The EU Commission has proposed a draft regulation on indices used as benchmarks in financial instruments and financial contracts. It has issued an impact assessment and an executive summary of the impact assessment. The provision of benchmarks will become a regulated activity and will be supervised at national and EU level. Conflicts of interest will have to be avoided or (where that is not possible) managed. Benchmark providers and contributors will be obliged to ensure appropriate governance and controls over the benchmark setting process and that process is to be more transparent. Benchmarks will have to be assessed for suitability in respect of contracts with retail customers. Specific measures will apply regarding benchmarks which are "critical" because of their systemic importance.
The proposed regulation will now pass to the EU Parliament and the EU Council under the ordinary legislative procedure. The Commission expects this process to be completed by the end of the current parliamentary term and that the (by then adopted) regulation will be directly applicable throughout the EU one year later. The commission also released a FAQ.
The manipulation of the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) resulted in multi-million euro fines on several banks in Europe and the US, and allegations of manipulation of commodity (e.g. oil, gas and biofuel) and exchange-rate benchmarks are also under investigation. The prices of financial instruments worth trillions of euro depend on benchmarks, and millions of residential mortgages are also linked to them. The proposal covers all benchmarks that are used to reference financial instruments admitted to trading or traded on a regulated venue, such as energy and currency derivatives, those that are used in financial contracts, such as mortgages and those that are used to measure the performance of investment funds. Central banks that are members of the European System of Central Banks are out of scope as they have systems in place that ensure compliance with the objectives of this draft regulation. Benchmarks whose input data is provided by regulated venues are released from certain obligations to avoid dual regulation. The measures complement the Commission’s proposals to make the manipulation of benchmarks a market abuse offence which will be subject to fines.