Banks Should Review Staff Pay to Prevent Libor Repeat, ESMA Says

European Union regulators are calling on banks to review how they pay staff that submit benchmark data, in the wake of the scandal engulfing interbank lending rates and oil price reporting.

The guidelines, drawn up by regulators in the European Securities and Markets Authority are part of a broader EU response to the rate-rigging scandal that may also see oversight of some “critical benchmarks,” such as Libor, given to the Paris-based agency.

Banks should 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, according to guidelines published by Paris-based ESMA today. Lenders should also “prevent or control the exchange of information between staff” whenever such contact could lead to attempts at rate manipulation.

Global regulators are seeking to overhaul the setting and governance of benchmarks in the wake of revelations that banks sought to manipulate the London Interbank Offered Rate and other interbank lending rates. 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.

Oil Probe

Investigations by authorities have also extended to other benchmarks. The European Commission announced last month that it was probing companies including Royal Dutch Shell Plc, BP Plc, and Platts for potential manipulation of the $3.4 trillion-a-year crude oil market. U.S. regulators are also investigating the ISDAFix rate used as a reference for derivatives trades.

Michel Barnier, the EU’s financial services chief, is set to propose that oversight of “certain critical inter-bank interest rate benchmarks” including Libor and the Euro Interbank Offered Rate, Euribor, should be handed to ESMA, on the grounds that more than one country stands to be affected by manipulation of these indexes.

Supervision by a national regulator “will not be efficient and effective in terms of addressing the risks that the critical benchmark poses,” according to a copy of the draft commission plans obtained by Bloomberg News.

ESMA said that the guidance published today links with recommendations made by national regulators and principles that are set to be published by the International Organization of Securities Commissions.

EBA Cooperation

The ESMA guidelines, drawn up in tandem with the European Banking Authority, also include requirements for organizations that set benchmarks to have “an effective whistle-blowing mechanism as well as complaints procedures in order to facilitate early awareness of any misconduct.” Such organizations will have to ‘comply with any query,’’ from regulators and be prepared to disclose 5 years of meeting records on request.

ESMA and the EBA said that they would review implementation of the principles after 18 months, while also working to transaction-based alternatives to benchmarks such as Libor that are based on estimates.

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