On 18 September 2013, the European Commission (the Commission) published a draft proposal for a regulation on indices used as benchmarks in financial instruments and financial contracts (the Regulation). The Regulation will complement the Commission and the European Parliament’s agreement in June 2013 to categorise benchmark manipulation as a market abuse offence subject to strict administrative fines or criminal sanctions under the forthcoming market abuse regulation and the directive on criminal sanctions for market abuse.

According to the Commission, the proposed Regulation seeks to restore confidence in indices and benchmarks following the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) scandals in 2012. In particular, the Commission aims to improve the reliability and integrity of benchmarks by preventing their manipulation and clarifying the remit of supervisory bodies to improve the detection and prevention of manipulation. Furthermore, it seeks to increase transparency in the benchmarks, and introduces fines for cases of manipulation. As such, the Regulation will require benchmark providers, who are currently largely unregulated and unsupervised, to seek authorisation and adopt pro-active measures to tackle conflicts of interest.


Benchmarks are indices commonly used as references for financial instruments and contracts, based on representative sets of underlying data. The LIBOR and EURIBOR scandals demonstrated the vulnerabilities of benchmarks to manipulation, and the significance of the markets involved. On the basis that financial instruments and residential mortgages worth trillions of euros are linked to benchmarks, the Commission has identified benchmark manipulation as representing a significant threat to investors, consumers and market confidence generally.

In September 2012, the Commission launched a public consultation, seeking the views of market participants on issues relevant to the possible regulation of benchmarks. This consultation closed in November 2012 and the Commission published a summary of the responses in February 2013. The Commission concluded that more concerted regulation was necessary in order to improve the functioning and governance of benchmarks in the European Union.

The proposal that appeared in an early draft of the Regulation to put LIBOR under the direct control of the European Securities and Markets Authority (ESMA) has been removed from the 18 September draft. Stricter liability provisions were also removed. Nevertheless, the Regulation remains sufficiently broad with regards to scope and aim.

Scope of the Regulation

Benchmarks that will fall under the scope of the Regulation include those that relate to

  • Interest rates, e.g., EURIBOR
  • Commodities
  • Referencing financial instruments traded on a regulated venue, e.g., energy derivatives
  • Financial contracts, e.g., mortgages
  • Measuring investment fund performance
  • Any other type of financial instrument.

The key elements of the Regulation include the following:

  • The provision of benchmarks will become a regulated activity requiring benchmark providers to obtain prior authorisation and to undergo supervision at a national and European level.
  • Administrators must avoid conflicts of interest where possible, or, as a minimum, “manage them adequately”. A legally-binding code of conduct will be required by administrators for each benchmark.
  • Benchmark providers must use data that is sufficient, accurate and from reliable sources. Verified estimates may only be used if transaction data is not available.
  • Data used in benchmark calculations, and the calculations themselves, must be transparent. Benchmarks must also include an explanatory statement detailing what they aim to measure, together with any weaknesses in the calculations.
  • Critical benchmarks, i.e., benchmarks referencing financial instruments with a notional value of at least €500 billion, where the majority of contributors are supervised entities, will be supervised by colleges of supervisors including ESMA. These supervisors will have the power to resolve disagreements by binding mediation.
  • Third country providers will be supervised in their respective jurisdictions. Subject to satisfying certain conditions, such as the provision of third country equivalence decisions by the Commission, and the establishment of cooperation arrangements with the relevant third country competent authorities by ESMA, third country benchmarks may be used by supervised entities in the European Union. Third country benchmarks may, however, be banned if they are subject to less stringent regulatory procedures than European benchmarks.
  • Competent authorities will have the power to request information from benchmark providers, access documents, carry out on-site investigations and prevent benchmark from carrying out any activities in contravention of the Regulation.
  • In the case of breaches, competent authorities will have the power to impose fines on individuals of up to €500,000, and on firms whichever is the greater of €1 million or 10 per cent of annual turnover. Member States may increase these fines at their discretion. 

Next Steps

The Regulation will now be considered by the European Parliament and the Council of the European Union, with trilogue discussions set to start in 2014. The Commission will then publish the final proposal for the Regulation in due course.

Although some elements of the text are likely to change, the key provisions, including the scope of the coverage of the Regulation and enforcement/sanction provisions, are unlikely to alter materially. The Regulation is expected to be adopted before the end of the current EU Parliamentary mandate (before May 2014), with the specific rules coming into effect 12 months after its adoption.

Robert Lister