United States: Indices: The Good, The Bad And Knowing The Difference

An issuer comes to us and asks if it can link its debt security to an index. This seemingly simple question (if the index is the S&P® 500 Index, for example) progresses through layers of complication as the underlying index varies from a broad-based benchmark index (such as the SPX) to a proprietary index with a small number of constituents. We discuss below the principal issues to consider.


There is no definition of "index" under the U.S. securities laws, nor are there any regulations governing indices, other than the generic exchange listing rules discussed below.1 There are several definitions that come close to an index definition, but the focus of those definitions relates principally to the characteristics of the index as "broad" or "narrow."

An index is generally understood to represent a statistical aggregate that measures or reflects change; for our purposes, the change relates to groups of equity securities, commodities, bonds, currencies or futures contracts. From that overbroad definition, we can look to some regulatory sources for reference.

The NYSE has certain "generic" listing rules, which have been approved by the Securities and Exchange Commission (the "SEC").2 When listing a debt security, such as an exchange-traded note, on the NYSE Arca, the underlying index must meet these rules. In the case of an equity index, the following summarized requirements apply:

  • Minimum of ten constituents;
  • Minimum market value per component of at least $75 million;
  • Minimum monthly trading volume above a threshold;
  • No single component can be more than 25% of the dollar weight of the index, and the five highest dollar-weighted components cannot exceed 50% of the dollar weight (60% for an index of fewer than 25 components);
  • 90% of the index's weight and at least 80% of the number of components must be eligible for standardized options trading on the NYSE

    • This last requirement does not apply, however, if:

      • No underlying component represents more than 10% of the dollar weight of the index; and
      • The index has a minimum of 20 components;
  • All component securities are either issued by a company required to file periodic reports under the Securities Exchange Act of 1934 (the "Exchange Act") or are non-U.S. securities or American depositary receipts, with such non-U.S. securities subject to certain limitations.3

Some general themes emerge from these rules, and one can define a spectrum of index characteristics, with bona fide indices on one end and indices that may be very customized (and, as a result, less "index like") on the other. The following indicia are helpful in characterizing an index as a bona fide index:

  • More than 20-25 components;
  • Not top-heavy;
  • Actively traded components;
  • The index and its methodology have been publicly available for some period of time;
  • The index methodology is rules-based and can be replicated by third parties;
  • There are listed options and/or ETFs linked to the index; and
  • The index measures an objective market segment.

The following index characteristics may raise concerns warranting additional review:

  • Fewer than 10 components;
  • A small number of index components represent most of the index weighting;
  • A narrow-based index (see below);
  • The index methodology has discretionary elements;
  • The index was created for the purpose of issuing a product or meeting the needs of a specific or a limited number of customers, rather than in order to objectively measure an identifiable market segment; or
  • Embedded fees in the index negatively affect the index level.


The NYSE generic listing rules are similar to the definition of an index that is not a "narrow-based security index" in Section 3(a)(55)(C) of the Exchange Act (i.e., the index is a broad-based index). A broad-based index has the following characteristics:

It has at least nine component securities;

  • No component security comprises more than 30% of the index's weighting; and
  • Each component security is

    • Registered under Section 12 of the Exchange Act;
    • One of 750 securities with the largest market capitalization; and
    • One of 675 securities with the largest dollar value of average daily trading volume.4

A narrow-based index likely would not satisfy the generic exchange listing rules. This is not to say that an index with a small number of components could not be a bona fide index. The NYSE FANG+" Index has ten components, meets the NYSE Arca generic listing requirements and has a recognized index administrator (ICE Data Indices, LLC, which is the index sponsor, index administrator and index calculation agent).


Indices operate pursuant to a methodology, and are administered by a small cast of characters with tightly defined roles. The methodology and the identities of the entities responsible for index administration must be clearly described in the index description portion of an offering document. There is no provision in Regulation S-K under the Securities Act of 1933 (the "Securities Act") setting out requirements related to index descriptions. Practitioners are left to analogize and to determine the type of information that a reasonable investor likely would find to be material.

There are a number of distinct roles performed in conjunction with the maintenance of an index, including the following:

  • The index sponsor (or "administrator") manages the index. The index sponsor may or may not own the intellectual property underlying the index. Anyone who wants to reference the index, or link a security or derivative to the index, must license it from the index sponsor. The index sponsor is usually the entity that has created the index (i.e., wrote the methodology), although in recent years many banks have engaged third-party sponsors to administer indices that were created by the banks.5 S&P Dow Jones Indices LLC is the sponsor of many indices, including the SPX. FTSE Russell is the index sponsor of the Russell 2000® Index (the "RTY") and other indices. Disclosure relating to the offer of a debt security that references the performance of the SPX or the RTY will include a paragraph or two describing the license agreement between the issuer of the debt security and the index sponsor.
  • The index calculation agent determines the level of the index pursuant to the methodology. Generally, the index calculation agent has very little discretion, subject to the exceptions described below. This role may also be performed by the index sponsor.
  • The index publisher disseminates the index level and other related information. Many times this role is combined with that of the index calculation agent. Bloomberg L.P. disseminates the levels of many indices with respect to which it may or may not be the index calculation agent.


1 Benchmark regulation and related rules adopted outside of the United States are beyond the scope of this article.

2 See NYSE Arca Equity Rule 5.2-E(j)(6). The Nasdaq and Cboe BZX Exchange have substantially similar generic listing rules. See Nasdaq Rule 5710 and Cboe BZX Exchange Rule 14.11(d).

3 NYSE Arca Equity Rule 5.2-E(j)(6)(B)(I)

4 See also Section 3(a)(55)(B) of the Exchange Act (definition of a "narrow-based security index"); Section 1a(35)(A) of the Commodity Exchange Act (same); Section 1a(35)(B) of the Commodity Exchange Act (an index that is not a narrow-based security index).

5 An index sponsor may succeed to an index created by another index sponsor.

To view the full article, please click here

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2019. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions