Millions of investors have placed trillions of dollars into investment products that are linked to benchmarks for interest rates, foreign exchange rates, equities prices, and countless other reference points. These benchmark-linked investment products range from mutual funds that track the S&P 500 index to complex, customized swaps used by the world’s largest pension funds and companies.

Unfortunately, the benchmarks underpinning many of these products may be subject to conflicts of interest, susceptible to manipulation, and insufficiently transparent to ensure their accuracy or integrity. Worse, the existing United States regulatory framework is ill-equipped to address the risks and conflicts of interest posed by benchmark-linked investing. We propose a path forward to better protect investors and the markets overall.

Benchmark-linked investment products offer enormous opportunities for sophisticated and unsophisticated investors alike to gain access to a wide variety of diversified investment strategies that claim to rely on rules-based approaches. These products can offer efficient alternatives to traditional discretionary methods of investing at less cost. Benchmark-linked investment products may also provide investors with access to thematic, geographical and sector products that were previously accessible only to sophisticated global institutions. In general, benchmark-linked investment products generate returns linked to the performance of benchmarks that, in turn, are designed to reflect measures of prices, rates, or other data points. These benchmarks may be outputs from complex, proprietary formulas or simply references to public rates or trading prices.

While benchmark-linked investments have flourished across a wide range of assets, so too have their risks. Investors often view benchmark-linked investing as a relatively easy way to gain unique financial exposures, but they have not generally recognized that their returns may be impacted by conflicts of interest and insufficient data. In fact, as detailed below, the markets for benchmark-linked investment products that have been manipulated are in the hundreds of trillions of dollars. Further, benchmarks may not accurately reflect the markets to which investors seek exposure. While benchmark-linked investment products can reduce complexity and transaction costs for investors, they also introduce significant risks for investors and the markets overall.

In March 2019, Healthy Markets released its report, Benchmark-Linked Investments: Managing Risks and Conflicts of Interest, which seeks to provide investors and regulators with a practical framework for managing risks and conflicts of interests in benchmark-linked investment products.

US regulators should not shy away from ensuring that financial products within their jurisdiction are linked to benchmarks that are consistent with basic standards designed to mitigate risks and conflicts of interest. Further, to avoid a race to the bottom, regulators around the world who have already begun to implement these types of standards should continue to press ahead.

Our modern markets increasingly rely on benchmarks to steer trillions of dollars of investors’ assets into a dizzying array of financial products. Benchmark-linked investment products have become increasingly essential for investors and our economy. We urge regulators and investors to do what they can to ensure the integrity and utility of these benchmarks in the years to come.