better understand the vendor commercial models underlying the models that cause a 6% on average annual cost increase. Typically, vendor commercial models are complex and opaque in many cases. This, by the way,  applies to more vendors than index vendors alone.

At TRG Screen, an initiative has started to work on a catalogue type service helping clients to better understand relevant vendor products, their added value and potential alternatives. As the market data vendor market is ever changing, this may well pose a challenge in the coming years!

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