Europe agrees proposal text for Benchmark Regulation

On the 25th November 2015 after three years of negotiations, the Council of the EU, the European Parliament and the European Commission reached agreement on the proposed Regulation of financial benchmarks.

The Regulation is intended to contribute to the accuracy and integrity of benchmarks used in financial instruments and financial contracts by:

  • ensuring the appropriate supervision of critical benchmarks, such as EURIBOR/LIBOR, the failure of which might create risks for market participants and for the functioning and integrity of markets; and
  • improving their governance (e.g. management of conflicts of interest) and requiring greater transparency on how a benchmark is produced; and
  • ensuring that benchmark administrators are subject to prior authorization and supervision depending on the type of benchmark (e.g. commodity or interest rate benchmarks).

The Council adopted its General Approach in February 2015, and the European Parliament adopted its text in May 2015. The Luxembourg Presidency, led by Minister of Finance Pierre Gramegna, submitted a global compromise proposal for the 7th Trilogue, mainly focusing on the outstanding issues on the categorization of benchmarks as well as on the third-country regime.

The Regulation will encompass numerous indices and benchmarks as a result of an intentionally wide definition given in the Proposal:

  • A Benchmark means any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument is determined.
  • An Index means any figure:

(a) that is published or made available to the public;

(b) that is regularly determined, entirely or partially, by the application of a formula or any other method of calculation, or by an assessment; and

(c) where this determination is made on the basis of the value of one or more underlying assets, or prices, including estimated prices, actual or estimated interest rates, or other values or surveys;

  • The Provision of a benchmark means:

(a) administering the arrangements for determining a benchmark;

(b) collecting, analyzing or processing input data for the purpose of determining a benchmark; and

(c) determining a benchmark through the application of a formula or other method of calculation or by an assessment of input data provided for that purpose;

“The adoption of the Benchmarks Regulation will help restore confidence in the integrity of benchmarks and enhance their robustness and reliability, hence strengthening confidence in the financial markets and preventing new manipulation scandals”, said Pierre Gramegna, Minister of Finance of Luxembourg and President of the Ecofin Council.

The press release issued by the Luxembourg Presidency of the Council of the EU notes that a compromise was reached on the third country regime, which will allow third country indices to continue being used in the EU, namely through newly set-up “recognition” or “endorsement” regimes, while ensuring that European benchmark administrators will not be disadvantaged vis-à-vis their non-European competitors.

The proposed regulation will now be subject to a vote by the European Parliament. The political agreement is to be formalized by Member States at the meeting of the Permanent Representatives Committee on 9 December 2015.

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