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EU makes progress on benchmark regulatory reform

The European Union has been reaching key milestones in its efforts to create regulations that would heighten supervision of financial benchmarks in the region. The European Commission has advocated these changes, which may create more prudent risk management, after major banks allegedly manipulated several widely-used interest rates.

National ambassadors work on proposal
By establishing the proper regulations, the EC hopes to minimize the odds of future rate rigging, according to Bloomberg. Before the commission’s proposals can become effective, they must receive approval from both the European Parliament and the European Council. Michel Barnier, former European Commissioner for Internal Market and Services, previously explained that officials in the region want to create higher standards for financial benchmarks.

Currently, ambassadors representing the 28 EU nations are working on a draft plan, which has similar principles to the commission’s proposal, the media outlet reported. As early as the week starting Feb. 9, these emissaries could reach a joint negotiating position on a bill that would require teams of national supervisors to manage important rates and compel benchmark administrators to follow certain good governance guidelines, two people close to the situation told the news source.

Broad range of benchmarks
Under current proposals, the range of benchmarks covered would be extremely broad, Mark Compton, who works for law firm Mayer Brown as a London-based financial regulation partner, wrote in an email, according to the news source. “This will even catch proprietary indices and is much wider than the range of benchmarks” that fall under the rules of the Financial Conduct Authority, he said.

The broad scope covered by the proposal resulted from a preliminary agreement member states made Feb. 4, EU diplomats told Reuters. That day, members of the 28-nation group agreed to revise the guidelines they would use when determining which benchmarks are “critical” and should be subject to the new regulations.

The European Union has been making progress toward benchmark regulatory reform.

New evaluation criteria
The EC’s original draft proposal would count all benchmarks linked to investment funds with at least 500 billion euros under management as critical, according to the news source. However, as of Feb. 4, the member nations had added two new definitions so that supervisors could have jurisdiction over important national and cross-border benchmarks, one diplomat told the news source.

If the European Securities and Markets Authority consented, a national supervisor would be able to suggest that a smaller benchmark of national significance be deemed critical, the media outlet reported. In addition, the new evaluation criteria would deem benchmarks that are widely used, tracked by at least 400 billion euros and have either few or no substitutes as critical, according to the news source.

Next steps

“The range of benchmarks covered would be extremely broad.”

If the ambassadors of the EU member nations can determine their joint negotiating position on a bill, reaching this milestone will result in setting up discussions with the European Parliament about a final version of the legislation, according to Bloomberg. Currently, the EP is scheduled to vote on its negotiating position in March.

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