EU Considering Moving Libor Oversight to ESMA From U.K.

The European Union is considering whether to hand oversight of the scandal-ridden London interbank offered rate to the European Securities and Markets Authority.

The European Commission is proposing to move regulation of Libor and other benchmarks away from the U.K. to Paris-based ESMA because the rates may affect banks, administrators and consumers in multiple member countries, according to a draft of the proposed regulation obtained by Bloomberg News. ESMA is already reviewing benchmarks and issued guidance today calling on banks to ensure their pay policies don’t create conflicts of interest.

Oversight of “certain critical interbank interest rate benchmarks” by a national regulator “will not be efficient and effective in terms of addressing the risks that the critical benchmark poses,” according to the document. “Authorization and supervision is most effectively carried out by ESMA.”

Global regulators are working on alternatives to Libor after U.S. and U.K. officials uncovered attempts by banks to manipulate the benchmark rate. Royal Bank of Scotland Group Plc, UBS AG and Barclays Plc have been fined a total of about $2.5 billion and at least a dozen firms remain under investigation.

The proposals would also hand regulators the power to force banks to join panels that submit data for the setting of “critical” benchmarks, according to the draft.

‘More Transparency’

The commission’s proposal will establish “good governance rules” to ensure “more transparency, to limit conflicts of interest and to assure the representativeness of benchmarks,” Chantal Hughes, a spokeswoman for Michel Barnier, the EU’s financial services chief, said in an e-mail.

“It will also establish a framework for the supervision of benchmarks” backed with sanctions, she said, without going into detail about the specifics of the plans.

The plans would be a further boost to ESMA, which has been handed successively greater responsibilities since it was established in 2011. The agency has direct oversight over credit-ratings companies and trade repositories, and last year was given the power to ban short selling.

Spokesmen for ESMA and the London-based U.K. Financial Conduct Authority, which currently oversees Libor, declined to comment. The proposed regulation was reported earlier by the Financial Times.

Direct Link

Under the guidance issued by ESMA today, banks must remove “any direct link between the remuneration of staff involved in benchmark data submissions and the remuneration of, or revenues generated by, different staff,” whenever there is a risk of a conflict of interest. ESMA said the measure is needed to prevent staff that submit data from having any financial incentive to manipulate rates.

Lenders should also “prevent or control the exchange of information between staff” whenever such contact presents a conflict of interest that could lead to rate manipulation attempts.

Martin Wheatley, the chief executive officer of the FCA, has spent nearly a year seeking to bolster credibility of Libor. His report, known as the Wheatley Review, was carried out at the request of Chancellor of the Exchequer George Osborne after Barclays was fined almost a year ago.

Wheatley said in March that oversight of Libor, which wasn’t previously regulated, would be handed to the FCA. An independent committee is currently searching for an administrator for the rate, who will have to corroborate submissions and monitor suspicious conduct.

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