Benchmarks: Parliament tackles unfair deals between banks

The European Parliament today adopted legislation that tackles risks of manipulation of benchmarks, such as the LIBOR interest rate, reference exchange rates or commodity benchmarks. These manipulations have significantly decreased investors' confidence in financial markets. The contracts using such indexes can be valued at hundreds of billions of Euros and are used not only by financial institutions, but also firms and households.

A number of banks were penalised for participating in a cartel which was manipulating the benchmark interest rate level for the Euro and the Japanese Yen from 2005-2010. In December 2013, the European Commission fined eight of these international financial institutions a total of €1,494,302,000.

The EPP Group Rapporteur Luděk Niedermayer MEP commented: "We focused on increasing the quality of benchmarks used by companies as well as private investors for a number of financial contracts. The main challenge we faced in the Parliament was to find appropriate rules for both benchmarks for markets with turnovers of billions of Euros and benchmarks for small, often local markets. We have demanded strict proportionality in the Regulation. We also wanted to grant the possibility for EU users of benchmarks to benefit from high-quality non-EU benchmarks in the new regulative framework. Even though most of the supervision is provided at national level, an important role has been given to a 'European supervisor', namely the European Securities and Markets Authority (ESMA), in the draft Regulation."

Following the scandal, the European Union and other developed countries have significantly strengthened the Regulation, supervision and sanctions to prevent such illegal behaviour in the future. The Regulation endorsed by the European Parliament is one of the final steps in this line of measures and, unlike the previous measures, is focused on the role of benchmark administrators and increased transparency of indexes.

"I believe that we will arrive at a functioning but not too expansive Regulation which will restore the confidence of financial markets. Many companies, households, investors and financial institutions rely daily on EU benchmarks. They are used for business, trade, investments, risk management and providing or obtaining a loan", concluded Niedermayer, who is also a former Vice-Governor of the Czech Central Bank.

Benchmarks, e.g. benchmark interest rates and benchmarks describing the development of stock indexes or the price of commodities, are used for an enormous number of financial instruments. Financial instruments linked to benchmarks are essential for efficient risk management and risk reduction by firms and households.

Benchmark interest rates such as LIBOR are set daily for different currencies on the basis of interest rates of selected banks. In other words, the benchmark interest rate is a price which banks are willing to lend each other on the interbank market in a given currency. Banks providing data and an administrator calculating and setting rules for the benchmark both play a key role in the process of setting the benchmark. The risk of manipulation with data contributed by banks was addressed in previous legislation (Market Abuse Directive), while this Regulation focuses on the proper functioning of benchmark administrators and better transparency of benchmarks for users.