New EU Rules on Benchmarks
Today, the European Commission published its proposal for a Regulation on indices used as benchmarks in financial instruments and financial contracts. The European Commission’s proposal comes in light of recent scandals of manipulation on the LIBOR and EURIBOR indices. Indices represent the change in a predetermined basket of underlying data, which when its price is used as a reference for a financial instrument, becomes a benchmark.
The Benchmarks Regulation comes in conjunction with earlier proposals for stricter rules, tabled in the Market Abuse Regulation (MAR) and the Market Abuse Directive (MAD). These are looking to implement a raft of new measures to tighten rules and better control the manipulation and abuse of indices by market participants in the European Union. Although the latter two legislative proposals change the sanctioning regimes to better define administrative or criminal sanctions, the Benchmarks text aims to tackle possible problems at their source; that is, the governance and controls of the benchmarks process by administrators and contributors.
The European Commission aims to improve these controls to mitigate conflicts of interest between administrators and participants, improve the quality of data used, and ensure the adequate foundations for benchmark-use, by giving the relevant competent authority the power to order contributors to supply data. The eventual objective is to better protect consumers and investors with the added transparency that the following measures provide, but also by improving and setting adequate rights of redress and assessments of suitability for the latter.
The proposal will apply to all published benchmarks referencing financial instruments and that are traded on a regulated venue, as well as those that measure the performance of an investment fund. It will provide an adequate set of rules designed for the governance and control of administrators that include:
- An oversight function of its benchmarks
- A control framework ensuring adequate application of the Regulation
- An accountability framework ensuring the administrator implements adequate record keeping, auditing and complaints processes in compliance with the Regulation