Last updated: September 18, 2013 4:44 pm

Brussels plans end to self-regulation of market benchmarks

Thousands of benchmarks underpinning €1,000tn markets ranging from oil and rice to mortgage rates would be regulated for the first time, under a sweeping Brussels proposal to set tougher EU standards in the wake of the Libor scandal.

The European Commission blueprint, unveiled on Wednesday, goes further than any other international jurisdiction in ending self-regulation and placing tight legal obligations on all those that compile and contribute to benchmarks.

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Michel Barnier, the EU commissioner responsible, ditched some controversial measures from early drafts, including a plan to put the scandal-mired Libor lending rate under the direct control of a European markets supervisor based in Paris. Stricter liability provisions were also removed.

Even with these revisions, the final proposal remains far-reaching in its aims and scope, requiring regulators to authorise and police all published benchmarks used as a reference for exchange-traded financial instruments or financial contracts. As drafted, the reforms also hand the commission power to outlaw, within Europe, the use of non-EU benchmarks subject to weaker standards.

The proposal is published at a late stage in the Brussels legislative calendar. While Mr Barnier watered down some elements with the aim of accelerating a deal, the reforms will struggle to pass before the European parliament shuts for elections in March, particularly given expected resistance to some measures from Germany and the UK.

Global regulators are racing to restore faith in interest rate benchmarks following the rate-manipulation scandal. Brussels’ reform blueprint comes as it pursues three cartel probes into rate rigging and an antitrust investigation into possible manipulation of oil benchmarks.

If reference rates are manipulated or rigged, the “whole of world finance would be built on sand”, Mr Banier said as he unveiled the plan. “Some bankers lied, they lied about rates,” he added. “There needs to be some morality and ethics back in markets.”

Benchmark providers such as Platts, a unit of New York-listed McGraw-Hill Financial, have resisted intrusive oversight. Some contributors and providers warn that overly strict rules will kill off more obscure commodity and financial benchmarks and even restrict rights of journalists reporting markets.

Under the plan, supervisors of benchmarks would be empowered to seize documents, levy fines, demand market information, gain access to traders’ systems in commodities markets, suspend trading of the financial instrument that references a benchmark, freeze assets and correct mistakes.

In depth

Libor scandal

Analysis BIG PAGE Libor pfeatures

Regulators across the globe probe alleged manipulation by US and European banks of the London interbank offered rate and other key benchmark lending rates

Contributors would be subject to a legally binding code of conduct. However, the commission dropped plans for a pan-EU liability provision that required contributors to cover losses from breaches of rules. The final proposal goes no further than existing national law.

So-called “critical benchmarks” – defined as underpinning more than €500m of contracts and involving mainly financial sector contributors – are put under a stricter regime.

This would permit regulators of interest-rate benchmarks such as Libor and Euribor to force contributors to make submissions if more than a fifth of the panel leave within a year.

Several banks quit the Euribor benchmark in spite of warnings that contributions may be mandatory in future. “I am confident that banks will stay in and even return if they’ve left already to the process of drawing up benchmarks,” Mr Barnier said.

London would remain the primary authority responsible for Libor. However, the commission wants a college of supervisors from other member states to participate in oversight and share information. “It is not weak supervision I’m proposing,” said Mr Barnier as he defended allowing the UK to oversee Libor. “The centre of gravity for Libor is in London,” he added.

The European Markets and Securities Authority is granted the power to mediate disputes within the college with binding decisions. London has resisted giving this power to a European watchdog in other financial regulation.

Overall the EU governance requirements go further than expected and are tighter than reforms in any other major jurisdiction. This may complicate the process – outlined in the draft – of giving EU approval to benchmarks from the US or Asia with less stringent regimes, where benchmarks need not be authorised and supervisors lack binding power.

At the same time, the commission plan adheres to global guidelines in sanctioning hybrid models for indices, so survey results can be used where necessary to complement real transactions or bids data.

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