Index Theory: The Law, Promise and Failure of Financial Indices

62 Pages Posted: 18 Mar 2012 Last revised: 27 Mar 2013

See all articles by Gabriel V. Rauterberg

Gabriel V. Rauterberg

University of Michigan Law School

Andrew Verstein

Wake Forest University School of Law

Date Written: October 5, 2012


Financial indices, like the S&P 500 or the Consumer Price Index, have become a ubiquitous feature of our financial markets. One index, the London InterBank Offered Rate (“Libor”), may be the world’s most important number, an interest rate benchmark upon which hundreds of trillions of dollars depend. Yet, almost everyday new revelations emerge that Libor was tampered with during the height of the financial crisis by one or many of the world’s most prominent banks, with billions of dollars potentially misappropriated. This index disruption has attracted tremendous interest from regulators, private litigants, and market observers. Despite their importance, however, financial indices are poorly understood, and almost completely unstudied. In this Article, we explain why and how people use financial indices as well as how they are created. We show human discretion and value judgment to be essential ingredients in even the most “objective” indices. We then develop a taxonomy of financial indices, illustrating how the risks indices can pose, and the solutions applicable to those risks are intimately related to the motivation that drives the index’s creation. We show that the manipulation of indices is unsurprising given the precarious state of intellectual property rights in indices. While many call for prosecuting or regulating the Libor banks, our novel solution is to strengthen property rights for those who create financial indices.

Keywords: Index, Indices, Libor, Swap, Derivative, Manipulation, Underproduction, Malproduction, Hot News, London InterBank Offered Rate, Finance, Syndicated Lending, CPI, S&P 500

Suggested Citation

Rauterberg, Gabriel V. and Verstein, Andrew, Index Theory: The Law, Promise and Failure of Financial Indices (October 5, 2012). Yale Journal on Regulation, Vol. 30, No. 1, 2013. Available at SSRN: or

Gabriel V. Rauterberg

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

Andrew Verstein (Contact Author)

Wake Forest University School of Law ( email )

P.O. Box 7206
Winston-Salem, NC 27109
United States
3367585433 (Phone)


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