The new gatekeepers of financial claims: States, passive markets, and the growing power of index providers

Abstract

Since the financial crisis there has been a massive shift from actively managed funds to passive funds that merely replicate financial indexes. Instead of active investors influencing states through their investment decisions, in this new economic reality the locus of agency is shifting from investors towards index providers as they decide which companies and countries are included into key benchmark indexes. We argue that the major index providers (MSCI, S&P Dow Jones and FTSE Russell) exercise growing private authority as they steer capital via their indexes. Index providers have become crucial intermediaries in the relationship between states and investors. Through producing widely used indexes, index providers essentially provide a crucial infrastructure that enables the creation and trading of increasingly passively allocated financial claims. Through the infrastructural power they derive from this gatekeeper position, index providers are able to ‘standardise’ the issuers of capital claims and the countries in which these issuers reside through determining the criteria that corporations and states, especially emerging markets, have to fulfil to qualify for index membership – and consequently asset allocation. This chapter therefore investigates the relationship between states and index providers and the latter’s influence on issues of domestic financial regulation, investor access and international capital flows.

International financial subordination in the age of asset manager capitalism

“…hedge funds), and generally more long-term (pension and insurance funds) investors, as the low-interest rate environment forced traditional long-term investors to seek higher yielding assets (for a similar argument in the context of Sub-Saharan Africa see also . Fichtner et al (2021) show how the use of indices can further cement the global financial hierarchy, as index providers -largely located in core economies -determine the rules that steer financial flows and with which EM actors have to comply. Though these contributions have analysed elements of the recent transformations in global financial markets, and their implications for EM' financial and monetary subordination, so far there is no systematic conceptual and empirical engagement with the implications the rise of AMC has for international financial subordination.…”

“…These de-risking pressures should lead to a global homogenisation of institutional, regulatory, and governance structures in line with those prevalent in core financial centres (a process which Gabor, 2020;Konings, 2007 characterised as the 'Americanisation' of global finance). In AMC, these pressures can become explicit requirements, as securities need to fulfil certain criteria to be included in key benchmark indices (Fichtner et al, 2021;Petry, 2021). As a result, arguably more so than financial flows dominated by global banks, the rise of AM potentially contributes to the financialisation of the domestic economy, reflected in both: the growth and development of the 'emerging market' asset class, and the regulatory and institutional changes (to market-based finance) necessary to make them suitable and 'safe' for global investors.…”

“…Though this literature has analysed specific aspects of recent transformations in the global financial system (e.g. Bonizzi and Kaltenbrunner, 2019;Cormier and Naqvi, 2023;Fichtner et al, 2021;Kaltenbrunner and Painceira, 2018;Musthaq, 2021a;Naqvi, 2019;Petry et al, 2021), so far it has not systematically and conceptually engaged with the rise of AMC.…”

Mind the ESG capital allocation gap: The role of index providers, standard‐setting, and “green” indices for the creation of sustainability impact

“…Asset owners pay fees (shown as narrow arrows) to asset managers; asset managers pay fees to ESG providers to use their ESG indices/benchmarks or ratings. Particularly noteworthy is the crucial role that indices play in this age of asset management (see Fichtner et al, 2022;Jahnke, 2019aJahnke, , 2019bPetry et al, 2021). Active ESG funds usually have a non-ESG benchmark index against which their performance is being evaluated, while passively managed ESG funds directly Figure 1 The ESG investment chain and potential transmission mechanisms.…”

State capitalism and capital markets: Comparing securities exchanges in emerging markets

“…Financialization processes are not uniform, they are rather variegated and often refracted by national institutional settings that lead to different trajectories (Dixon, 2011; Karwowski and Stockhammer, 2017). Every economy consists of a set of institutions which create distinct patterns of constraints and incentives that shape and channel actors’ behaviours (Zysman, 1994: 245–246).…”