Banks risk fines as high as 10 percent of their yearly sales for failing to set up adequate safeguards to combat benchmark rigging, under European Union anti-manipulation rules presented today.
Michel Barnier, the EU’s financial services chief, called for the sanctions as part of sweeping plans to toughen regulation of benchmarks underpinning more than 1,000 trillion euros ($1,335 trillion) of financial contracts ranging from oil and sugar to mortgages and foreign-exchange swaps.
Global regulators are seeking to restore trust in rates undermined by evidence of endemic rigging. Authorities have fined UBS AG (UBSN), Barclays Plc (BARC) and Royal Bank of Scotland Group Plc about $2.5 billion for distorting the London interbank offered rate, or Libor, and other interbank rates. Other firms are under investigation around the world.
“Market confidence has been undermined by scandals and allegations of benchmark manipulation,” Barnier said in an e-mailed statement. “This cannot go on.” The proposals from the Brussels-based European Commission “will ensure for the first time that all benchmark providers have to be authorized and supervised. They will enhance transparency and tackle conflicts of interest.”
Banks and other participants in benchmarks, as well as administrators of the rates, could be fined for failing to follow ground rules that seek to mitigate conflicts of interest and reduce the potential for rate-rigging, according to the EU plans. They would also toughen supervision of rate-setting, with “critical benchmarks” such as Libor to be overseen by colleges of national regulators.
The proposals from the commission, the EU’s executive arm, require approval by national governments and by the bloc’s parliament lawmakers before they can take effect.
Barnier’s hopes that the plans would be adopted before the European Parliament breaks for elections next year received an immediate blow when the U.K. indicated that it would seek changes to the measures.
Britain will seek to make improvements to the proposal to ensure they are sensible, proportionate and internationally coherent, according to a U.K. official.
The U.K. backs the development of international principles for benchmark setting, said the official, who couldn’t be named in line with government policy.
The commission plans are “impulsive and premature,” Syed Kamall, a U.K. Conservative lawmaker representing London in the European Parliament said in an e-mail.
“The commission seems intent on new regulation for the energy sector even before an investigation into alleged fixing of oil benchmarks have been concluded,” he said. “To suggest that all benchmarks and indices are faulty and in need of regulating on the basis of the Libor experience is absurd.”
The draft law would also enable the commission to decide whether other nations have put in place rules that are as rigorous as the EU’s standards.
Banks and other companies within the EU would only be allowed to base a financial instrument on a benchmark that is administered in the EU or in another country that has rules judged as “equivalent” to those in the 28-nation bloc.
The rules would apply to “all published benchmarks that are used to reference a financial instrument traded or admitted to trading on a regulated venue,” as well as those that underpin financial contracts such as mortgages and those that measure the performance of an investment fund, according to the commission. An exemption would apply for rates set by EU central banks.
“The text covers benchmarks for commodities because there are risks -- as in oil and gas,” Barnier told reporters in Brussels.
Rates would have to be based on real transaction data where possible, under the EU plans, which also allow for some special treatment of benchmarks underpinning the commodity markets because of their “sector-specific characteristics.” Benchmark participants would also be forced to sign a legally binding code of conduct setting out their obligations.
Regulators would be able to fine companies as much as 1 million euros ($1.3 million) or 10 percent of their annual revenue, whichever is greater. National governments will be free to grant regulators even tougher fining powers.
The sanctions rules would be put in place in parallel with tougher penalties for market abuse that were approved by the European Parliament last week.
“There are people guilty of rigging who should go to prison in my view,” Barnier said.
While early versions of the benchmark proposals would have taken oversight of critically important benchmarks out of national hands, the final blueprint doesn’t go this far.
Under today’s proposals, the European Securities and Markets Authority, based in Paris, would be a member of the colleges of critical-benchmark regulators and be given power to solve disagreements between them.
Each college would be led by the regulator of the country where the benchmark is administered. In the case of Libor, that would be the U.K. Financial Conduct Authority.
“The center of gravity for Libor is in London,” Barnier said. “National supervisors have competence, expertise. The same applies to the British regulator, the FCA. It has proximity.”
Companies including BlackRock Inc., the world’s largest asset manager, and banks including Barclays and Standard Chartered Plc (STAN) have warned regulators to avoid rulemaking that drives up costs or inhibits effective benchmark setting.
Barnier said he’s seeking to empower regulators so that they can force banks to take part in some benchmark-setting panels.
Authorities could force banks to take part in setting such a critical rate if it has lost, or is “likely” to lose 20 percent of its member banks.
Critical benchmarks would be those underpinning financial instruments worth at least 500 billion euros ($668 billion) and where the majority of data submitters are banks, insurers and other “supervised entities” -- a term covering mainly financial firms.
Euribor-EBF, the Brussels-based group that administers the setting of Euribor rates, said in January that it was facing an exodus of lenders from its rate-setting panels in the wake of the benchmarks scandal.
“The possibility for supervisors to impose mandatory contributions is a positive measure,” Guido Ravoet, chief executive officer of Euribor-EBF, said in an e-mail. “Until it is in place, it will hopefully lead panel banks and authorities alike to take their responsibilities and ensure that Euribor is not discontinued.”
Under Barnier’s plans, authorities across the EU would also be handed a suite a minimum powers to carry out raids and get access to documents when investigating potential breaches of the benchmark-setting rules.
In addition to scaling back plans for centralized oversight, Barnier, the member of commission responsible for drafting financial laws, also scrapped provisions that would have set common rules on how investors who lose money from rate-rigging can sue.
While the commission “is undoubtedly aiming to be more aggressive in how it deals with the repercussions of Libor scandals, there are still some problems that will need to be addressed before this comes into force,” Mark Compton, a partner at law firm Mayer Brown in London, said in an e-mail.
These include plans to force “price reporting agencies to make their source sign a code of conduct or mandatory contribution and how that would work,” he said.
The EU measures would codify global recommendations for benchmark setting made by the International Organization of Securities Commissions, including Iosco principles for oil price reporting agencies, the commission said.
The commission said it will “in particular” examine whether other nations have implemented the Iosco principles.
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