The EU wants to regulate financial benchmarks that are used in transactions worth trillions of dollars globally, an effort to prevent market manipulations such as the one involving the London interbank offered rate (LIBOR), an interest rate banks use to borrow from each other.
The European Commission, the executive arm of the 28-nation EU, on Wednesday unveiled draft legislation that tightens the financial instruments’ oversight, increases transparency and introduces stiff fines for manipulations.
Under the proposal, national regulators and a coordinating European body are granted new powers to investigate possible rigging or conflicts of interests and can issue fines of up to 10 percent of a firm’s revenue.
LIBOR is an average rate that measures how much banks expect to pay each other for loans. It underpins trillions of dollars in contracts around the world, including mortgages, bonds and consumer loans. As a result, its manipulation can cause significant losses to consumers and investors, and distort the real economy.
“Market confidence has been undermined by scandals and allegations of benchmark manipulation,” said EU Commissioner Michel Barnier, who is in charge of financial services. “Some banks lied about the going interest rates by manipulating the index.”
“Today’s proposals will ensure for the first time that all benchmark providers have to be authorized and supervised — they will enhance transparency and tackle conflicts of interests,” he added.
The LIBOR scandal emerged last year when authorities realized banks — including Royal Bank of Scotland, Barclays and Switzerland’s UBS — were submitting false data to gain market advantages for their own trades.
US and UK regulators fined Royal Bank of Scotland more than US$460 million for rate-rigging. Barclays’ role led to a US$453 million fine and the resignation of chief executive Bob Diamond. Swiss bank UBS was fined US$1.5 billion, including a US$100 million fine imposed on subsidiary UBS Securities Japan during sentencing on Wednesday in the US.
The Commission’s proposal still needs approval by the European Parliament and the governments of the 28 member states, adding to a busy schedule of financial reforms to be pushed through in the coming months before parliament switches from working to full-time campaigning ahead of next May’s elections.
The proposal targets LIBOR and the Euro interbank offered rate (EURIBOR) interest rates, but its scope includes many other benchmarks that are used to reference financial instruments.
An initial idea to hand oversight of the benchmarks such as LIBOR and EURIBOR to a European agency was thrown out amid resistance from Britain — which is home to the bloc’s biggest financial industry — and concerns that the relatively small European Securities and Markets Authority (ESMA) agency does not have the resources for the job, EU officials said.
However, if national regulators cannot reach an agreement between them on a particular case, Paris-based ESMA would be able to decide by binding mediation, according to the proposal.