Views on improving the integrity of global capital markets
17 December 2013

Brussels Update: Breaking down EU Benchmark Regulation

Posted In: Uncategorized

Following intense scrutiny from EU policymakers of benchmarks in the wake of the LIBOR and Euribor manipulation allegations, the European Commission followed up by focusing on amending the existing proposals for a Market Abuse Regulation and criminal sanctions in the Market Abuse Directive to clarify that manipulation of benchmarks would be subject to sanctions. Indeed, Commissioner Joaquin Almunia of the Directorate General for Competition of the European Commission, opening an investigation into possible cartel and antitrust practices, recently announced record fines of 1.7 billion euros for several banking groups in the Euribor and Yen manipulation.

However, the Commission was clear that this could not be the sole action by the EU. A more preventive and corrective policy proposal was needed to look at benchmarks in general. Furthermore it was important to develop a coherent EU approach on the topic, not leaving sole action to national regulators. In the meantime, the European Securities and Markets Authority (ESMA) and the European Banking Authority published nonbinding Principles for Benchmarks-Setting Processes in the EU in June 2013; the International Organization of Securities Commissions (IOSCO) also released its own nonbinding Principles for Financial Benchmarks in July 2013.

CFA Institute has responded to most consultations on the subject and written an issue brief summarizing our position. To summarize, CFA Institute believes greater transparency over the calculation and production of benchmarks is key to upholding integrity. In order to achieve this, actual transaction data should be used in the compilation of benchmarks to the fullest extent possible, and producers of benchmarks should provide sufficient transparency for users to be able to clearly understand and evaluate the methodology used to compile the benchmarks.

The European Commission proposal for a binding regulation (which means the law is directly binding and applicable in member states, unlike a directive which needs to be transposed into national law and allows for some flexibility) on benchmarks came out in September and was discussed in this space.

Latest Developments in Brussels

The draft regulation is currently being discussed in the Economic and Monetary Affairs Committee of the European Parliament. Rapporteur Sharon Bowles has provided her draft amendments well in advance of the publication of the draft report on the regulation, in order to gain time and move to a general consensus, if possible, given the short time frame to pass the regulation through the European Parliament before the European elections in May 2014.

In discussions in the Committee, there was a general consensus on the rapporteur’s amendments, but some main issues would necessitate further debate and discussion, including whether certain benchmarks could be exempted and what the threshold should be. Another point is whether over-the-counter (OTC) derivatives should be included, and what to do about commodities. A key issue was the role of ESMA (such as its ability to coordinate and set standards and the allocation of responsibilities between ESMA and national regulators), and how to provide for flexibility at “level two” for ESMA to be able to include or take out benchmarks from the scope of the regulation. This included some discussion on the role ESMA, and indeed the national regulators, could play at level two (when the European Parliament and Council of the European Union delegates to the Commission and the supervisory authorities implementation of the legislation through technical standards).

Third-country applicability was also important, especially in order to avoid making the EU less competitive within the global environment. Here, reference was made to those benchmark administrators that applied the IOSCO code and whether the EU could accept such compliance as being equivalent to the demands of the EU’s regulation. A possibility discussed in committee might be for a provisional equivalence to be granted to the provider and leave ESMA to judge whether there was compliance with the IOSCO principles or not.

The third main issue was transparency of data and how to avoid impacting intellectual property issues and other commercial considerations. Lastly, on financial stability, it was deemed important to protect against negative consequences, especially in circumstances where the withdrawal of submitters from submissions-based benchmarks (such as LIBOR) could affect the reliability and representativeness of the benchmark. In this respect, the Committee discussed how to ensure a minimum level of contributors for such benchmarks.

Amendments to the draft report were due on 16 December and will be discussed in January with a vote in the Committee tentatively set for January. If this agenda is maintained, it is possible that the report, as adopted by the Committee, may yet find its way to being discussed in the trialogue with the Council on behalf of the Member States.

However, currently the agenda for closing financial services dossiers by the European Parliament and the Council is very tight; European elections are slated for May and, thus, considerably limit the time available for negotiations.

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About the Author(s)
Josina Kamerling

Josina Kamerling is head of regulatory outreach for CFA Institute for the Europe, Middle East, and Africa (EMEA) region and is based in the Brussels office. She is responsible for supporting CFA Institute's EMEA policy development, advancing the impact of advocacy efforts, and promoting capital market integrity and investor protection issues.

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