#Benchmarks: European Parliament votes to stop market manipulation of benchmarks such as LIBOR and EURIBOR

The European Parliament has just voted on legislation aimed at stopping the manipulation of benchmarks. The legislation was proposed when it was discovered that more than a dozen financial institutions were involved in rigging interest rates including the LIBOR and EURIBOR interest-rate benchmarks. The EU proposal covers a wide range of benchmarks.

Benchmark interest rates that are critical to financial market stability across Europe, such as the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR), will become more reliable thanks to a new law, which aims to clean up the benchmark-setting process, improve transparency and prevent conflicts of interest such as those that led to the LIBOR rigging scandals of recent years, where banks colluded to give the impression that they were in a stronger position. In addition, they mis-sold products based on these rates.

Cora van Nieuwenhuizen MEP (ALDE, the Netherlands), who took the lead on this report, welcomed massive support, with 505 in favour of her vote: "This law should put an end to manipulation of benchmarks and I am delighted it has now been passed. These indices are important for people with mortgages, but are also used to establish the price of petrol and the euro exchange rate and should therefore be fully trustworthy. I am proud that Europe is the first continent to regulate this."

Financial Stability, Financial Services and Capital Markets Union Commissioner Jonathan Hill welcomed the Parliament’s vote: "Benchmarks are vital for the functioning of our financial markets. Manipulating benchmarks is tantamount to stealing from investors and consumers. So I welcome today’s vote in the European Parliament, which means we now have new rules that will help rebuild confidence in financial markets in the European Union.”

Benchmark categories

The law creates three categories of benchmarks, subject to different supervisory regimes depending on how much influence they have over the stability of financial markets.

“Critical” benchmarks influence financial instruments and contracts with an average value of at least €500 billion and could thus affect the stability of financial markets across Europe. A benchmark may also be deemed critical if it has no or very few appropriate substitutes, and, if it were to cease to be provided, there would be a significant and adverse impact on market stability.

“Significant” benchmarks influence financial instruments or financial contracts having a total average value of at least €50 billion. “Non-significant” benchmarks are those that do not fulfil the conditions set for the significant category. Benchmarks could be moved from one category to another when necessary.

Supervision, methodology and transparency

Under the new law, all benchmark administrators will have to be authorized by a competent authority or registered, even if they provide only non-significant benchmarks. They will have to publish a “benchmark statement” defining precisely what their benchmark measures, describing the methodology and procedures for calculating the benchmark and advising users about the impact a change or cessation of the benchmark may have on financial contracts.

Data used to set a benchmark will be subject to quality standards designed to ensure that it accurately reflects the reality that it is meant to measure. Where the benchmark is based on contributions, the data must come from reliable contributors, who are bound by a code of conduct for each benchmark.

Critical benchmark administrators will have to have a clear organizational structure to prevent conflicts of interest, and be subject to effective control procedures.

Administrators of non-significant benchmarks will be exempted from fulfilling certain conditions but will have to immediately notify the competent authority if the benchmark exceeds the €50 billion threshold.

Next steps

The benchmark regulation now needs to be officially approved by the Council. It will then be published in the EU Official Journal and enter into force on the day following that of its publication.

Share this article: