Proposal for a Regulation of the European Parliament and of the Council on indices used as benchmarks in financial instruments and financial contracts

An index is a measure, typically of a price or quantity, determined from time to time from a representative set of underlying data. When an index is used as a reference price for a financial instrument or contract it becomes a benchmark. A wide variety of benchmarks are currently produced using different methodologies by different providers, ranging from public entities to independent dedicated benchmark providers.

The settlements reached by several competent authorities with a number of banks concerning the manipulation of the LIBOR and EURIBOR interest rate benchmarks have highlighted the importance of benchmarks and their vulnerabilities. Allegations of attempted manipulation of commodity price assessments provided by commodity price reporting agencies (PRAs) are also under investigation by the competent authorities and IOSCO has carried out a review of oil price assessments by PRAs.

The integrity of benchmarks is critical to the pricing of many financial instruments, such as interest rate swaps, and commercial and non-commercial contracts, such as mortgages. If a benchmark is manipulated this will cause significant losses to some of the investors that own financial instruments whose value is determined by reference to the benchmark. By sending out deceptive signals about the state of an underlying market it may distort the real economy. More generally concerns about the risk of benchmark manipulation undermine market confidence. Benchmarks are susceptible to manipulation where conflicts of interest and discretion exists in the benchmark process and these are not subject to adequate governance and controls.

The first part of the Commission’s response to the alleged manipulation of LIBOR and EURIBOR was to amend the existing proposals for a market abuse Regulation (MAR) and criminal sanctions for market abuse Directive (CSMAD) to clarify that any manipulation of benchmarks is clearly and unequivocally illegal and subject to administrative or criminal sanctions. However, changing the sanctioning regime alone will not improve the way in which benchmarks are produced and used; sanctioning does not remove the risks of manipulation arising from the inadequate governance of the benchmark process where conflicts of interest and discretion exist. Secondly, in order to protect investors and consumers, it is necessary that benchmarks are robust, reliable and fit for purpose.

In the light of these considerations, this proposal for a regulation has four main objectives that aim to improve the framework under which benchmarks are provided, contributed to and used:
– to improve the governance and controls over the benchmark process and in particular ensure that administrators avoid conflicts of interest, or at least manage them adequately;
– to improve the quality of the input data and methodologies used by benchmark administrators and in particular ensure that sufficient and accurate data is used in the determination of benchmarks;
– to ensure that contributors to benchmarks are subject to adequate controls, in particular to avoid conflicts of interest and that their contributions to benchmarks are subject to adequate controls. Where necessary the relevant competent authority should have the power to mandate contributors to continue to contribute to benchmarks; and
– to ensure adequate protection for consumers and investors using benchmarks by enhancing transparency, ensuring adequate rights of redress and ensuring suitability is assessed where necessary.

EUR-Lex: COM(2013)641: Follow the progress of this proposal through the decision-making procedure http://eur-lex.europa.eu/legal-content/EN/HIS/?uri=COM:2013:641:FIN

EUR-Lex: SWD(2013)336: Impact assessment http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD:2013:336:FIN

EUR-Lex: SWD(2013)337: Executive summary of the impact assessment http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD:2013:337:FIN

ESO: Background information: New measures to restore confidence in benchmarks following LIBOR and EURIBOR scandals http://www.europeansources.info/record/press-release-new-measures-to-restore-confidence-in-benchmarks-following-libor-and-euribor-scandals/

---