Libor-Style Rate Rigging in EU Crosshairs as Talks Start

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European Union lawmakers began talks to determine which financial benchmarks will face the toughest regulatory treatment in a draft law intended to tackle rate rigging.

Negotiating teams for the European Parliament and the bloc’s 28 national governments convened on June 2 in Brussels for the first round of compromise talks on a final version of the bill. Key open issues include which gauges should be deemed critical and face the heaviest oversight, and what rules should apply to rates that are set outside of the EU, said Cora van Nieuwenhuizen, the parliament’s lead negotiator.

“The scope of the rules, the definition of critical benchmarks and the treatment of third countries will all be points that we need to discuss,” she said. “Overall we are very optimistic.”

Benchmarks are used to price everything from student loans to mortgages, oil and currencies. Global regulators have moved to tighten oversight of the gauges after the world’s largest banks paid billions of dollars to settle allegations of rigging the London interbank offered rate and other interest rates.

Six banks were ordered to pay $4.3 billion last year to settle probes into the manipulation of foreign-exchange rates. Barclays Plc said last month that it had paid a total of 1.5 billion pounds to five authorities to settle the scandal. That included a 284.4 million pound ($432 million) fine from Britain’s Financial Conduct Authority, the U.K. regulator’s largest-ever penalty.

Binding Regulation

The EU is planning to convert international agreements on benchmark oversight into detailed, binding regulation. The parliament and national governments must both approve the final legislation.

Banks and other financial firms, as well as companies involved in commodities trading, have warned that parts of the EU’s original blueprint risked hampering the functioning of markets.

The draft plans include handing responsibility for overseeing critical benchmarks to groups of national regulators, with powers to intervene to ensure the rates are robust.

Banks could be barred from quitting benchmark-setting panels for as long as two years.

More generally, administrators of both critical and non-critical benchmarks would face governance rules intended to tackle conflicts of interest.

Van Nieuwenhuizen has said that she is seeking a deal on the law by the end of the year.

‘High Regulatory Burden’

So far, the EU parliament and the Council of the European Union, the EU institution that represents national governments, have each worked on their own version of the legislation, taking as a starting point proposals made by the EU Commission, the bloc’s executive arm.

“The positions of the council and European Parliament are closer to each other than they are to the original proposal of the European Commission,” van Nieuwenhuizen said.

Both the council and parliament have amended the commission’s proposals on how to identify critical benchmarks, which centered on a threshold that the rate be used as a reference for valuing at least 500 billion euros ($552 billion) of securities. While both sides retained the threshold, they also added other criteria.

Parliament’s approach leaves more flexibility in the hands of national regulators to label additional benchmarks as critical, Kay Swinburne, a U.K. lawmaker who represents the assembly’s European Conservatives and Reformists group in the talks, said by e-mail.

Stringent Standards

The U.K. has already put its own rules in place in response to rate-rigging, including drawing up a shortlist of benchmarks that are supervised by the FCA.

Nations should remain free to judge which benchmarks are of critical importance, Swinburne said.

“I wouldn’t want EU legislation to prevent any member state, particularly my own, from having higher, more stringent standards,” she said. “The council text has less flexibility for supervisory judgment. It’s more prescriptive.”

Key benchmarks stand to face a “high regulatory burden” from the EU law, Latvia, which holds the rotating presidency of the Council, said in a note circulated ahead of the June 2 meeting. The toughest measures in the law “should be limited to the most important EU benchmarks,” according to the note.

A spokesman for the Latvian presidency declined to comment on the note.

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