The European Commission has released a proposal for regulating benchmarks, arguing that the manipulation of indices could harm investors including pension funds, markets and the wider economy.
The proposal, which comes a year after Brussels first launched a consultation on the use of financial indices serving as benchmarks, aims to ensure “any abuse is properly sanctioned” and improve the way benchmarks are produced and used.
According to the Commission, the proposal will cover benchmarks made available to the public and used to reference financial instruments, listed or traded on a regulated venue, or financial contracts in the EU.
It will also cover benchmarks used to measure the performance of an investment fund.
However, the Commission stressed that benchmarks provided by central banks would be exempt, as they already have systems in place that ensure compliance with the objectives of the draft regulation.
“Where a benchmark is not robust and is subject to the risk of manipulation, as was the case with LIBOR and EURIBOR, its use may harm investors, markets and the wider economy,” it said.
“In particular, consumers will be harmed when their mortgage repayments or the returns from pension funds in which they invest their savings are altered as the result of the manipulation or unreliability of the benchmarks to which they are referenced.”
Internal market commissioner Michel Barnier added that benchmarks were at the heart of the financial system and critical for markets, as well as the “mortgages and savings of millions of our citizens”.
“Yet, until now,” he said, “they have been largely unregulated and unsupervised. Market confidence has been undermined by scandals and allegations of benchmark manipulation. This cannot go on – we must rebuild trust.”
If the European Parliament and the Council approve the proposal, the supervision of benchmark administrators will be carried out by the national authorities in each EU member state, under the coordination of the European Securities and Markets Authority (ESMA).
The Commission added: “Where a benchmark is deemed to be critical, a college of national supervisors including ESMA will be established and take key decisions concerning the supervision of the benchmark administrator.
“Competent authorities will be empowered to impose administrative measures and sanctions in cases of breach of this regulation.”
The benchmark proposal will now be sent to the European Parliament and the Council for approval before becoming law.
The Commission expects the process to be completed by the end of this year and the rules to come into effect by 2014.