The European Commission has proposed draft legislation in a bid to restore confidence in the integrity of benchmarks.  Benchmarks are widely used as a reference price for financial instruments or financial contracts, or to measure the performance of an investment fund.

A number of recent high profile multi-million euro settlements made with several banks, concerning the manipulation of LIBOR, EURIBOR and TIBOR, have highlighted the importance of benchmarks and their vulnerabilities. While the Commission has separately proposed market abuse and criminal sanctions reforms, it concluded that sanctioning alone does not remove the risk of manipulation arising from inadequate governance of the benchmark process where conflicts of interest and discretion exist.
The main objective of the proposed legislation is to ensure that benchmarks produced and used in the EU are robust, reliable, representative, fit for purpose and not subject to manipulation. The proposed legislation aims to:

• Enhance governance and controls over the benchmark-setting process
• Limit and manage conflicts of interests at providers of and contributors to benchmarks
• Improve the quality of data and methodologies used in the determination of benchmarks
• Ensure adequate protection for investors and consumers through improved transparency and suitability assessments

The supervision of benchmark administrators will be carried out by the national competent authorities, under the coordination of ESMA.  Where the benchmark is deemed to be critical, a college of national supervisors, including ESMA, will be established to take key decisions concerning the supervision of the benchmark administrator (to include authorisation and sanctions).  A benchmark is deemed to be critical when the majority of contributors to it are supervised entities and where the benchmark is used as a reference for financial instruments having a notional value of at least €500 billion.  If such a benchmark were to cease to be provided, it would have significant adverse impact on financial stability and the orderly functioning of markets.

The draft legislation has been passed to the European Council and Parliament for their consideration.

Contributed by Michelle McGrath