Manipulation of market benchmarks: Council confirms agreement with EP on tougher rules
On 9 December 2015, the Permanent Representatives Committee approved, on behalf of the Council, a compromise agreed with the European Parliament on new rules aimed at ensuring greater accuracy and integrity of benchmarks in financial instruments.
"The adoption of this regulation will help restore trust in the integrity of benchmarks and enhance their robustness and reliability, thereby strengthening confidence in the financial markets and preventing new manipulation scandals," said Pierre Gramegna, minister for finance of Luxembourg and president of the Council.
The agreement with the Parliament was reached during a trilogue meeting in Strasbourg on 24 November 2014. Council and Parliament representatives have held seven trilogue meetings since agreeing their respective negotiating positions in February and May 2014.
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 financial 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 and where these are not properly supervised. The regulation 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 and adequate rights of redress.
The regulation will introduce 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, in certain circumstances, by central counterparties and public authorities.
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.
Three categories of benchmarks
Benchmarks will be subject to requirements appropriate to their size and nature, while at the same time respecting a core set of minimum requirements in line with the internationally agreed principles of the International Organization of Securities Commissions (IOSCO).
Critical benchmarks: Those used as a reference for financial instruments or financial contracts or for the determination of the performance of investment funds having a total value of at least €500bn on the basis of all the range of maturities of the benchmark; or benchmarks based on submissions by contributors mainly located in one member state and recognized as being critical in that member state. Benchmarks of at least €400bn can also be considered critical if they have no or very few appropriate market-led substitutes, and if their absence would have significant and adverse impacts on markets integrity, financial stability, consumers, the real economy, or the financing of households and corporations.
Significant benchmarks used as a reference for financial instruments or financial contracts or for the determination of the performance of investments funds having a total average value of at least €50bn on the basis of all the range of maturities or tenors of the benchmark over a period of six months. Benchmarks below this threshold can be upgraded if they have a significant impact on the markets, with no or few market-led substitutes.
Non-significant benchmarks are subject to a light regulatory regime based a comply-or-explain mechanism, i.e. general principles in line with the internationally agreed IOSCO principles.
However, specific regimes will apply to commodity, interest rate and regulated data benchmarks:
- Commodity benchmarks of more than €100m are subject to the principles for oil price reporting agencies (PRA) issued by the IOSCO on 5 October 2012. These principles serve as a global standard for regulatory requirements for benchmarks. They were endorsed by the G20 in 2012 and cover governance structures, controls, integrity, and conflict management.
- Interest rate benchmarks, which are more prone to conflicts of interest and data manipulation, are subject to additional requirements relating to input data and contributors as these benchmarks.
- Regulated data benchmarks are exempt from some requirements as the nature of the data that is used in the determination of such benchmarks is less subject to manipulation and conflicts of interest.
Third country regime
Benchmarks provided by non-EU countries will be used by supervised entities in the EU through “recognition” or “endorsement” regimes, based on compliance with the IOSCO principles.
Moreover, a partial equivalence regime will facilitate equivalence with regard to third countries which do not intend in the foreseeable future to put in place a fully-fledged regime for all types of benchmarks, but which have put or may put in place specific rules for certain types of benchmarks or benchmark administrators, such as certain interest rate benchmarks.
Adopting the regulation
The regulation will now be submitted to the European Parliament for a vote at first reading, and to the Council for final adoption.