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S&P Dow Jones Indices to Pay SEC $9M for VIX Index Mispricing

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What You Need to Know

  • The lapse led S&P DJI to publish and disseminate stale index values during a period of unprecedented volatility.
  • S&P DJI did not disclose an “Auto Hold” feature which led to the stale values, and personnel failed to release the hold.
  • S&P DJI agreed to a cease-and-desist order and to pay a $9 million penalty.

The Securities and Exchange Commission announced it has settled charges against S&P Dow Jones Indices LLC for failures relating to a previously undisclosed feature of one of its volatility-related indices. The lapse led  S&P DJI to publish and disseminate stale index values during a period of unprecedented volatility.  

The SEC’s order charges S&P DJI with violating Section 17(a)(3) of the Securities Act.  Without admitting or denying the SEC’s findings, S&P DJI agreed to a cease-and-desist order and to pay a $9 million penalty.

S&P DJI licenses the index to issuers of securities including the issuer of the VelocityShares Daily Inverse VIX Short Term ETN (XIV).

The SEC  found that on Feb. 5, 2018, the S&P 500 VIX Short Term Futures Index ER published by S&P DJI experienced a spike of 115%, but the index recorded no change during certain intervals between 4:00 pm and 5:08 pm that day.

This was due to an “Auto Hold” feature, which is triggered if an index value breaches certain thresholds, at which point the immediately prior index value continues to be reported, The Auto Hold feature was never publicly disclosed, according to the SEC

Moreover, the SEC found that  S&P DJI personnel did not release the Auto Hold feature during the intervals between 4:00 pm and 5:08 pm ET even though they had the ability to do so. The index failed during those intervals to do what it was intended to do: calculate values based on real-time prices of certain CBOE Volatility Index (VIX) futures contracts.

As a result, DJI published and disseminated stale and static Index values, rather than values based on the real-time prices of certain VIX futures contracts.

While the Auto Hold was in place, XIV’s indicative value breached a key metric, which provided XIV’s issuer the right to accelerate all outstanding notes.  According to the SEC’s order, XIV had an economic value that was substantially lower than what had been publicly reported and was at risk of being accelerated by its issuer. 

“Index providers like S&P DJI play a crucial role in the financial markets,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, in the SEC press release.  “When index providers license their indices for the issuance of securities, as S&P DJI did here, they must ensure that the disclosure of critical features of their products as well as the publication of real-time values are accurate.”

S&P DJI, in a statement responding to the SEC order, said it “takes these matters seriously and is committed to transparency and the integrity of its benchmark determination process. S&P DJI has reviewed its methodologies and its related policies and procedures as part of its index governance processes.”


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