Brussels-based interest rate index Euribor and its London counterpart Libor are currently under investigation by the European Commission to examine whether there was collusion amongst member banks in an attempt to rig interest rates. 

In response to the initial findings of these investigations, the Commission published, in July of this year, measures to bring the manipulation of benchmarks within the scope of the proposed directive replacing the Market Abuse Directive, and to ensure that manipulation of markets becomes a criminal offence.

In September, the European Commission published a consultation document seeking views on a possible framework for the regulation of the use and production of indices serving as benchmarks in financial and other contracts. This consultation almost certainly heralds the end of self-regulation, a hands-off approach which led to a culture of index manipulation in the case of Libor. This culture has led to heavy fines being imposed on both Barclays Bank and UBS after regulators found that each bank had attempted to manipulate Libor rates between 2005 and 2010.

The consultation examined:

• The definition of market indices and benchmarks, their purposes, the methodology behind their production and the persons who produce them
• Governance and transparency issues concerning the calculation of benchmarks, including data usage and persons contributing such data
• The purpose and use of benchmarks
• The ways in which private and public bodies provide benchmarks
• The potential impact of regulating benchmarks, including the international issues that will need to be considered

A number of regulatory authorities and market participants have issued responses to the consultation paper. One of the most significant is the response issued by the European Systemic Risk Board (“ESRB”). The following are the key points made by the ESRB:

• A credible regulatory framework for the functioning and oversight of reference benchmarks needs to be established urgently. Governance-enhancing measures could have the benefit of immediately increasing markets’ confidence in the integrity of benchmarks. These could be introduced together with the provision of a clear roadmap regarding the regulation and supervision of systemically important interest rate benchmarks.
• Re-establishing confidence in the medium term requires a transition to more transparent inter-bank markets.
• The possible transition to a new regime, and the potential co-existence of several regimes during transition raises the issue of market segmentation risk. The implications, particularly at a time when financial markets still appear fragile, need to be carefully considered.
• Market participants should be encouraged to carefully consider their use of benchmarks. In particular, consideration should be given to whether financial markets would be better served by greater use of a diversity of more tailor-made benchmarks.
• The response sets out the characteristics of reliable and robust benchmarks that the ESRB considers desirable from a macro-prudential perspective.

For further information, please contact one of the key contacts listed above or your usual contact in our Asset Management and Investment Funds Team.