The deletion of Article 30, which proposed non-discriminatory access to benchmarks, from the upcoming update to the European Regulation Mifid is a missed opportunity by regulators despite the validity of arguments against the open access to benchmarks,

Ever since the CME’s Leo Melamed struck a deal with S&P in 1982 to licence the S&P 500 index to trade futures, the dominant model in the industry has been exchange ownership of benchmarks. According to legend, Melamed had to persuade the S&P to charge for the licence - it was going to give it away for free.

Had it done so, one of the most contentious issues in the industry would not exist. Almost continually since 1982, an exchange has been in the process of legal action to prevent or persuade open access to an equity index.

Valid points
The arguments on both sides are valid. Advocates of IP ownership on the benchmarks point to the costs of marketing and building liquidity on a contract. Former Liffe chief executive Garry Jones once quipped in his inimitable style that providing open access to benchmarks was “playing Robin Hood with the inept”.

Open access fundamentalists claim that by preventing exchanges from launching look-a-like contracts, an insurmountable barrier to entry in index trading exists. It is clearly true that the ability to compete is lessened by IP ownership of contracts but what claims should exchanges have to the IP of the indexes they trade?

To those in favour of open access, exchanges are supermarkets selling a variety of goods, which should be freely available to sell elsewhere. To those in favour of protecting benchmarks, exchanges are manufacturers that develop products with unique specifications and IP.

However, neither analogy is entirely accurate. Exchanges should have the ability to recoup investment in a contract but the ownership of what are often third party and limited in number indexes is detrimental to competition. Also, indexes are licencend, not patented.

Lessons from pharma
Clearly, the debate is not black and white and EU regulators should look for the middle ground. In the pharmaceutical industry, developers of products are granted exclusivity on those products for a certain period of time, after which the IP rights lapse and the product is free for other companies to sell.

A similar model could work in the futures and options industry. An exchange is granted a period of exclusivity that would enable it to recoup costs and build liquidity in a contract before it becomes openly accessible.

Open access is no silver bullet to liquidity as Turquoise Derivatives has found in its unsuccessful attempt to take liquidity from Liffe in the FTSE 100 contract. Open access will not make is easy to shift liquidity. However, it does mean that a genuinely innovative exchange offering something new can have a chance at changing the industry.