Progress report on the EU Benchmark Regulation

There has been an end of year rush by European lawmakers to finalise drafts of the proposal for a Regulation of the European Parliament and of the Council on indices, formally known as the REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds.

Since July this year, the proposal has been examined by the Working Party on Financial Services in eight meetings during the Italian Presidency of the Council. During the discussions the Presidency has tabled four compromise proposals (docs. 12983/14, 14753/14, 15936/14 and 16539/14) in order to make progress on the draft, given that the proposal was issued nine months previously and that most of the Member States’ major concerns with it were already discussed under the former Hellenic Presidency. Additionally, the European Central Bank and the European Economic and Social Committee delivered their opinions on 7 January 2014 and 21 January 2014 respectively.

For the most part, the initiative of the European Commission has been well received as, in light of the major scandals occurred with some widely used financial benchmarks, there is a general consensus that a resilient and more uniform regime in this area is needed, with the only main concern relating to the possibility to continue to make use of the benchmarks provided by entities located in third countries, as reportedly no other jurisdictions outside Europe will have adopted equivalent legislative action by the time the Regulation is due to enter into application.

The proposal requires that other countries have equivalent oversight of indexes, which could prevent European banks and asset managers from using U.S. benchmarks, according to a counselor to Treasury Secretary Jacob J. Lew. European lawmakers wants national governments to take responsibility for regulating financial and commodity benchmarks, something the U.S. has no plans to do. The third countries regime included in the European Commission’s proposal “goes well beyond” the scope of new oversight of benchmarks envisioned by a group of global authorities, Randall DeValk, the Treasury counselor, wrote in a Dec. 16 letter to lawmakers. The U.S. “does not plan to adopt direct supervision of benchmarks,” he added.

After the latest meeting of the European Councils Working Party on Financial Services on the 12 December 2014, the Presidency of the Council considers that a number of issues having debated so far are recognised as settled by the vast majority of Member States. For instance, it has been made clear that the combination of indices does not amount to administration of a composite benchmark but rather to the use of its components. Another example pertains to the transparency requirements which have been calibrated, i.e. by removing the obligation for administrators to publish input data and by specifying that the publication of the methodology is to be meant as the disclosure of its key elements rather than the underlying formula. Nevertheless, it appears that further debate is necessary before seeking guidance at political level as to the options to be followed regarding the following issues:

  • Critical benchmarks –definition and implications
  • Colleges of supervisors – ESMA binding mediation

One thing is certain; the regulatory debate on benchmarks is far from over, particularly with regards to the production of benchmarks by countries outside of the EU. The work will be resumed as a priority early in the New Year.

The latest compromise text dated 08th December 2014 is here.

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