European Commission releases statement concerning Benchmark Regulation

The European Commission has issued a statement concerning the European Parliament vote on the Benchmark Regulation. The statement notes that talks will start in June this year and that the Commission hopes to reach a final agreement as soon as possible.

The Commission’s proposal to make benchmarks more reliable, and at less risk of manipulation, started in September 2013 with a proposal of new standards in the wake of the rigging of various benchmarks including inter-bank offered rates (EURIBOR, LIBOR, etc.) and others such as those for foreign exchange (FX) and commodities.

“It is consumers who ultimately have to pay the price when benchmarks are manipulated or unreliable as this can increase the cost of their mortgage repayments or the returns on their pension funds,” said Jonathan Hill, EU Commissioner responsible for Financial Stability, Financial Services and Capital Markets Union.

The proposed EU rules aim to improve the functioning and governance of benchmarks that are produced and used in the EU in financial instruments such as bonds, shares, futures or swaps, and in financial contracts such as mortgages. “Our proposal will put in place rules for safer benchmarks across the EU. I am confident that we can now move swiftly to find an agreement on a final text.” Concluded Hill.

The Commissions statement explains that benchmarks play a crucial role for consumers as they help determine the mortgage payments of millions of households, while in the financial industry, for example, benchmarks determine the prices of many derivatives.

The Commission first proposed a Regulation on benchmarks in September 2013 to improve the functioning and governance of benchmarks produced and used in the EU and to ensure that they are not susceptible to manipulation. The regulation upholds the Principles agreed at international level by the International Organization of Securities Commissions (IOSCO) in 2012 and 2013. Although IOSCO has international consensus on the Principles for benchmarks, and a review of their implementation was published in February this year, the Principles left flexibility as to the scope and means of their implementation and in relation to certain terms which the European lawmakers were concerned with.

Once finalised, the proposal will contribute to the accuracy and integrity of benchmarks used in financial instruments and financial contracts by:

  • ensuring that contributors to benchmark are subject to prior authorisation and on-going supervision depending on the type of benchmark (e.g. commodity or interest-rate benchmarks);
  • improving their governance (e.g. management of conflicts of interest) and requiring greater transparency of how a benchmark is produced;
  • ensuring the appropriate supervision of critical benchmarks, such as EURIBOR/LIBOR, the failure of which might create risks for many market participants and even for the functioning and integrity of markets of financial stability;
  • the European Securities and Markets Authority (ESMA) will have an enhanced role with regard to critical benchmarks. y;Such benchmarks will be overseen by a college of national supervisors, led by ESMA.

The so-called trialogues between the European Parliament, the Council and the Commission will start next month, and the Commission hopes to reach a final agreement as soon as possible.

The European Commission’s website on Benchmarks is available here.

The IOSCO Principles for Financial Benchmarks can be found here.

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