Out-Law News 3 min. read
15 Jan 2013, 3:55 pm
The work follows allegations that major banks were involved in the manipulation of EURIBOR and other financial benchmarks, such as the London Interbank Offered Rate (LIBOR).
Following their review, the European Securities and Markets Authority (ESMA) and European Banking Authority (EBA) have concluded that there are "weaknesses and inefficiencies" in the current rate-setting process. As well as consulting on the creation of a new governance framework (14-page / 289KB PDF), the regulators have also published recommendations for supervisory authorities (12-page / 208KB PDF) responsible for the conduct of those banks that contribute to the rate.
ESMA chair Steven Maijoor said that the principles set out in the consultation would "give clarity to benchmark providers and users". However, he hinted that "potential wider changes" to both supervision and regulation of financial benchmarks at a European level could follow. The European Commission is currently considering the need for broader structural change, including the potential introduction of criminal sanctions for actual or attempted manipulation of market reference rates.
Among other flaws identified in the current rate-setting process, the regulators said that EURIBOR governance was not "sufficiently independent" from panel banks. The definition of the rate itself was "not sufficiently clear" and "based on terms which create ambiguity", and there were no formal internal governance requirements for those banks involved in setting the rate, they said.
EURIBOR is a daily reference rate based on the interest rates at which banks can borrow unsecured funds from other banks. It is used as a reference rate for euro-denominated forward rate agreements, short-term interest rate futures contracts and interest rate swaps in the same way as LIBOR is used for sterling and US dollar-denominated financial contracts. It replaced domestic rates in what is now the Eurozone when the Euro launched on 1 January 1999.
The UK is currently undergoing fundamental reform of how LIBOR is administered and set, following the June 2012 announcement that Barclays Bank was to settle with international regulators over "significant failings" on LIBOR and other rates. In his independent review of LIBOR, commissioned by the Government in July, the FSA's Martin Wheatley recommended that administering and contributing to LIBOR should become regulated activities, while criminal sanctions should be introduced for making "misleading statements" in relation to benchmarks.
In their 11-point plan for EURIBOR, ESMA and the EBA call for EURIBOR-EDF, the body which administers the rate, to take greater responsibility for the way that it is calculated and published. Currently, business data provider Thomson Reuters compiles and publishes daily rates on behalf of EURIBOR-EBF. Banks should base their daily submissions on actual transactions rather than estimates where possible, and should not allow employees that could potentially benefit from manipulating the rate to be involved in the submissions process, they said.
The regulators recommended that Thomson Reuters keep "clear records of all submissions from each panel bank over the years"; including details of those banks which failed to submit or submitted "flawed or questionable" rates. The data provider should also establish a Code of Conduct related to rate-setting, and should be subject to regular audits both internally and by EURIBOR-EBF.
They also suggest that the number of published rates be "scaled down" in order to focus on "maturities with the highest usage and volume of underlying transactions". A similar process is currently underway in the UK in relation to LIBOR.
The consultation closes on 15 February, and the regulators propose for the changes to take effect from April. However, the EBA is not planning to consult on its additional recommendations for national supervisors due to the "urgent nature" of the proposals. It expects national authorities to implement them into their supervisory practices where appropriate by 11 March.
Guido Ravoet, chief executive of EURIBOR-EBF, said that he was "pleased" that the recommendations reflected "preliminary steps" taken to improve the rate by the administrators.
"These recommendations put forward by EBA and ESMA provide a solid interim solution, on which we hope the regulators will be able to build in their future proposals," he said. "They will certainly give us clear guidance with regards to our own reflection on the revision of EURIBOR."
