Brussels, 17/09/2013 (Agence Europe) - On Wednesday 18 September, the European Commission will unveil a draft regulation to boost governance in the domain of financial benchmark creation, in response to recent illegal manipulation of the LIBOR and EURIBOR inter-bank interest rate benchmarks.
In the draft regulation dated 10 September, that this newsletter has seen, the European Commission says that the integrity of benchmarks is crucial for setting prices of a number of financial instruments, like interest rate swaps, commercial and non-commercial contracts such as mortgages. If a benchmark is manipulated, then this causes losses to the owners of some instruments whose value is set in line with the benchmark.
The draft legislation will apply to all benchmarks used for financial contracts or financial instruments sold on a regulated trading platform, along with benchmarks measuring investment fund performance. It takes a four-pronged approach: - improving governance and control of the process of drawing up the benchmark by tackling conflicts of interest that benchmark management bodies may face; - improving the quality of the data provided and the methodology used by the management bodies; - ensuring that management bodies are subject to appropriate controls, allowing the national authorities to force bodies providing data used to set benchmarks to continue to provide such data; and - ensuring appropriate protection of clients and investors that make use of benchmarks, by means of greater transparency, the ability to appeal and assessment of compatibility of the services provided with the investor profile.
Unlike in an initial draft leaked to Reuters, the Commission is no longer trying to give the European Security Markets Authority (ESMA) the power to supervise benchmarks. Instead, national authorities will have the power to grant and withdraw certification and central banks will not be covered by the new legislation. Central banks will be given the powers they need to carry out investigations to ensure that the regulation will be respected and to issue penalties, such as fines, for infringement or manipulation.
The Commission introduces different rules for critical benchmarks because the majority of financial bodies providing data used to draw them up are regulated and used as a reference for at least €500 billion-worth (in notional value) of financial instruments in more than one member state. For these indices, colleges of national supervisors will be set up in order to improve the exchange of information and ensure a uniform process of authorisation and supervision. The benchmark management supervisory authority will chair the college of supervisors and will draw up written agreements laying down modalities for the exchange of information among national authorities, the decision-making process and cases where authorities will be required to hold consultations with each other. ESMA will have a seat on the colleges of supervisors and have binding intermediary powers in the event of disagreement among national authorities.
It remains to be seen when the rules will come into force because it seems unlikely that it will be possible to introduce them before the end of the current European Parliament term of office (in the spring of 2014). Under the draft legislation, the regulation would apply one year after publication in the EU Official Journal.
Inter-institutional negotiations are ongoing on the draft legislation on criminal penalties for the manipulation of benchmarks. (MB/transl.fl)