Council of the European Union agrees draft on financial benchmark controls

Out-Law News | 16 Feb 2015 | 11:52 am | 2 min. read

EU ministers have agreed proposals on the manipulation of financial benchmarks which will now form the basis of negotiation with the European Parliament. The European Commission has backed the proposals.

Draft regluations were published in 2013 to regulate the manipulation of financial instrument benchmarks including LIBOR (London Interbank Offered Rate) and EURIBOR (Euro Interbank Offered Rate). The benchmarks are used to price financial instruments or contracts, or to measure the performance of an investment fund. LIBOR and EURIBOR, for example, are used for interbank interest rates, oil price assessment and stock market indexes.

The permanent representatives committee of the Council of the European Union, which is the body for ministers from each EU country, has agreed a stance on new rules that aim to bring greater accuracy and integrity in these benchmarks, the Council said in a statement.

"Recent cases of manipulation of interest rate benchmarks such as LIBOR and EURIBOR have highlighted the importance of benchmarks and their vulnerabilities. The pricing of many financial instruments and contracts depends on the accuracy of benchmarks. Doubts about the integrity of indices used as benchmarks can undermine market confidence, cause losses to consumers and investors and distort the real economy," the Council said.

The Council's draft regulations will now be taken to the European Parliament, and the two organisations will negotiate to find common ground on what the legislation should say, a Council spokeswoman said.

The current presidency has been asked to begin negotiations with the European Parliament. The hope is that the regulation will be adopted on this first reading, before the end of June when the Latvian presidency will end, without the need for a second period of negotiation, the spokeswoman said.

Conflicts of interest and discretion and a lack of supervision in a benchmark process make it more susceptible to manipulation. The draft regulations therefore have four objectives: improved governance and controls over the process, to avoid conflicts of interest; improved choice of data and methodologies used by administrators; adequate controls to avoid conflicts of interest in contributors and the data they provide; and protection of consumers and investors through greater transparency, rights of redress and assessment of suitability.

A legally binding code of conduct for data contributors is to be introduced, requiring "robust methodologies and sufficient and reliable data". Actual transaction data should be used wherever possible. 

Benchmarks that are deemed more "critical" will have stricter rules than others, including the power for authorities to insist upon the use of relevant transactional data, the Council said.

The administrators of benchmarks will have to apply for authorisation, and will then be supervised by the "competent authority" of the country where they are located. Authorisation can be suspended or withdrawn if the regulations are not followed and administrators will have to put arrangements and controls in place to avoid conflicts of interest.

This supervision will be coordinated by the European Securities and Markets Authority (ESMA). A group of national supervisors, including ESMA, will be set up to make decisions on the most critical benchmarks, the Council said.  

The regulations do not apply to the provision of benchmarks by central banks, or for public policy purposes.

The European Commission welcomed the announcement.

"Manipulating benchmarks amounts to stealing from investors and consumers and undermines confidence in markets. I welcome the backing given by the Council today. The proposed regulation will ensure that we have benchmarks that are robust, reliable and representative," said Jonathan Hill, EU commissioner responsible for financial stability, financial services and capital markets union. "I hope we can make rapid progress on this proposal and that the European Parliament will agree its position as soon as possible."

The UK's Financial Conduct Authority announced in December 2014 that it would begin to regulate seven financial benchmarks used as reference rates in foreign exchange, commodities and swaps transactions from 1 April this year.

Editor's note 16/02/15: this story was edited for clarity.