Crypto Assets Benchmark Statement
This document is a benchmark statement of Invierno AB, a company limited by shares registered in the Kingdom of Sweden. This benchmark statement is published in compliance with Article 27 of Regulation 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (the ”BMR”). This benchmark statement was first published June 22, 2020, and updates are made as per the version control. The key elements for each benchmark provided are published and made available through a methodology. This benchmark statement states the regulatory framework for the administration of the crypto asset index family by Invierno AB (the "Company" or “Vinter”). Invierno AB provides non-significant benchmarks under the registered trademark Vinter.
Invierno AB was authorized by the Swedish Financial Supervisory Authority (“Finansinspektionen”) with an effective date of June 16, 2020, as a registered Benchmark Administrator under the BMR.
The European Securities and Markets Authority (“ESMA”) has included Invierno AB in its register of Benchmark Administrators approved to carry on the regulated activity of administering a benchmark.
The infancy of the crypto market poses a challenge to established methods for indexing. Vinter Indexes provided by Invierno AB combine traditional indexing with appropriate adjustments for factors such as liquidity, exchange stability, custody limitations, as well as regulatory requirements. The indexes within the family are developed to provide a rule-based and transparent way to capture the price of single and portfolios of crypto assets.
Invierno AB's index methodologies are developed to provide a rule-based and transparent way to track the value of crypto assets whether they are presented individually (single asset indexes) or in a basket (portfolio indexes) containing multiple assets and instruments. Portfolio indexes measure the value of an investment strategy. Single asset indexes capture the value of individual crypto assets relative to fiat currencies or other crypto assets. All indexes governed by this statement are determined from input data of the same nature. The input data provides specific measures of the same or similar market or economic reality. The methodologies clearly determine what constitutes an active market for the purposes of each index, and establish the priority given to different types of input data. The methodologies take into account factors like the size and normal liquidity of the market, the transparency of trading and the positions of market participants, market concentration, market dynamics, and the adequacy of any sample to represent the market or economic reality that the benchmark is intended to measure.
The Company’s Product Development Department develops each index listed at vinter.co. The Product Maintenance Department manages the operations of the indexes. The Product Maintenance Department analyses each index, tests its robustness, reliability and performs technical back-testing. The index is then presented to the independent Oversight Function which will review the relevant methodology in accordance with the process defined in Article 5(3) of the BMR. Finally, each index is presented to the Board of Directors of the Company for final approval.
The procedures for consulting on any proposed material change in this benchmark statement or related methodology and the rationale for such changes are included below. This includes a definition of what constitutes a material change and the circumstances in which the Company is to notify users of any such changes. The procedures required regarding proposed material changes provide for advance notice, with a clear time frame, that allows analyzing and commenting upon the impact of such proposed material changes. Those comments and the Company’s response to those comments are made accessible after consultation with the Oversight Function, except where confidentiality has been requested by the originator of the comments.
A material change of a benchmark is any change to the index benchmark statement or methodology that would lead to a substantial change in index trajectory. For example and without limitation, material changes could include:
- Material/significant changes in the methodology used to develop a benchmark
- Cessation of the provision of a benchmark
- Change of benchmark administrator or calculation agent
- Cessation of registration of an administrator
All material changes are subject to an advance notice published by the Company. The notification will be sent to users as well as published 60 days prior to the change and will include a clear time frame. The notification is made in order to allow index users and market participants to adjust their processes. The Company may apply a shorter notice at its own discretion if the affected index is not being used nor is licensed to any third party using it for its financial product(s). All recipients of the notice will be allowed to comment on the proposed change(s). The Company will publish all comments except when the commenting party explicitly has requested confidentiality.
If an index is to be discontinued, the Company will publicly announce the decision six months before the end of the index calculation if there are existing financial products linked to the index. A risk analysis will be conducted and presented to stakeholders who will be consulted and offered a transition period to ensure a safe transition before the index is definitely terminated.
