The European Parliament’s economic affairs committee voted on Tuesday in favour of the rules that will introduce direct European supervision of critical benchmarks such as the London Interbank Offered Rate (LIBOR) and currency indexes for the first time. Additionally, the revised text backed by the committee softened the rules for benchmarks created outside of the EU, relaxing controversial clauses which would have made it complex to use benchmarks calculated and administered by non-EU countries.
The text aims to clean up the benchmark-setting process, by curbing conflicts of interest like those that led to the London Interbank Offered Rate LIBOR rigging scandals of recent years. “Manipulating benchmarks such as LIBOR or EURIBOR (Euro Interbank Offered Rate) undermines market confidence, distorts the economy, reduces investors’ profits and inflates mortgages and loans. Other benchmarks similarly influence energy and currency markets.” The committee led by Dutch MEP Cora van Nieuwenhuizen said in a statement.
The draft law aims to curb conflicts of interest in setting “critical” benchmarks, such as LIBOR and EURIBOR, which influence financial instruments and contracts with an average value of at least €500 billion and could thus affect the stability of financial markets across Europe. The setting of critical benchmarks that affect more than one country would be overseen by a “college” of supervisors, including the European Securities and Markets Authority (ESMA) and other competent supervisory authorities.
Critical benchmark-setting data would have to be verifiable and come from reliable contributors who are bound by a code of conduct for each benchmark. Contributors, such as banks contributing data needed to determine a critical benchmark, would have to notify the benchmark administrator and the relevant authority if they wished to cease doing so, but would nonetheless have to continue doing so until a replacement were found. Additionally, critical benchmark administrators would have to have a clear organisational structure to prevent conflicts of interest, and be subject to effective control procedures.
The final decision on whether a benchmark is “critical” would be up to ESMA and national authorities, but a national authority could also deem a benchmark administered within its territory to be critical if it has a “significant” impact on the national market.
All benchmark administrators would have to be registered with the ESMA and would have to publish a “benchmark statement” defining precisely what their benchmark measures and to what extent it could be relied upon. They would also have to publish or disclose existing and potential conflicts of interest and meet accountability, record keeping, audit and review requirements.
Benchmark “administrators” are natural or legal persons, who collect, analyse and process data that are not publicly available or use a formula or calculation method to determine a benchmark. MEPs want these methods to be made public or, if this would breach intellectual property rights, at least made available to the relevant competent authority.
The first draft text would only permit EU Users to use non-EU based benchmarks if they were compiled under Laws that were deemed at least equivalent as the proposed EU regulation. The U.S. Commodity Futures Trading Commission (CFTC) regulator, had warned of “adverse market consequences” if the original draft regulation was not amended, citing the third country equivalence regime as unworkable in the global markets.
To ease the CFTC’s objections, the MEPs voted through amendments making it possible for individual administrators of benchmarks in non-EU countries to apply for “recognition” of their benchmarks in the EU, thus allowing them to continue being used. Non-EU Administrators would be given two options for compliance with the rules. Either demonstrate that they meet the new EU rules, or that they comply with IOSCO Principles for Financial Benchmarks.
The text will be put to a vote by Parliament as a whole to consolidate Parliament’s position before its three-way negotiations with EU member states and the European Commission.
The Committee on Economic and Monetary Affairs video on the vote is available here.