The proposed EU law to regulate benchmarks moved a step closer last Wednesday, when the 28 EU states agreed to amend how they would decide which benchmarks are defined as “critical” and therefore subject to a more stringent supervision under the soon to be implemented rules.
A wider than anticipated range of financial benchmarks will come under the European Union’s regulatory supervision if the deal debated by member states next week wins final approval. The amended draft text will be put to the bloc’s representatives on the 13th of February for formal approval, and then negotiations will start with the European Parliament on a final deal as early as March.
New rules were tabled after banks and brokers were caught manipulating previously unregulated interest rate and currency market benchmarks. The Regulation aims to put a full stop to, what the latest text describes as “staggering cases of intentional and far-reaching manipulation driven mostly by Systemically Important Financial Institutions.” So at a minimum, the rules must ensure that all benchmarks that are critical to financial and economic stability have in place both solid and binding governance requirements.
MEP and Rapporteur to the Economics Committee Cora van Nieuwenhuizen said that a macro prudential approach to proportionality was required in the Regulation. “The stability of the financial system and the real economy were leading in applying proportionality. That stability is based on trust, trust on the accuracy of benchmarks but also on the availability of a large and diverse supply of benchmarks.” She said that when imposing additional requirements on benchmark Administrators they must not just consider their impact on reducing the threat of manipulation in the industry, but the costs that such requirements create for Administrators and Users.
Nieuwenhuizen argued that for non-critical benchmarks vulnerability to manipulation should be by left to informing and empowering the end Users. Administrators of non-critical benchmarks could produce audited benchmark and compliance statements to empower Users to make decisions on. She also noted that this approach was more in line with the globally acknowledged IOSCO Principles on benchmarks.
The original draft, by the European Commission in September 2013, defined critical benchmarks as being linked to investment funds of at least 500 billion euros. Nieuwenhuizen maintains that additional proportionality is needed beyond what the Commissions draft had proposed. “We need to focus on those benchmarks whose manipulation and or cessation would do serious harm to financial and economic stability, for such critical benchmarks governance requirements should be binding, and Supervisors must have the power to mandate contributions where necessary.”
The member states have, during the debate, added two more definitions of “critical benchmarks” to ensure that important cross-border or national benchmarks not reaching the €500bn threshold are not overlooked:
- Benchmarks tracked by at least 400 billion euros, which are used widely and with few or no alternatives;
- National supervisors can propose that a smaller benchmark of national importance can be “critical” if the EU’s European Securities and Markets Authority (ESMA) agree.
Additionally, the most recent draft of the rules would also give National Supervisors powers to force banks and others to contribute to a benchmark if the number of submitters falls to levels where market confidence in the benchmark is in jeopardy.
Other changes from the Commissions document include an easing of rules on EU-based use of benchmarks administered outside of the bloc. U.S regulators had warned that the commission’s approach to this was too restrictive and would interfere with the functioning of global markets.
Certainly, the European Commission’s proposal was widely seen as insufficient with regards to third country equivalence as it would have rendered a large number of key benchmarks ineligible in the EU. Under the most recently tabled amendments, third country Administrators will be permitted to apply for registration or authorisation with ESMA. The same application and requirements would apply to EU and Non-EU Administrators alike, giving a level playing field and ensuring a continued broad supply of benchmarks for use in the EU.
MEP’s argued that the definition of “equivalence”, like that of “critical benchmarks” needs to be within the Regulation and not left to ESMA or the National Supervisors to determine. They have also stated that conflicts of interest, where the entity providing the benchmark is involved in products based on that benchmark, need to be duly considered before finalisation of the rules.
A video of the European Parliaments recent debate is available to view here.
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