Methodologies and Benchmark Statements are reviewed at least once a year. Feedback from index users and other relevant market participants is considered during the review process. Material changes are communicated in accordance with this benchmark statement. Note that Yearly Review is not the same as the Review Date.
Invierno AB has as a registered benchmark administrator under the BMR applied the following policies:
Article in the BMR
Ethical issues handling policy
Rules of procedure for and instruction to the index committee
Article 4 and 11
Control framework and oversight function policy
Conflicts of interest handling policy
Complaints handling policy
Article 7.1, 8.1(g) and 9
The Company’s provision of benchmarks shall be governed by the following principles and requirements with respect to its input data:
- 1.the input data shall be sufficient to accurately and reliably represent the market or economic reality that the benchmark is intended to measure;
- 2.the input data shall consist of transactional data, if available and appropriate. If transaction data is not sufficient or is not appropriate to represent accurately and reliably the market or economic reality that the benchmark is intended to measure, input data which is not transaction data may be used, including estimated prices, quotes, and committed quotes, or other values;
- 3.the input data shall be verifiable;
- 4.clear guidelines regarding the types of input data, the priority of use of the different types of input data, and the exercise of expert judgment shall be published;
- 5.the input data shall be of readily available data from eligible exchanges, and no contributed or submitted data will be considered.
In the case of regulated data, existing regulation and supervision of the relevant data provider already ensure the integrity of regulated data. Crypto asset exchanges are rarely regulated and do typically not fall under the BMR's definition of regulated data sources. Therefore, in order to ensure that input data sources and benchmark constituents comply with the criteria defined in the BMR and the IOSCO principles for financial benchmarks, the Company has established a set of minimum eligibility criteria that are generally applicable for all input data sources as well as benchmark constituents within the crypto asset family of indexes. The eligibility process is designed to bring institutional-level diligence to crypto asset exchanges, filtering out exchanges that are not appropriate as sources of data to institutional financial products.
Crypto assets are eligible as benchmark constituents if they at the review date:
- 1.are a cryptographically secured digital bearer instrument;
- 2.are not index tokens, stablecoins, or pegged to another asset such as currencies or commodities;
- 3.are not an ongoing Initial Coin Offering;
- 4.are not deemed a security, fraudulent, or banned by a public financial regulatory authority with jurisdiction over the constituent or its wrapper;
- 5.are not alleged to be a security or fraudulent by a public financial regulatory authority with jurisdiction where a financial instrument ought to be listed with the constituent as underlying;
- 6.are supported by the industry including market makers, custodians, and regulated exchanges;
- 7.can be deposited to and withdrawn from at least two eligible exchanges;
- 8.are freely traded and can be freely held for the foreseeable future;
- 9.have a daily trading volume that exceeds USD 20 million;
- 10.have at least 90 days of historical price data;
- 11.allow for cold storage;
- 12.have a market capitalization above USD 500 million;
- 13.trade against a G10 currency (AUD, CAD, EUR, JPY, NZD, NOK, GBP, SEK, CHF, USD);
- 14.are not designed to be private; and
- 15.trade on eligible exchanges.
For an exchange to be eligible, it must at the review date have:
- 1.been operating as a crypto asset exchange for a minimum of two years;
- 2.implemented trading, deposits, and withdrawal fees for a minimum of one month without interruption;
- 3.met a minimum monthly volume threshold of USD 30 million with respect to the total trading volume;
- 4.provided reliable, continuous, and valid market data for a minimum of one month;
- 5.offered the possibility to withdraw and deposit for a minimum of one month, settling in 2-7 business days;
- 6.chosen a jurisdiction of incorporation that offers sufficient investor protection, such as Financial Action Task Force (FATF), FATF-style regional bodies (FSRBs), or Moneyval member states;
- 7.complied with relevant anti-money laundering and know-your-customer regulations;
- 8.cooperated with requests from Vinter and relevant regulatory bodies;
- 9.not been domiciled in a jurisdiction subject to EU restrictive measures (sanctions) as per the EU Sanctions Map;
- 10.provided information concerning ownership and corporate structure; and
- 11.not been declared unlawful by any governmental authority or agency with jurisdiction over the exchange.
