Benchmarks for financial instruments: Council agrees stance on tighter controls
The Permanent Representatives Committee on 13 February 2015 agreed, on behalf of the Council, a negotiating stance on new rules aimed at ensuring greater accuracy and integrity of benchmarks in financial instruments.
It asked the Latvian presidency to start, as soon as possible, negotiations with the European Parliament so as to enable adoption of the regulation at first reading.
Recent cases of manipulation of interest rate benchmarks such as Libor and Euribor have highlighted the importance of benchmarks and their vulnerabilities. The pricing of many financial instruments and contracts depends on the accuracy of benchmarks. Doubts about the integrity of indices used as benchmarks can undermine market confidence, cause losses to consumers and investors and distort the real economy.
Benchmarks are susceptible to manipulation where conflicts of interest and discretion exist in the benchmark process and where these are not properly supervised. The draft regulation agreed by the Council therefore has the following objectives:
- Improving governance and controls over the benchmark process, in particular to ensure that administrators avoid conflicts of interest, or at least manage them adequately;
- Improving the quality of input data and methodologies used by benchmark administrators;
- Ensuring that contributors to benchmarks and the data they provide are subject to adequate controls, in particular to avoid conflicts of interest;
- Protecting consumers and investors through greater transparency, adequate rights of redress and an assessment of suitability where necessary.
The draft regulation introduces a legally binding code of conduct for contributors (of data) requiring the use of robust methodologies and sufficient and reliable data. In particular, it calls for the use of actual transaction input data where possible. But other data may be used if the transaction data is insufficient.
The scope of the regulation is broad, although benchmarks deemed to be critical will be subject to stricter rules, including the power for the relevant competent authority to mandate contributions of input data. The regulation will not apply to the provision of benchmarks by central banks and for public policy purposes.
Administrators of benchmarks will have to apply for authorisation and will be subject to supervision by the competent authority of the country in which they are located. If an administrator does not comply with the provisions of the regulation, the competent authority may withdraw or suspend its authorisation. Administrators will be required to have in place appropriate governance arrangements and controls to avoid conflicts of interest.
The European Securities and Markets Authority (ESMA) will coordinate the supervision of benchmark administrators by national competent authorities. For critical benchmarks, a college of national supervisors including ESMA will be set up and take key decisions.