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The European Commission proposes rules to promote benchmark governance

The European Commission and the Council of the European Union recently reached an agreement on stricter regulations for financial benchmarks, to be presented to the European Parliament, according to a report released by the European Commission. This meeting was based on previously proposed regulations by the European Commission following a scandal involving alleged manipulations of financial benchmarks.

“Proposed regulations followed a scandal involving alleged manipulations of benchmarks.”

Background
The new rules from the European Commission came in late 2013 after a rash of alleged benchmark manipulations. According to a Waters Technology report, these manipulations included inter-bank offered rates like the London Interbank Offered Rate and the Euro Interbank Offered Rate, foreign exchanges and commodities. The Commission proposed the rules as a reaction to the fact that the alleged manipulations would have a detrimental impact on EU consumers and companies. Ultimately, the Commission hopes these regulations will establish global standards for financial benchmarks.

The latest update
The regulations will look to align the EU with the international standards established by the International Organization of Securities Commissions in 2012. In turn, the European Commission report stated that the recent meetings were held to establish a dialogue with the European Council in order to reach an agreement on a mandate for financial benchmark regulations. Following the meeting, the new rules will be presented to the European Parliament for vote.

The goal of these proposed rules will be to implement prior authorization and strict supervision of EU benchmark providers and contributors, initiate more stringent governance and control mechanisms as well as mitigate potential conflicts of interest. These regulations are designed to integrate more transparent benchmark calculation methodologies.

The new regulations will reduce the likelihood of manipulation in the future.

Ultimately, the new regulations will reduce the likelihood of manipulation in the future. The Waters Technology report noted that this agreement will improve governance of EU benchmarks involving financial instruments like equities, bonds, futures and swaps. These rules will directly benefit EU consumers and companies as financial benchmarks are the primary determinant of mortgage payments levels for millions of homeowners. Buy-side firms will also be directly affected by the proposed regulations, particularly those asset managers that employ internal blending functions to qualify their firms as benchmark administrators.

Bottom line
As the previous benchmark manipulation scandals were regarded by the European Council, Parliament and the Commission as tantamount to stealing, the goal of the regulations is to restore consumer and investor confidence in the markets. Perhaps just as important, though, these rules have the potential to ensure the accuracy and integrity of these benchmarks in financial instruments and financial contracts.

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