This week’s feature by Paul Amery raises the question as to whether a big indexing dispute in Germany could spill over to other countries.

In case you haven’t seen the story, basically Deutsche Boerse and Commerzbank had a dispute running over several years about whether the bank (Commerzbank) would have to pay licensing fees for launching index certificates (something akin to warrants), based on the DAX.

Although an early court ruling sided with Deutsche Boerse, two more recent rulings—the latest in the German Federal Supreme Court—have favored Commerzbank. (See Paul's story here.)

The question has been raised as to whether this could affect other products outside of Germany, such as ETFs.

My first job out of college was working for Dow Jones Indexes. I’m also a big fan of freely available data and transparency. So I have some very, very mixed feelings about all this.

The certificates seem to simply have been tied to the return of the DAX, without incorporating the index name into their own—at least that’s my understanding—and thus the argument appears to be that no license was needed.

This seems a little disingenuous to me. It’s not a case of simple benchmarking, like an actively managed fund comparing its own performance to that of the S&P 500. In this case, the DAX’s performance is the defining characteristic of the index certificates. It’s the sole reason that investors would want to put their money into the products. Surely something is owed to the providers of the benchmark that make the products' very existence possible.

An article written by Commerzbank’s lawyer, Dr. Henning Harte-Bavendamm, cites the “dramatic increase in the annual fees charged by Deutsche Boerse” as the reason for Commerzbank terminating its licensing contract with the exchange. That threw me, because it sounds like Commerzbank was totally OK with paying a licensing fee until the prices got too high—then they decided they didn’t have to pay it anymore. Frankly, the reasoning just seems bizarre.

I know firsthand that a lot of resources go into creating and maintaining indexes, and they usually only represent a few basis points of the fees. It’s not exactly a high-margin industry. Indexes are valuable tools, and the creators have a right to be compensated when other folks use those tools to make money—particularly when the index itself is the main attraction of the product for customers.

Besides that, two points are really bugging me about this.

First, Paul’s article indicates that more firms may avoid using an index’s name in their product name to avoid having to pay licensing fees. If the product is still built around the index and is actually mentioned in the associated prospectus or literature as the source of the product’s returns, then it would seem to me it should still require a license.

I also wonder if, because the whole point of index-based investment is transparency, it is wise for product providers to avoid referencing a product’s underlying index in its name. Making the investor dig into the prospectus to find out what they would be investing in seems rather counterintuitive.

Second, Paul pointed out that index providers might stop calculating indexes. Although the article says one observer found this implausible because the index industry preceded the index-based product industry, I find it very plausible. The rise of ETFs has seen a similar explosion in the number of indexes available, and even in the number of index providers. A lot of these indexes have been created with the specific purpose of underlying products.

With licensing fees suddenly optional, index providers might find creating indexes to be less of an attractive prospect. As far as existing indexes are concerned, they might very well decide to limit the data they disseminate, which would subsequently affect the transparency of an investment philosophy largely based upon that concept.

Basically, what it comes down to is that index providers provide a valuable commodity. Ideally, their data should be freely available, but if that data is going to be an integral part of an investable product, those index providers should receive compensation. If they don’t, ultimately the entire structure of the index-based investment industry could be threatened.

Heather Bell is managing editor of the Exchange-Traded Funds Report and contributing editor to the Journal of Indexes. She welcomes comments and suggestions for future blogs at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .