EU Parliament to back jail sentences for Libor cheats

Fri Oct 5, 2012 11:18am EDT

* Traders rigging Libor would face jail

* Some lawmakers may back minimum sentences for abuses

* Curb on high-frequency trading to be amended

By Huw Jones

LONDON, Oct 5 (Reuters) - Traders found guilty of rigging Libor and other financial market benchmarks would face jail from next year under a cross-party deal to be voted through next Tuesday in the European Parliament.

The Parliament's economic affairs committee is due to back new rules that would bring manipulation or insider trading involving benchmarks under the EU's market abuse rules.

The Parliament may back minimum criminal sentences for market abuse of five years for serious crimes and two years for lesser breaches but some countries are likely to oppose this as it touches on national sovereignty.

Arlene McCarthy, the committee's British centre-left member who is steering the measure through the parliament, said fines had failed to change culture in banking.

"We are therefore extending the law to, for the first time, impose tough EU wide criminal sanctions and jail time," McCarthy said in a statement. "We have also extended the scope to cover all benchmarks and indices as the Libor manipulation shows that abuse is still rife in the banking sector."

British bank Barclays was fined a record 290 million pounds in June to settle allegations that it manipulated Libor - the London Interbank Offered Rate - an interest rate used as a basis for pricing more than $300 trillion products from home loans to credit cards.

A cross-party compromise in the Parliament would apply the EU's market abuse rules to interest rates, currencies, benchmarks, interbank rates like Libor, indices and financial instruments or any interest rate-based derivative contract.

"I am confident that the full committee will back a tough approach to abuse and manipulation which, as the Libor crisis showed, continues to undermine confidence and integrity in financial markets," McCarthy said.

The UK Financial Services Authority still has no direct power over Libor and used breaches of principles as a basis for the action against Barclays. The UK watchdog has also outlined plans to overhaul Libor, which is meant to reflect rates at which banks borrow from one another.

The Libor rigging also did not come under the EU's existing market abuse rules which the bloc is now revising.

The Parliament will sit down with EU states after the vote to agree a final legal text. EU member states are also set to back making benchmark rigging illegal.

FAST TRADING CURB

The Parliament is also going to amend plans to curb the activities of so-called high-frequency traders who bombard markets with many unfilled orders.

These dealers, armed with the latest computer software, can dart in and out of markets to exploit tiny price differences. Policymakers say it creates volatility but traders say it boosts trading volume.

It will ditch a specific order-to-execution ratio that would trigger higher trading fees on these fast-moving traders.

McCarthy had proposed a ratio of 250:1 but other policymakers feared this could easily be overtaken by rapid advances in trading technology. The European Commission may get powers to set the ratio which can then be amended as circumstances change.

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