Barnier Plans EU Benchmark Law That Won’t Ban Libor-Style Rates

The European Union will propose tougher regulation of interbank lending rates, without banning tarnished benchmarks such as Libor that are based on estimates rather than real transaction data.

“To the greatest extent possible, we should rely on indices based on real transactions,” Michel Barnier, the EU’s financial services chief, said in an e-mail. “However, we also need to be realistic, and if there is no data because there are no transactions, we should allow the publication of indices based on estimates, as long as a clear methodology is used.”

The setting of benchmark rates has faced a wave of criticism after U.S. and U.K. regulators uncovered widespread attempts by banks to manipulate the London interbank offered rate, or Libor. Royal Bank of Scotland Group Plc, UBS AG, and Barclays Plc have been fined about $2.5 billion and at least a dozen firms remain under investigation.

Barnier said that the use of estimates in benchmarks shouldn’t be outlawed entirely because of the need to allow for situations where there is a lack of real transaction data available and also because such a move would affect many existing contracts.

The plans would “bring about more transparency, reduce conflicts of interest, and ensure that benchmarks are representative,” Barnier said. The new rules will be backed by sanctions, and will be in line with international standards prepared by market regulators, he said.

Other interbank lending rates, as well as benchmarks used in the $379 trillion swaps market, have also come in for scrutiny. The U.S. Commodity Futures Trading Commission is probing suspected rigging of the ISDAFix rate used as reference for derivatives trades.

The scandal has prompted a flight by banks from the panels of lenders that provide rate-setting data.

Barnier reiterated previous warnings, made in tandem with the European Central Bank, that his proposals would hand regulators the power to force banks to join the panels.

The European Commission will publish the draft law “this summer,” Barnier said.