Selected exchanges and assets are the assets and exchanges which are ultimately included as part of a benchmark. The number of selected exchanges can be less, but never more than the number of eligible exchanges. Likewise, the number of selected constituents can be less, but never more, than the number of eligible constituents. The number of selected constituents or exchanges may be fewer than the number of eligible exchanges for various reasons including, but not limited to, thematic indexes and eligible exchanges being temporarily disabled. Under extraordinary circumstances (such as a permanent shutdown of several exchanges) new exchanges can be added in accordance with the Rules of Procedure for and Instructions to the Index Committee.
For a full description of the market or economic reality measured by the benchmarks, read the Crypto Assets Methodologies available at vinter.co.
The methodology for each index referred to above complies with article 12 of the BMR and:
- 1.is robust and reliable;
- 2.has clear rules identifying how and when discretion may be exercised in the determination of that benchmark;
- 3.is rigorous, continuous, and capable of validation including, where appropriate, back-testing against available transaction data;
- 4.is resilient and ensures that the benchmark can be calculated in the widest set of possible circumstances, without compromising its integrity; and
- 5.is traceable and verifiable.
The Product Maintenance Department is responsible for the daily operations of the indexes which includes determination of index values, calculations, rebalancing, and dissemination of indexes. The department is responsible for the provision of benchmarks.
If a pricing source does not publish market quotations during the time window, the course of action will be determined by the Index Committee in accordance with the Index Committee Policy.
Reasons for lack of input data include but are not limited to: closure for public holidays, introduction of limited trading hours, irregular trading activities, and technical breakdown in the systems or means of communication.
In order to ensure that input data is appropriate and verifiable, the administrator should be required to monitor input data on a regular basis, to a degree that reflects the vulnerability of the particular input data type. In the case of regulated data, existing regulation and supervision of the relevant data provider already ensure the integrity of regulated data. That type of data should therefore be subject to less extensive monitoring requirements. Other types of input data require more verification and should be subject to more extensive checks, notably input data that is not transaction data and especially if it is contributed from a front-office function.-DELEGATED REGULATION 2018/1638
The Company continuously assesses the reliability of the data provided regarding the availability and consistency of each data source. Data is compared across multiple independent crypto asset exchanges. Anomalies, such as abnormal deviation from the median, are investigated. Exchanges with substantial and persistent anomalies are at risk of being removed from the list of eligible exchanges. Accuracy is verified by comparing the available data with other trusted data sources from eligible exchanges.
Validated transactions from eligible exchanges are used as input data and are monitored to ensure reliability and to detect manipulated transactions. The time between each request for data and the number of times a request was denied is registered. The number of missing values, the number of received data points and the time interval between consecutive transactions are also registered in order to control the data quality.
Stakeholders are informed about removed transactions if the impact on index return is considered to be substantial.
The Product Maintenance Department uses an anomaly detection procedure to identify potential data corruption. In the case of data corruption, an investigation into the reasons behind the corrupted data will take place in order to remove possible vulnerabilities from the data-collection process and to locate the source of the corrupted data. Erroneous internal computations are corrected whenever possible. If correction is not possible, the source is removed as a component in the calculation of the index. If the erroneous source is external, the reason behind the error will be investigated. If the error is not corrected, the source will be removed as a component in the calculation of the index. A consequence analysis will be performed where financial and legal consequences, with respect to corrupted data, are assessed and a structural review of relevant computational schemes are performed. Affected clients will then be informed about the error, its potential legal and financial consequences and relevant recalculations. Any conduct that may involve manipulation or attempted manipulation of an index is reported to the Swedish Financial Supervisory Authority. Calculation errors are corrected and made available to stakeholders if technically possible and economically viable. Stakeholders have the right to require a corrected value if they can show that the absence of a corrected value would risk financial stability or drastically damage the stakeholder's reputation. In these situations, the company should act promptly.
