Out-Law News 2 min. read
07 Jun 2013, 2:38 pm
The new Principles for Benchmark-Setting Processes in the EU (45-page / 621KB PDF) have been produced jointly by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA). They are intended to create a common EU-wide framework for activities related to setting benchmark rates, such as LIBOR and EURIBOR, and will also "help in the transition to any potential future EU legal framework", the regulators said.
"The EBA and ESMA believe that these Principles represent a sound interim solution for benchmark providers and users, ensuring that these important market indices are produced in a transparent and reliable manner," said EBA chair Andrea Enria.
The joint project was announced following allegations that major banks were involved in the manipulation of financial benchmarks. The European Commission is currently considering the need for broader structural change, including the potential introduction of criminal sanctions for actual or attempted manipulation of market reference rates. According to media reports, a draft European regulation on financial benchmarks also proposes transferring regulatory oversight of the LIBOR rate from the UK to ESMA.
"Regardless of any discord between London and Brussels over LIBOR reform or replacement, it is clear that global consensus on benchmarking is still a long way off," said banking law expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com.
The LIBOR and EURIBOR rates are daily references based on the interest rates at which banks can borrow unsecured funds from other banks, in London and the eurozone respectively. They are widely used as the basis for financial instruments including interest rate and currency hedging instruments, and to set the interest rate for syndicated loans. Interbank rates are used to price some $550 trillion worth of loans, securities and derivatives globally, according to the European Commission.
The principles are "aligned" with those currently being developed by the International Organisations of Securities Commissions (IOSCO), the regulators said. IOSCO sets standards for the regulation of securities markets around the world. Its financial markets task force, co-chaired by the UK's Martin Wheatley, published its own set of draft principles earlier this year.
Although closely based on a draft published by the regulators for consultation in January, the principles have been modified to include a requirement for continuity provisions, which will take effect if the data on which the benchmark is based dries up. The regulators have also included a recommendation that data used to calculate a benchmark should represent the underlying assets, prices or rates "accurately and reliably", and should be based on "observable transactions entered into at arm's length".
The document establishes a general framework covering all stages of the benchmark-setting process including data submission, administration, calculation, publication, the use of benchmarks and the continuity of benchmarks. Separate sections set out principles for benchmark administrators, submitters, calculation agents, publishers and users.
Under the guidance, benchmark methodology should be documented and subject to regular scrutiny and controls. The process of setting a benchmark should be governed by clear and independent procedures, details of which should be made available publicly, and should be backed by regulatory oversight and an appropriate sanctioning regime. Benchmarks should also be transparent and accessible to the public, with fair and open access to the rules governing the processes.
EBA and ESMA guidelines are not legally binding; however the regulators expect all market participants to follow them. In a statement, ESMA and the EBA said that it was important that all market participants adopt the principles "immediately". They will be reviewed after 18 months, although that time frame may be altered depending on related developments, the regulators said.