(Bloomberg) -- What’s the next big trend in passive investing? Index merger mania.

The wave of consolidation that’s washed over companiesunderpinning exchange-traded funds and indexed mutual fundsincreasingly looks like a fight to the death.

And it’s all because of a new regulation that’s complicating thebusiness of benchmarking.

Starting in January, indexes used within the European Union --whether to operate passive ETFs or gauge the performance of activemanagers -- will be overseen by nationalregulators.

So will the indexers themselves. That’s a huge complianceheadache, adding costs to a business undergoing a sensitive feecompression. And it may push some providers to put themselves upfor sale.

“If this becomes too onerous, you will force consolidation,”said Rick Redding, chief executive of the Index IndustryAssociation, which represents independent benchmarkers. “Youdon’t want to wake up in 10 years and have just a handful ofproviders.”

The industry has already contracted significantly since 2014,when a tie-up between London Stock Exchange Group Plc and RussellInvestments Ltd. created FTSE Russell, one of the largest globalproviders of indexes.

Since then, Atlanta-based Intercontinental Exchange Inc. hasbought Bank of America Merrill Lynch’s widely used bond indexes,while Bloomberg LP, the parent of Bloomberg News, has acquiredBarclays Plc’s benchmarks.

With a new batch of takeovers in the cards, investor choicecould narrow even further.

Libor scandal reaction

“It may be a challenge for index providers with more limitedscale,” said Waqas Samad, chief executive of fixed-income andmulti-asset benchmarks at FTSE Russell. “When regulation comes tobear, you need to have some degree of investment and scale to beable to deal with it robustly. Otherwise it can become too costly acomponent of the operation.”

The rule isn’t intended to price companies out of the business.Rather, it was enacted in the wake of the Libor scandal andallegations that currency and commodity benchmarks weremanipulated. The EU Benchmarks Regulation was designed to removeconflicts of interest and boost transparency.

But the rule has contributed to a growing sense thatindexing ultimately will be the sole province of the mega indexers.This helps explain why UBS Group AG sold its convertible bondbenchmarks to Thomson Reuters Corp. in 2014, HSBC Holdings Plctransferred its Asian bond indexes to Markit in January 2016, andCitigroup Inc. sold its fixed-income gauges in May.

‘Continued consolidation’

“You stop some competition because, in the end, you need to be abig index shop to comply with everything,” said Steffen Scheuble,chief executive of Solactive AG, a Frankfurt-based indexer. “It’s alittle bit prohibitive for smaller shops. My feeling is that therewill be continued consolidation, but we should just keep in mindthat there’s not an unlimited number of assets out there.”

Asset managers that have built their own indexes may howeveralso have to think about spinning those off. ETF issuers includingBlackRock Inc. and Charles Schwab Corp. have started self-indexedfunds this year.

All companies that offer indexes within the EU must comply withthe new rules. Those based in the bloc are required to registerwith, or seek authorization from, a national regulator to act as anindex administrator. Meanwhile, those located outside the regionmust seek recognition as an administrator or have the indexes theyoffer in the region endorsed by an EU administrator. A list ofapproved administrators and indexes will be compiled by theEuropean Securities and Markets Authority.

That kicks in this January, but established providers have timeto get their houses in order. Those doing business before June 30,2016, have until January 2020 to register with a regulator and cancontinue providing benchmarks -- including new gauges -- throughoutthe transition period.

Handful of providers

The rules impose oversight and reporting responsibilities thatvary depending on whether a benchmark is deemed critical,significant or non-significant. And give regulators the ability topunish offenders.

That’s a costly and labor-intensive proposition. Solactivecreated a new position for a chief risk officer earlier this year,hiring Christian Vollmuth to take responsibility for legal,compliance and regulatory affairs and appointing him to themanagement board. FTSE has directed its governance groups to lookat it, according to Samad.

S&P Dow Jones Indices said it’s “focused on implementing anyrequired changes.” And MSCI Inc. “has been actively monitoringthese developments and engaging in dialogue with the relevantparties,” representatives for the two companies said, withoutgiving further details.

Indexing’s Big Three -- FTSE, S&P Dow Jones and MSCI -- arealready facing pressure to lower the licensing fees they typicallycharge funds to track their benchmarks. For smaller indexers thathave less room to negotiate, the extra expense could provefatal.

“It fundamentally changes that relationship between the productissuer and index provider,” said the IIA’s Rick Redding. And, withcompanies still rushing to comply, “there’s going to be a lot ofconversations happening in December.”

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