EU parliament requires transparency, robustness and accuracy on regulatory
financial benchmarks
Legislators all over the world continue to introduce
new financial regulatory compliance rules. This time, it is the European
Union-European Parliament that is set to make it harder to manipulate financial
benchmarks on London (Libor) or in the euro zone (Euribor). These are used
as references in financial and commercial contracts, together with other
parameters such as prices of gold or crude oil and foreign exchange rates.
The new regulation would introduce three
reference categories with a strict regime for systemically important benchmarks
(Libor and Euribor). All benchmark administrators would have to be authorised
by a competent authority or registered, even if they provide only non-significant
parameters. Data used to set the benchmark will be subject to quality
standards. Critical benchmark administrators would have to have a clear
organisational structure to prevent conflicts of interest.
What are benchmarks?
Benchmarks are indices such as interest rates on interbank loans in London
(Libor) or in the euro zone (Euribor), they are often used as references
in financial and commercial contracts, together with other benchmarks
such as prices of gold or crude oil and foreign exchange rates (such as
the euro against the dollar).
Manipulation of benchmarks
Financial scandals involving benchmarks such as Libor and Euro LIBOR are
susceptible to manipulation. The new rules will ensure transparency of
all benchmarks criteria used in the EU for robustness and accuracy of
parameters. Banks engaged in manipulation can increase their profits or
cut their losses from investments linked to those benchmarks. In other
situations financial institutions, banks or pension funds can avoiding
costly recapitalisation and regulatory intervention on references linked
to benchmarks;
- A mortgage interest rate may be determined as the Euribor rate plus
a specified premium.
- Value of financial derivatives - which are bets on how financial
products and indices from mortgages to interest rates will behave
in the future
Cash cow
For benchmarks to serve their purpose, they have to be both reliable and
neutral. However, their daily value is determined by the actions of a
few big market players. In 2012-2013, authorities in Europe and the US
carried out investigations into the manipulation of Libor and Euribor.
In December 2013, the European Commission fined eight banks a total of
€1.7 billion for taking part in illegal cartels seeking to influence Libor
and Euribor. Several more banks were fined for similar offences in 2014.
Find more details by reading Parliament's press release. http://www.europarl.europa.eu/news/en/news-room/20151123IPR03987/MEPs-strike-deal-on-robust-and-transparent-benchmark-setting
