EU cracks down on interbank ‘benchmark’ indexes

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The European Commission proposed sweeping new rules yesterday (18 September) that aim to avoid repeats of the scandals affecting the London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor) in 2012.

The proposals, presented by the EU's Internal Market Commissioner Michel Barnier, would regulate a huge range of indexes covering finance, commodities, energy and currencies for the first time.

The draft law aims to prevent scandals such as the rigging of the London Interbank Offered Rate (Libor), which is used globally to price some $300 trillion of products, including home loans and credit cards.

>> Read: Euribor cuts Libor adrift in scandal storm

If agreed, the legislation will affect how all benchmarks are set, including North Sea Brent crude, which helps to determine gasoline prices.

But it stops short of handing direct regulatory authority over benchmarks to the European Securities and Markets Authority (ESMA), a move resisted by the City of London.

Instead national authorities will have primary control for regulation, although ESMA will play a role in governing the most high-valued of the indexes, which reference financial instruments and contracts exceeding €1quadrillion (or a thousand trillion).

The proposal would improve governance and controls over the benchmarking process, imposing authorisation and ongoing supervision of benchmark provision at national and European levels.

Keeping contributors in line

“Today’s proposals will ensure for the first time that all benchmark providers have to be authorised and supervised; they will enhance transparency and tackle conflicts of interest. As a result, the integrity as well as the continuity and quality of key benchmarks will be ensured," Barnier said, launching the proposals in Brussels.

"Market confidence has been undermined by scandals and allegations of benchmark manipulation," he added. "This cannot go on: we must rebuild trust.”

Benchmark operators will be required to avoid conflicts of interest, and create codes of conduct specifying contributors' obligations and responsibilities when they provide data for indices.

Where consumers are directly affected by benchmarks – for instance when banks draw up mortgage contracts – the banks will be obliged to assess the suitability of benchmarks used.

Although all benchmarks are covered by the proposal, so-called ‘critical benchmarks’ – those whose contributors are part of the regulated financial sectors – will be overseen by new colleges of supervisors, led by the national supervisor located where the benchmark is based, and including representatives from other national authorities and ESMA.

"Binding mediator"

National authorities will be able to compel contributions to the benchmark from key participants, and where a disagreement breaks out within the college, the new proposals will give ESMA a casting vote as the “binding mediator”.

Other requirements imposed on critical benchmarks include a power for relevant competent authorities to compel contributions.

Barnier said that retaining regulation at national level was sensible because ESMA already has “a lot on its plate” and it would be difficult to build up staffing for such a role.

"This proposal was intended to address the legislative flaws, which allowed the Libor and Euribor manipulation scandals to occur, but the Commission has instead bowed to pressure from 'The City' and failed to deliver robust regulation,” said German MEP Sven Giegold, the Green Party's finance spokesman in the European Parliament.

Giegold accused the Commission of using “feeble excuses” and called on Parliament to beef up the proposal. "Given the clear-cut case for European supervision of key benchmarks, the natural course of action would be to strengthen the competent European authority to ensure it can carry out this role. Instead, the Commission is grasping at straws,” he said.

Barnier’s hopes the regulation can be adopted following agreement between member states and MEPs before April next year, after which Parliament will no longer consider legislation as it prepares for the European elections.

The new rules would then apply from the beginning of 2015.

In London, some welcomed the proposed change. "This is a positive sign that European policymakers understand the need for flexibility when it comes to supervising Libor and other benchmarks," said Mark Boleat, Policy Chairman at the City of London Corporation. "A one-size-fits-all approach would be inappropriate, especially given that significant reforms have already been put forward by British regulators."

An index is a statistical measure, typically of a price or quantity, calculated from a representative set of underlying data. When this index is used as a reference price for a financial instrument or financial contract it becomes a benchmark.

Benchmarks determine the value of many financial instruments but can also affect consumers directly. For example, interest rates paid on a mortgage can be set by reference to an interest rate benchmark.

In the summer of 2012, regulators reached settlements with several banks for the manipulation the Libor, Euribor and Tibor (Japanese) benchmarks. Contributing banks had exploited the discretion in these benchmarks’ methodologies and attempted to manipulate the benchmarks’ levels.

A European Commission investigation into alleged cartel arrangements involving benchmarks, including Euribor and Libor and trading in related derivatives, is also ongoing.

  • By end April 2014: Commission hopes agreement on the regulation on benchmarks will be reached between EU Parliament and member states.
  • 2015: New rules could come into force

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