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

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.