UPDATE 1-EU executive dilutes plan to centralise benchmarks oversight
* ESMA would not become sole regulator of top benchmarks
* Latest draft also scraps tough liability provisions
* Possibility of mandatory contributions maintained
* EU's Barnier to publish final draft on Sept. 18 (Adds more detail, background)
By Huw Jones
LONDON, Sept 11 (Reuters) - The latest draft of a EU law on regulation of market benchmarks such as Libor for interest rates has ditched a plan to centralise daily supervision under a body based in Paris, a European Commission document showed.
Banks are likely to be relieved that draft also no longer calls for an administrator of a benchmark, and any contributor to it, to be liable to any user for any loss suffered for failing to comply with the European Union law.
The draft - which also applies to benchmarks in commodities markets - was written by Michel Barnier, the financial services chief of the EU's executive Commission, and is due to be published on Sept. 18.
It is part of the bloc's response to three banks so far being fined for the rigging of Libor - the London Interbank Offered Rate - which is used to price products from home loans to credit cards worth $300 trillion.
In an earlier draft leaked in June, so-called critical benchmarks like Libor or commodities that are widely used across the 28-country bloc would have been supervised by the European Securities and Markets Authority, or ESMA, in Paris.
The idea annoyed Britain where most important benchmarks are based.
COLLEGES OF SUPERVISORS
The latest draft, seen by Reuters on Wednesday, backtracks on that proposal, saying "for critical benchmarks colleges of supervisors should be formed to enhance the exchange of information and ensure uniform authorisation and supervision".
This refers to setting up a group comprising national supervisors from countries where a benchmark is widely used, meeting to take joint decisions on authorisation and supervision of its compilation and use.
"The home supervisor will be doing the day-to-day supervision but there is an emergency brake to take this supervision up to a European level," one EU official said.
When a first draft of the law was leaked in June, Sharon Bowles, the British Liberal chairman of the European Parliament's economic and monetary affairs committee called the core role for ESMA "intrusive".
The latest text, which could yet be changed before being published next Wednesday, also appears to widen its scope to cover benchmarks that measure investment fund performance.
Royal Bank of Scotland and Barclays along with Swiss bank UBS, have been fined a total of $2.6 billion since last year over the rigging of Libor.
Libor is calculated based on quotes supplied from a range of banks. The latest draft maintains an earlier proposal to force banks and others to contribute quotes for the compilation of a "critical" benchmark like Libor if at least 20 percent of contributors have pulled out in any year.
Regulators have become worried that several banks have withdrawn from panels that supply quotes for compiling Libor and Euribor, the continental European counterpart rate.
The latest draft still allows for some judgement to be used when compiling benchmarks "in the absence of sufficient transaction data".
The U.S. Commodity Futures Trading Commission has called for Libor to be scrapped and replaced with a benchmark only based on market transactions but Britain has argued that markets sometimes freeze up, as they did in the financial crisis.
The European Parliament and EU member states will have to approve the draft before it become law, a process that typically involves changes and compromises. (Additional reporting by John O'Donnell in Brussels; Editing by Tommy Wilkes and Anthony Barker)