On March 31, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) adopted its report on benchmarks. Key issues include: The Economic and Monetary Affairs Committee backed a draft EU law to make the benchmarks more trustworthy. The text aims to clean up the benchmark-setting process by curbing conflicts of interest like those that led to the London Interbank Offered Rate (LIBOR) rigging scandals of recent years. The setting of critical benchmarks that affect more than one country would be overseen by a “college” of supervisors, including the European Securities and Markets Authority (ESMA) and other competent authorities.
Curbing critical conflicts of interest
The draft law aims to curb conflicts of interest in setting “critical” benchmarks, such as LIBOR and EURIBOR, which, by influencing financial instruments and contracts with an average value of at least €500 billion, could affect the stability of financial markets across Europe.
The final decision on whether a benchmark is “critical” would be up to ESMA and national authorities, but a national authority could also deem a benchmark administered within its territory to be critical if it has a “significant” impact on the national market.
Critical benchmark administrators would have to have a clear organizational structure to prevent conflicts of interest, and be subject to effective control procedures.
Critical benchmark-setting data would have to be verifiable and come from reliable contributors who are bound by a code of conduct for each benchmark. Contributors, such as banks contributing data needed to determine a critical benchmark, would have to notify the benchmark administrator and the relevant authority if they wished to cease doing so, but would nonetheless have to continue doing so until a replacement were found.
All benchmark administrators would have to be registered with the ESMA and would have to publish a “benchmark statement” defining precisely what their benchmark measures and to what extent it is reliable. They would also have to publish or disclose existing and potential conflicts of interest and meet accountability, record keeping, audit and review requirements.
The text will be put to a vote by Parliament as a whole to consolidate Parliament’s position before its three-way negotiations with EU member states and the European Commission.