There is a series of unique market events specific to crypto assets such as forks, staking and airdrops. These events have the potential to disrupt as well as increase the value and security of currently selected constituents. In order to reduce unpredictable changes in the composition of the index, the Product Maintenance Department will handle each event to ensure that intra monthly index returns solely depend on price movements in index constituents.
Formally, a blockchain is a distributed database of a network’s transaction history. Owning a crypto asset is to have writing permission to a specific blockchain database. A transaction of crypto assets is therefore the transferral of writing permission. Blockchains are often developed under an open-source license and can therefore be copied and transformed by any developer or group of developers. Whenever this happens, the developers can choose to keep parts of the transaction history or to erase it. Erasing it creates a new crypto asset and keeping it creates a fork. When a fork occurs, those with an amount of crypto assets on the old blockchain find themselves with an equal amount of crypto assets on the new blockchain.
Forks that occur with respect to index constituents can cause uncertainty in the computation of the index since it is not clear which of the two, or more, forks that should be used as the constituent. Forks are also an operational risk for those who seek to track the index since initiating trading of a new crypto asset often requires adjustments in the trading infrastructure.
Airdrops occur when a blockchain, or a part of a blockchain, distributes crypto assets, free of charge, to its users or a different blockchain’s users. Airdrops can come unannounced or they can be disclosed beforehand. Established blockchains tend to not announce airdrops, while newer networks often announce them. Airdrops often come with a need to perform some tasks in order to obtain crypto assets. This can include holding the native asset at a specific date, having to perform a set of transactions on the network, or participating in different surveys.
Writing permissions to a blockchain’s transaction history are administered by the access to private keys, which are connected to public addresses controlling crypto assets. Merely using private keys does not protect the blockchain from users trying to spend their assets twice, also known as double-spend attacks. To protect itself from these attacks, all blockchains implement some form of consensus process that enables the network to reach consensus regarding the validity of a transaction. To ensure that users do not corrupt the consensus process, participation must come with a cost. In the Bitcoin network, the cost is electric power, in a process called Proof-of-Work (PoW). The network does this to protect its transaction history. Staking, formally referred to as Proof-of-Stake (PoS), is another technology used by blockchains in order to maintain the immutability of their transaction history. Participants of a blockchain that implements staking stake some of their holdings of the network’s crypto asset to participate in the consensus process. Those who stake and verify transactions accurately are rewarded with new crypto assets, while those who verify transactions that later are deemed invalid are penalized and lose their stake. Certain blockchains demand that staked crypto assets are locked for a certain time or that a certain number of crypto assets are staked, while others allow the reward of staking to depend on the time the holdings have been staked.
An announcement by the Company will be made on its website if a forked asset will be included in an index. A fork that is not announced by the Company is not eligible for inclusion in an index. For a fork to be evaluated for potential inclusion in an index, it must be deemed material.
For a fork to be deemed material it must have:
- a reliable wallet solution with a qualified custodian
- sufficient liquidity in the asset on the day of the fork
- been forked from a current component
Once a fork is deemed material, it must meet the forking evaluation criteria. For a fork to meet the forking evaluation criteria it must have:
- been listed for spot trading on an exchange that meets the Company's exchange eligibility criteria
- been listed under a different ticker symbol
- had a higher market capitalization than the current component for ten consecutive days
A fork that does not meet the forking evaluation criteria at the time of assessment is not automatically included in an index would that fork meet the forking evaluation criteria at a later stage. Prior to a rebalance, an index affected by a forking event may contain more than the predefined number of constituents.
If market capitalization cannot be calculated, a last observation carried forward approach is used to obtain a price. The trading history of forked crypto assets is determined based on the operational time of the originating chain. Under extreme circumstances, the index committee has the right to make the decision on whether to include a fork, at their discretion in accordance with their index committee policy.
Applying these rules to historically important forks, the index would have tracked BTC in the BTC & BCH fork and ETH in the ETC & ETH fork.
Airdrops are not included. Certain airdrops are technically and structurally equivalent to forks and in that case treated as such.
Staking returns are not included.
In extraordinary cases, discretion may be exercised in the administration of an index. A benchmark administrator shall have a methodology with clear rules identifying how and when discretion may be exercised in the determination of a benchmark (Art.12(1)(a) BMR). For the avoidance of doubt, all benchmarks governed by this statement shall, after an internal reasonableness control, have the possibility to be subject to discretion in the determination of the benchmark if:
- the input data used in the determination of the benchmark is or appears to be of lower quality than equivalent input data that is not priorly designated in the methodology; or
- a situation not covered by the methodology risks investor protection if discretion is not made in the determination of the benchmark; or
- an extraordinary event occurs which includes, but is not limited to, hacking of market participants, hacking of platforms providing input data, trading halts, regulatory action, legal action, suspected fraud by a regulatory authority, minimization of custodial capabilities, or loss of support from the industry including, but not limited to, market makers, custodians, regulated exchanges and publications with tier 1 domain authority.
Invierno AB will keep a record of discretion events exercised if applicable. The exercise of discretion is made in compliance with applicable policies and methodologies with respect to benchmark users, the integrity of the market, investor protection, and other market participants.
On its first trading day, a financial instrument tracking a benchmark can either use the benchmark's current or rebalancing weights. Rebalancing weights, also referred to as target weights, are the weights of the index constituents as per the rebalancing time and date. The definition of current weights is the constituents' weights as per a specific date, regardless of whether that date is a rebalancing date or not. If the rebalancing weights are used on the first trading day of a financial instrument, an extra rebalancing is carried through before the first trading day. Subsequent rebalancing events will be carried through with a frequency as if the extra rebalancing has not occurred.
The Benchmark Administrator applies the rules in this Benchmark Statement to determine the new constituent and rebalancing weights at the review date. The review date is set on a per-benchmark basis in the relevant methodology. If not specified in the methodology, the review date is five business days before the rebalancing date. The Benchmark Administrator can apply an exception to this review date. If a benchmark user issues a financial instrument referencing a new benchmark later than the first date of the month, the initial review date can be set up to the listing date. The Benchmark Administrator can only make the exception if using the initial review date would not be sufficient to accurately and reliably represent the market or economic reality that the benchmark is intended to measure.
- Responsible for the implementation of this Statement: CTO.
- Responsible for implementation control: CCO and Oversight Function.
- Responsible for yearly review: Board of Directors.
- Regulatory requirements: Articles 11, 12, and 13 of the Benchmarks Regulation.
Invierno AB is not a registered investment or tax advisor or a broker/dealer. The content of this document is intended only to provide general and preliminary information and shall not be construed as investment, tax, legal or financial advice. The reader shall ensure that all of his or her investment decisions are not made based on the content of this document and shall be solely responsible for all financial losses made in connection with investment decisions. Nothing contained on this document constitutes a solicitation, recommendation, endorsement, or offer by Invierno AB or any third party associated with Invierno AB to buy or sell any financial instruments in this or any other jurisdiction. Although best efforts are made to ensure that all information on this document is accurate and up to date, occasionally unintended errors and misprints may occur. Invierno AB (559207-4172) is a registered Benchmark Administrator by Finansinspektionen (FI) and the European Securities and Markets Authority (ESMA) under Article 34 of the European Benchmarks Regulation (2016/1011). Vinter is a registered trademark owned by Invierno AB. Invierno AB and its indexes are protected by various intellectual property rights. All third-party use of Vinter and its indexes require by law a licensing agreement with Invierno AB.