S&P Indices And Indexing Business In 2012 Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Question No.1
What do index providers do?
Stock market index providers such as Standard & Poor, Dow Jones, and others have been used by many financial companies to track performance of the group of stocks and assets under management in the indices. Specifically, index trading refers to trading of a group of stocks in the created index, and that index might consist of a portfolio of different asset classes with respect to investors’ concerns and types of investors.
Since, many investors want to take risk, and some like to be behind the risk. Thus, requirements of the return also differ among the investors. Meanwhile, index providers generate indices in the combination of different asset classes and track their performance, and publish that information for the investors so that they can make necessary investment decisions regarding indices.
How they generate revenues?
These index providers generally generated revenue from two sources licensing and subscriptions. In the licensing model, indices charged proportional fees over the trading of mutual funds, exchange traded fund (ETFs), and other tracking investment vehicles based on the assets under management. The fees typically fixed on the per contract traded on the futures and option contracts.
Secondly, under subscription model, index providers charge fees from the subscribers who were being provided data of indices which isbeing used as a benchmark to track the performance of the stocks, and assets under management. The subscriber mainly includes large financial service providers such as Thomson Reuter, and financial research companies and other organizations.

S&P Indices And Indexing Business In 2012 Harvard Case Solution & Analysis
Question No.2
What is license fee that the largest ETF in the world pays to S&P?
The largest exchange traded fund in the world was SPDR S&P 500, and SPDR Gold in term of the assets under management. The licensing fees paid to the S&Pk about 0.0310% (3.1 basis points) of the net assets value. Previously, the ETF has enjoyed enormous growth into the market in 2010.The ETF increased from 50 to the 315 and assets under management increased $50 billion to $300 billion.
So, as trade increased into the market, then revenues of the index providers also increased because the ETF licensing fees increased with economies of scale. Since, the financial analysis reveals that 36% of the company’s revenues came from the licensing fees that was a major portion of the revenues because, the company was paid for every contract and for every option traded on the index, and S&P also had the right to negotiate higher fees over the contract transaction that seemed to belarge.
How does it compare to the license fees charged by MSCI?
MSCI was a public company that was a direct competitor to the S&P in the market. The licensing fees in the market for non-domestic ETFs have average 3 basis points. But, the average fees paid to MSCI is 3.5 basis point to 4 basis point. Meanwhile, some of the indices use the MSCI as the basis for trading decisions or use it as a benchmark and MSCI is paid as per the trading volume.............

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