EU Bill May Force Banks to Stay on Benchmark Panels

Banks could be barred from quitting benchmark-setting panels for as long as two years under plans backed by European Parliament lawmakers, in a bid to keep critical market gauges functioning.

Regulators would get the power to force banks to stay involved, according to the European Union legislature’s position on a bill to toughen regulation of key financial benchmarks in the wake of multiple rigging scandals.

The parliament’s Economic and Monetary Affairs Committee approved its negotiating stance in a vote on Tuesday and decided to seek a mandate from the full assembly before starting talks on a final agreement with EU national governments.

“There was a very large majority today, so there won’t be many changes in plenary,” Cora van Nieuwenhuizen, who’s leading parliament’s work on the bill, said in an interview after the vote. The full assembly will vote in May or June, she said. “Hopefully by the end of the year we will have a final agreement.”

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.

Data Submitters

The new powers would apply when a “critical benchmark” faces an exodus of data submitters that may threaten “the capability of the benchmark to measure the underlying market or economic reality,” according to a parliament working document. In addition to forcing banks to stay on rate-setting panels, regulators could also compel other firms to begin contributing data.

The power to force banks to submit data is among a number of options that would be available to regulators to shore up an impaired critical benchmark, the document shows.

Regulators could also require “changes to the code of conduct, methodology or other rules” in a bid to increase the rate’s representativeness and robustness. They could also force an administrator to keep producing for up to a year a rate that it plans to withdraw.

The committee broadly retained key elements of proposals made in 2013 by the European Commission, the 28-nation bloc’s executive arm. EU national governments approved their negotiating position earlier this year, and also followed the broad thrust of much of the commission text.

‘Qualitative Criteria’

The plans formulated by the EU parliament and national governments would set out general ground rules for how benchmarks should be administered, including measures to tackle conflicts of interest. It would also establish a class of critical benchmarks, such as Libor and Euribor, that would face additional rules and be administered by groups of national regulators, with the European Securities and Markets Authority involved.

Van Nieuwenhuizen said the main difference between the committee’s position and the commission’s is on what constitutes a critical benchmark.

“We add qualitative criteria because we think if you really want to know if a benchmark is of systemic importance, you should have some sort of assessment,” she said. “Also the distinction we make between critical and non critical. We have different regimes and we don’t want to cause too much administrative burden for the ones that are non-critical.”

‘Adverse Impact’

Under the parliament plan, the term critical would cover rates that are used as a reference for at least 500 billion euros ($537 billion) of transactions, or whose disappearance would “have a significant adverse impact” on markets, financial stability or the economy.

Other changes made by parliament address the use by EU-based firms of benchmarks set outside the bloc, amid concerns that the commission approach would see companies potentially cut off from being able to use key rates.

The approach would also carve out commodity benchmarks from some of the planned rules.

“They are in, but the way I see it none of them are critical,” Van Nieuwenhuizen said. “The requirements are not very different from what they have to do now.”

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