The European Commission (EC) has published draft proposals in the form of a Regulation, which covers a broad range of benchmarks in addition to standard interest rate benchmarks, such as LIBOR.
The aim of the proposed Regulation is to "restore confidence in the integrity of benchmarks" which the EC intends to achieve by ensuring that benchmarks are not subject to conflicts of interest, that they are used appropriately and that they reflect the actual market or economic reality they are intended to measure.
The Regulation covers all benchmarks that are used to reference financial instruments admitted to trading, or traded on a regulated venue, such as:
- energy and currency derivatives;
- those that are used in financial contracts, such as mortgages; and
- those that are used to measure the performance of investment funds.
The main changes introduced by the Regulation include:
- benchmark providers will be regulated and supervised, as will contributors who are already regulated at the national and European level (e.g. financial institutions);
- conflicts of interest will need to be managed and benchmark administrators will need to provide a code of conduct that clearly sets out the obligations and responsibilities of benchmark input data contributors;
- the providers of benchmarks and contributors to benchmarks will need to ensure appropriate governance and controls over the benchmark-setting process;
- improved transparency of the data used to calculate the benchmark and of the calculation method; and
- banks will need to asses the suitability of benchmarks for retail contracts, such as mortgage agreements for example.
Enforcement of the Regulation
In the event of a breach of the provisions of the Regulation, local regulators will have the power to impose administrative measures and sanctions. In order to prevent benchmark manipulation, which is the key driver of the Regulation, regulators will have the power to:
- Access documents.
- Request information from firms.
- Carry out on-site inspections or investigations.
- Require that any practice contrary to the provisions of the Regulation cease.
Regulators will also have the ability to fine individuals up to €500,000 and firms up to either €1 million or 10% of their total annual turnover (whichever is greater). Individual member states will also have discretion to impose higher maximum sanctions under national law.
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