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Regulation

EU to tighten control of benchmarks in wake of Libor scandal

The EU Commission has proposed new rules on how commodity-price and interest-rate benchmarks are set. The legislation follows massive manipulations, but is controversial among EU lawmakers and the finance industry.

The draft law was aimed at curbing benchmark manipulation which could cause significant losses to consumers and investors, as well as undermine confidence in financial markets, the EU Commission said Wednesday as it released the new legislation.

Noting that setting benchmarks for commodities and interest rates had been largely unregulated and unsupervised, EU Regulation Commissioner Michel Barnier said: "They are critical for our markets, as well as for the mortgages and savings of millions of our citizens."

Barclays fined for interest rate manipulation

The legislation comes as an EU response to the rigging of the London Interbank Offered Rate (Libor), which came to light last year. Employees at a number of major banks were suspected of providing false information about Interbank lending rates under efforts to improve their investment positions. The fraud was massive, and has already entailed total fines of $2.6 billion (1.9 billion euros) to Royal Bank of Scotland, Barclays and Swiss bank UBS. Currently, an investigation is under way into whether benchmark cartels also existed involving Euribor, the interest rate used in European Banks.

Softened rules stir dispute

The draft law, put forward by the European Commission, seeks prior authorization and permanent supervision of benchmark providers. This is to be done through a college of supervisors from different countries in collaboration with EU regulators of the European Securities and Markets Authority (ESMA).

Moreover, the new rules propose fines for benchmark manipulation in the range of 500,000 euros for individuals and up to 1 million euros or 10 percent of revenues for financial institutions. In addition, participants in benchmark setting are to be required to sign a code of conduct.

The EU Commission, however, stopped short of proposing bank liability should the benchmark prove misleading – a move seen by critics as prompted by industry concerns.

Describing the draft as disappointing, German member of the EU parliament Sven Giegold claimed that the commission had caved in to Britain's demand to keep Libor control in London.

"The national supervisors didn't catch previous manipulation, and I would expect more independence from a European Authority," he told Reuters news agency.

The Commission proposal not only seeks to curb interest rate fixing, but also aims at manipulations of commodities benchmarking. In this sector, EU regulators have launched an investigation recently, following raids on the offices of oil giants Shell, BP and Statoil.

uhe/mz (Reuters, dpa, AFP)

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