The European Commission's proposal to make benchmarks more reliable and less at risk of manipulation moved forward today after the European Parliament cleared the way for negotiations with the Council and the Commission to start next month.
The Commission proposed new standards in September 2013 in the wake of the alleged manipulation of various benchmarks including inter-bank offered rates (EURIBOR, LIBOR, etc.) and other benchmarks, such as those for foreign exchange (FX) and commodities, including gold, silver, oil and biofuels.
The proposed EU rules aim to improve the functioning and governance of benchmarks that are produced and used in the EU in financial instruments such as bonds, shares, futures or swaps, and in financial contracts such as mortgages.
"It is consumers who ultimately have to pay the price when benchmarks are manipulated or unreliable as this can increase the cost of their mortgage repayments or the returns on their pension funds," said Jonathan Hill, EU Commissioner responsible for Financial Stability, Financial Services and Capital Markets Union. "Our proposal will put in place rules for safer benchmarks across the EU. I am confident that we can now move swiftly to find an agreement on a final text.”
A benchmark is an index or indicator calculated from a representative set of data or information that is used to price a financial instrument or financial contract, or to measure the performance of an investment fund. Examples include the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR), both benchmarks for inter-bank interest rates; oil price assessments and stock market indexes. Benchmarks play a crucial role for consumers as they help determine the mortgage payments of millions of households, while in the financial industry, for example, benchmarks determine the prices of many derivatives.
The Commission first proposed a Regulation on benchmarks in September 2013 to improve the functioning and governance of benchmarks produced and used in the EU and to ensure they are not subject to manipulation (see IP/13/841). The regulation upholds the principles agreed at international level by the International Organization of Securities Commissions (IOSCO) in 2012 and 2013. The Council already agreed on a negotiating mandate as regards that proposal in February 2015 (see IP/15/4422).
When adopted, the proposal will contribute to the accuracy and integrity of benchmarks used in financial instruments and financial contracts by:
- ensuring that contributors to benchmark are subject to prior authorisation and on-going supervision depending on the type of benchmark (e.g. commodity or interest-rate benchmarks);
- improving their governance (e.g. management of conflicts of interest) and requiring greater transparency of how a benchmark is produced;
- ensuring the appropriate supervision of critical benchmarks, such as EURIBOR/LIBOR, the failure of which might create risks for many market participants and even for the functioning and integrity of markets of financial stability.
The so-called trialogues between the European Parliament, Council and Commission will start in June. The Commission hopes to reach a final agreement as soon as possible.
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