NZX to review index-setting processes after criticism of Allied case

Tuesday 23rd February 2010

NZX today issued its third clarification statement in three days amid ongoing investor protests about how it handled consideration of including Allied Farmers Ltd. in the NZX 50 index.

NZX informed subscriber participants in an email on Monday last week that AFL would become part of the benchmark index, routinely used by index-trading managed funds to structure their portfolios.

On Friday of last week, an email to the same group rescinded that decision. In the meantime, AFL shares had risen 23% and immediately fell 11% on the u-turn.

In the closest it has come in an official statement to conceding any error in its process, NZX said it was "undertaking a full review of its index processes, including the distinction between monthly and quarterly index reviews".

"NZX will also be assessing some of the methodology of constructing those indexes" and would inform the market of the results.

NZX reiterated its view that its practice of distributing potentially market-sensitive information about index composition only to fee-paying clients was not only uncontroversial globally, but a necessary reflection of the cost of producing indices that created market benchmarks, which NZX did not fully recover.

In addition, small-time investors would not be disadvantaged because they could only trade shares on the NZX platform through a registered market participant, who would be in possession of all index composition notifications.

"Index products globally are subscription products," the statement said. "They are costly to produce - regardless of who produces them. Some organizations that produce them are media organizations (e.g. Dow Jones, FTSE), some are financial institutions (e.g. Frank Russell, MSCI, S&P), and some are exchanges (e.g. NYX, Deutche Bourse, NZX).

"There is no regulatory requirement for NZX to produce or distribute indexes."

Businesswire.co.nz

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