The European Central Bank wants regulators to be handed the authority to compel banks to participate in setting key financial benchmarks.
Robust powers for supervisors are a “crucial” part of a planned European Union law to curb rate-rigging, the ECB said in a note to governments obtained by Bloomberg News. The mandate should apply to “critical benchmarks” underpinning the financial markets, the ECB said.
Supervisors should be equipped to counter “free rider behavior” by major users of a benchmark who seek to escape taking part in rate-setting, according to the June 2 note. They should also be able to call for mandatory contributions to remedy pre-existing deficiencies in a rate panel’s membership, not just respond to banks opting out, the note states.
Regulators are grappling with how to respond to rigging scandals afflicting benchmarks from the London interbank offered rate to the foreign-exchange markets. More than a dozen authorities on three continents are reviewing whether traders colluded to rig the currency market, while nine firms have been fined more than $6 billion for manipulating Libor, a rate used to price more than $300 trillion of contracts from student loans to mortgages.
The scandals and subsequent moves to toughen oversight prompted an exodus of banks from some rate-setting panels.
Euribor-EBF, the group that administers the setting of Euribor rates, said last year that it was facing a sharp drop in the number of lenders on its rate-setting panel, losing banks including Citigroup Inc. and HSBC Holdings Plc.
The number of participants on the Euribor panel has dropped to 26 from a high of 44, according to the ECB document.
The ECB note was submitted as part of negotiations between governments on draft EU rules presented last year by Michel Barnier, the EU’s financial-services chief. An ECB spokesman declined to comment on the document.
Under his plans, 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. Tougher rules would apply for benchmarks identified as critical.
While the EU plans include regulator powers to force banks to contribute data for setting critical benchmarks, the proposals may not be tough enough, according to the ECB.
“The administrator and the competent authorities should assess the size and representativeness of critical benchmarks at regular intervals and also whenever a contributor has notified of its intent to leave the panel,” according to the note.
Governments are working on their position on the plans, ahead of negotiations with the European Parliament on the final version of the law. National officials will hold their next meeting on the plans on June 25.
The mandatory contribution powers would be used “only as a last resort,” according to an amended draft of the law prepared by Greece, which holds the rotating presidency of the EU, and dated June 6.