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EU Weighs Scrapping ESMA Libor Oversight Plan in Draft Law

ESMA Headquarters
Under the alternative EU plan, ESMA would still have a role as a dispute mediator between the national regulators, the official said. Photographer: Balint Porneczi/Bloomberg

U.K. regulators would retain a role in the oversight of the London interbank offered rate as the European Union considers backing away from a plan to shift supervision of the tarnished benchmark to an EU agency in Paris.

The European Commission may rewrite proposals scheduled to be presented later this month that would have handed oversight of critical benchmarks, including Libor, to the Paris-based European Securities and Markets Authority, according to an EU official who requested anonymity because the talks are private.

Under the alternative plan, the rates would be overseen by a group of national regulators including the U.K. Financial Conduct Authority, the official said. ESMA would have a role as a mediator between national regulators, the official said.

Michel Barnier, the EU financial services chief, is scheduled to present plans on Sept. 18 to toughen benchmark-setting rules. The measures would also give investors a right to sue if they lose money from shoddy rate-setting, and empower regulators to force banks to submit data to administrators, according to draft proposals obtained by Bloomberg News.

Interbank Lending

Global regulators have fined UBS AG, Barclays Plc and Royal Bank of Scotland Group Plc about $2.5 billion for distorting Libor and similar benchmarks. Other firms are under investigation around the world, and probes into potential manipulation have extended beyond interbank lending rates.

The FCA is currently responsible for regulation of Libor and how it is administrated. Chris Hamilton, a spokesman for the U.K. authority, declined to comment.

There is a good case for Libor supervision to remain at the national level, given limits to ESMA’s resources, and the fact that the rate is produced from data supplied by banks in London, said Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels.

“I caution against giving too many tasks to ESMA, especially if you don’t have the budget,” Lannoo said in a telephone interview. Supervision should remain where there is the most competence and market knowledge, he said.

Barnier’s proposals are part of a broader push by the EU to toughen benchmark rules.

European Parliament lawmakers voted today to back tougher fines and other sanctions against rate-rigging, following a deal with governments earlier this year.

“The Libor scandal was market manipulation of the worst kind,” Arlene McCarthy, a U.K. lawmaker in charge of the EU assembly’s work on the rules, said in an e-mail.

Market Abuse

“The litmus test of our new market-abuse rules is whether in a fast moving, high-tech global financial system these rules can capture potential and emerging abuses and whether those who commit market abuse in the U.K. and Europe will face the full force of the law rather than being extradited to the U.S.,” she said.

Regulators are pursuing different probes into potential rigging. German financial regulator Bafin said last month that it’s reviewing whether the country’s banks may have participated in manipulating the ISDAfix benchmark that underpins the market for interest-rate derivatives. The U.S. Commodity Futures Trading Commission and U.K. FCA are also probing banks over potential rigging of the rate.

The U.K. FCA is also looking into the currency market, where $4.7 trillion is exchanged each day.

The Libor scandal has “undermined the confidence of consumers and investors” in financial markets, Barnier said today during a debate in the EU parliament today. “Those who manipulate benchmarks such as Libor will be guilty of market abuse and face tough fines,” he said.

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