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EU-level regulation proposed for LIBOR, EURIBOR and other benchmark rates

Providers of LIBOR, EURIBOR and other benchmark measures would be subject to "prior authorisation and ongoing supervision" by both national and European regulators under proposals from the European Commission.

However the draft regulation (81-page / 294KB PDF), prepared in response to alleged manipulation of financial and other benchmarks, does not recommend shifting regulatory oversight of the London Interbank Offered Rate (LIBOR) and other "critical" benchmarks to the European Securities and Markets Authority (ESMA).

The proposed regulation is in line with the principles recently agreed at an international level by the International Organisation of Securities Commissions (IOSCO). It would cover a broad variety of benchmarks; from the interest rate benchmarks used in the valuation of financial instruments, to commodities benchmarks used to set the prices of oil, gas and biofuels.

"Benchmarks are at the heart of the financial system: they are critical for our markets as well as the mortgages and savings of millions of our citizens, yet until now they have been largely unregulated and unsupervised," said Internal Market Commissioner Michel Barnier.

"Market confidence has been undermined by scandals and allegations of benchmark manipulation. This cannot go on: we must rebuild trust. Today's proposals will ensure for the first time that all benchmark providers have to be authorised and supervised; they will enhance transparency and tackle conflicts of interest. As a result, the integrity as well as the continuity and quality of key benchmarks will be ensured," he said.

A benchmark is a statistical measure, calculated from a representative set of underlying data, which is used as a reference price for a financial instrument or financial contract. The LIBOR and EURIBOR rates are daily references based on the interest rates at which banks can borrow unsecured funds from other banks, in London and the eurozone respectively. They are widely used as the basis for financial instruments including interest rate and currency hedging instruments, and to set the interest rate for syndicated loans.

Benchmarks have historically not been subject to direct regulatory oversight, but the manipulation of the LIBOR, EURIBOR and Japanese TIBOR rates by a number of banks has "sparked concern" about their integrity, according to the European Commission. Doubts about the integrity and accuracy of benchmarks have the potential to undermine market confidence, cause significant loss to investors and distort the economy, it said.

The Commission's proposals are based around ensuring benchmarks reflect the "economic reality" they are intended to measure, are not subject to conflicts of interest and are used appropriately. The provision of benchmarks would become a regulated activity, supervised by national regulators under ESMA oversight. "Critical" benchmarks, defined as those underpinning at least €500 billion worth of financial instruments, would be subject to tougher standards and further oversight from a "college" of national regulators, including ESMA, led by the regulator of the benchmark administrator.

The proposal requires the use of "sufficient and accurate data" as a basis for setting benchmarks, with a preference for transaction data where possible. Where this is not available or sufficient, non-transaction data can be used if it is "verifiable". Data must be obtained from a "reliable and representative" panel or sample of contributors, who have signed a legally-binding code of conduct, and must be "sufficient, accurate and representative of the economic reality" that the benchmark is intended to measure. Benchmark providers would be required to use robust, reliable methodology to calculate the rates, and would need to publish 'benchmark statements' which clearly and unambiguously define what the rate measures and appropriate uses.

National regulators would be given the power to impose sanctions for breaches of the regulation. Proposed fines for individuals could reach a maximum of at least three times the amount of the profits gained or up to €500,000; while firms could be fined a maximum of €1 million or 10% of their total annual turnover. Regulators would be given powers to access documents, request information, carry out on-site inspections and end practices in breach of the regulation.

The proposal also limits the use of non-EU benchmarks. These would require a decision of the Commission, recognising that the provider is located in a jurisdiction with equivalent legal and supervisory safeguards. In particular, it would take into account the third country's compliance with the IOSCO Principles on financial benchmarks.

The proposal must now be considered and adopted by the European Parliament and Member States before it can be finalised.

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