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Libor Scandal Shows Need for EU Market-Abuse Law: Barnier

“The only thing that’s not possible is self-regulation or the status quo,” Michel Barnier, financial services commissioner for the European Union said. Photographer: Jock Fistick/Bloomberg
“The only thing that’s not possible is self-regulation or the status quo,” Michel Barnier, financial services commissioner for the European Union said. Photographer: Jock Fistick/Bloomberg

European Union lawmakers should enact tougher punishments for market abusers, including jail time, by the end of the year in response to the Libor scandal, the bloc’s financial-services chief said.

A culture of banks rigging interest-rate benchmarks shows the importance of an agreement on tougher market-abuse rules, Michel Barnier told a panel of EU lawmakers in Brussels today. EU regulators are also investigating possible breaches in cartel rules from both banks and brokers in the setting of Libor, Joaquin Almunia, the EU’s competition commissioner, said in his testimony to the European Parliament.

“The only thing that’s not possible is self-regulation or the status quo,” Barnier said.

Confidence in Libor, the benchmark interest rate for more than $500 trillion of securities, was shaken following Barclays Plc’s admission in June that it submitted false rates. The revelations provoked renewed calls for tougher oversight of the financial system and pushed regulatory and criminal probes of interbank lending rates to the top of the political agenda.

The parliament’s economic and monetary affairs committee is preparing to vote on Oct. 8 to boost the bloc’s sanctions against market abuse, including jail sentences for bank staff found guilty of collusion to fix interbank lending rates. Barclays was fined 290 million pounds ($469.8 million) by regulators in the U.S. and U.K after admitting it submitted false information on London and euro interbank offered rates.

Hefty Fines

The cartel probes will end as soon as possible, Almunia said, and will result in hefty fines if antitrust violations are proven. “We can imagine in this case we are not talking about 10 euros -- it is a big amount.”

“I’m referring to banks, but also in some cases to brokers,” he said. Fines may be increased to take into account the “gravity” of the behavior in the cases, he said.

Gary Gensler, the chairman of the CFTC said in prepared remarks for today’s Libor hearing, that it was “time for a new or revised benchmark -- a healthy benchmark anchored in actual, observable market transactions.”

Martin Wheatley, managing director of the U.K. Financial Services Authority, is scheduled to release a report this week on an overhaul of Libor.

Dan Doctoroff, chief executive officer of Bloomberg LP, also spoke at the EU parliament event today. Doctoroff proposed a new benchmark using data from a variety of financial transactions, including credit default swaps, and so would “better reflect participating banks’ real cost of credit.”

The company, the parent of Bloomberg News, would carry out the work on a pro-bono basis, Doctoroff said.

Rate Manipulation

Barnier’s plans would also set financial penalties for attempted rate manipulation. The European Commission is also seeking views on possible rules to overhaul Libor, Euribor and other market benchmarks.

EU regulators are weighing options such as forcing banks to provide real transaction data rather than estimates and increasing the number of lenders involved in the rate setting.

While there are alternative benchmarks available, “none represent a silver bullet,” Joanna Cound, head of government affairs for Blackrock Inc., said at the hearing. “We believe that a greater diversity of benchmarks is appropriate.”

Swaps Probe

A commission investigation into the pricing of credit-default swaps will also conclude as soon as possible, Almunia Said today.

Scrutiny of credit-default swaps intensified after Greece’s rating was cut to junk status by Standard & Poor’s in 2010. The downgrade added urgency to European plans to bail out the debt-plagued nation.

Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don’t own.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

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