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European Parliament MEPs vote for robust and transparent benchmark setting

The European Parliament has now published a press release stating that its Members have voted in favor of the draft Benchmark Regulation on the 19th May. The vote consolidated the lawmaker’s position for three-way talks with the Council of the European Union and the European Commission, with the aggressive goal of having the legislation ready by the end of this year.

The draft Regulation on indices used as benchmarks in financial instruments and financial contracts (the Benchmark Regulation) was first proposed by the European Commission (the Commission) in September 2013, in the wake of numerous high profile cases of benchmark manipulation. The purpose of the Benchmark Regulation is to improve the functioning and governance of benchmarks produced and used in the EU and to ensure they are not subject to manipulation.

The Benchmark Regulation upholds the principles agreed by the International Organization of Securities Commissions (IOSCO) in 2012 and 2013. The Council of the EU (the Council) agreed on a negotiating mandate with regards to the Benchmark Regulation in February this year.

“A few rotten apples in the banks messed up things for everybody else, now we want systemic benchmarks to be safe in the future’, said Cora van Nieuwenhuizen (ALDE, NL), the leading MEP drafting the Benchmark Regulation. “We need safeguards in place for such benchmarks as LIBOR, we also need a large number of indices to avoid the market concentration and we need a balanced approach towards smaller and bigger benchmarks”, she added during the Parliamentary debate on Monday evening.

Critical Benchmarks

The draft law aims to remove 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 adopted legislation counters conflicts of interest in the production of benchmarks, provides for full transparency and introduces prudential supervision,” Cora van Nieuwenhuizen said in a statement after the vote on Tuesday.

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 authorities. Critical benchmark administrators would have to have a clear organizational 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 its national market.

Benchmark Administrators

The pricing of many financial instruments and contracts depends on the accuracy and integrity of benchmarks published by a benchmark administrator, – the legal person or entity responsible for the establishment, design, production and dissemination of a benchmark and for the collection of the input data based on which the benchmark is calculated.

Under the new rules, all benchmark administrators will 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 is reliable. They would also have to publish or disclose existing and potential conflicts of interest and meet accountability, record keeping, audit and review requirements.

More controversially, the benchmark regulation would block benchmark contributors from quitting benchmark-setting panels for up to two years in a bid to keep critical benchmarks functioning. National regulators would get the powers to force firms to stay involved.

Next Steps

The vote consolidated the Parliament’s position for three-way talks on the draft with EU member states and the Commission, with a goal to have the benchmark legislation ready by the end of the year. “The adoption of the legislation by the European Parliament clears the way for negotiations with the Council on the final legislation to begin.” Concluded van Nieuwenhuizen.

Stages of the procedure are documented here.

The European Parliamentary debate is available here.

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