EU’s financial indices regulation ‘bizarre and wrong’

Professor Andrew Clare, CASS Business School

Andrew Clare

The regulation of financial indices and benchmarks will stifle innovation and is part of a move by Brussels to “regulate anything they don’t understand”, Andrew Clare told EURACTIV.

The CASS Business School professor published a paper yesterday (17 February) explaining how indices and benchmarks are constructed, and how they helped an “investment revolution”, laying out the case they play a vital role in financial markets.

The report notes how indices are used to distill a vast amount over information into intelligible figures which are used to measure the performance of certain markets.  

Index Industry Association’s CEO Rick Redding called the report a, ”significant vindication of the importance of benchmark providers in ensuring innovative, competitive and stable financial markets.”

According to Clare, the use of indices have been at the heart of new developments in the financial industry, including derivatives products, and the more recent exchange-traded fund.

“Indices have been fundamental to pretty much every financial market participant,” said Clare.

EU to fight manipulation of financial benchmarks

Meanwhile, the European Commission is in the process of drawing up new regulations to fight manipulation of financial benchmarks.

The LIBOR and EURIBOR scandals resulted in multimillion euro fines for banks across Europe.

>> Read: Libor/Euribor bank cartel hit with largest Commission fine

“Manipulating benchmarks amounts to stealing from investors and consumers and undermines confidence in markets,” said Jonathan Hill, the EU Commissioner for Financial Stability, Financial Services and Capital Markets Union. “The proposed regulation will ensure that we have benchmarks that are robust, reliable and representative.”

Clare stopped short of calling for regulation of LIBOR and EURIBOR, but drew a distinction between indices such as LIBOR, based on surveys and estimates, and those such as the FTSE 100, which are more transparent.

“I support the cleaning up of any indices that are based on market guesses, which LIBOR was. It was a bunch of blokes getting into a room and making up some numbers, literally.

“There is a difference between indices based on firm quotes and all round transaction prices (FTSE100) and those that are based on surveys and estimates of what those prices should be.

‘Brussels want to regulate anything they don’t understand’

“I think in this case we can let the industry decide on best practice themselves. It is in the industry’s best interest to have best practice that is robust. I’m not in favour of regulating everything.”

“Brussels and elsewhere seem to want to regulate anything they don’t understand, and that is just bizarre and wrong. They got caught out in 2007/8 and realised they didn’t understand a thing that was going on. Their knee-jerk reaction was to regulate everything, and I don’t support that at all.”

A Commission spokesperson told EURACTIV, “The European Commission has often highlighted the importance of financial benchmarks to the functioning of financial markets and recognises the benefits they can provide to investors, and other market participants”.

“Nonetheless, the European Commission also agrees with the International Organisation of Securities Commissions (IOSCO) that recent ‘investigations and enforcement actions raised concerns over the fragility of certain Benchmarks – in terms of both their integrity and their continuity of provision’. The proposed regulation therefore seeks to restore market confidence by ensuring adequate levels of governance to mitigate conflicts of interest and sufficient transparency for users. In large part, it follows the international consensus developed by IOSCO in its principles for Financial benchmarks.”

A benchmark is an index or indicator, calculated from a representative set of data or information, that is used to price a financial instrument or financial contract or to measure the performance of an investment fund.

Examples include the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR), both benchmarks for interbank interest rates.

The European Commission proposed new rules in September 2013 that aim to avoid repeats of the scandals affecting the London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor) in 2012.

>> Read: Euribor cuts Libor adrift in scandal storm

The proposals would regulate a huge range of indexes covering finance, commodities, energy and currencies for the first time. They would also indirectly affect consumer banking products such as home loans and credit cards.

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.

>> Read: EU cracks down on interbank ‘benchmark’ indexes

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