* ESMA wants benchmarks based on "observable transactions"
* New ESMA guidelines a stop gap before new EU law
* EU law would be tougher on financial, commodity indices
* ESMA being lined up to regulate top benchmarks
By Huw Jones and John O'Donnell
LONDON/BRUSSELS June 6 European Union regulators
published guidelines on Thursday to stop banks rigging Libor and
other market benchmarks in an interim measure before a more
far-reaching EU law comes in.
The draft law, to be published in a few weeks, would propose
shifting the supervision of Libor from London to Paris.
Two British banks, Royal Bank of Scotland and
Barclays, and Swiss bank UBS, were fined a
total of $2.6 billion for rigging Libor, with other banks set to
be punished for similar abuses.
Libor - the London Interbank Offered Rate - is used as a
basis for pricing financial products from home loans to credit
cards worth over $300 trillion globally.
"The final principles now give clarity to benchmark
providers and users in the European Union about what is expected
of them when engaged in this critical market activity," said
Steven Maijoor, chairman of the European Securities and Markets
Authority (ESMA), the Paris-based pan-EU watchdog.
The principles were drawn up with the European Banking
Authority provide a framework for administrating, calculating,
publishing and submitting quotes for compiling all benchmarks.
Draft guidelines were published in January and Thursday's
final version also requires benchmark providers to have
contingency plans if data for compiling the index dries up.
Another new element is that data used to compile a benchmark
should represent the underlying asset, such as a commodity or
interest rates and based on "observable transactions entered
into at arm's length."
This aims to try and satisfy regulators like Gary Gensler,
head of the U.S. Commodity Futures Trading Commission, who wants
Libor scrapped and replaced with a benchmark based on market
transactions, a step other regulators say is not feasible in the
Libor is based on rates at which banks think they can borrow
from each other but in the aftermath of the Lehman Brothers
collapse in 2008, interbank lending froze but Libor rates were
Maijoor said the immediate adoption of the principles will
help restore confidence in financial benchmarks and prepare the
way for future legislative changes.
NEXT STOP PARIS
EU financial services chief Michel Barnier will in coming
weeks publish the draft law that will incorporate all the
principles which were originally agreed at the global level.
In an annex to the draft law, Barnier will also set out a
tougher regime for financial and commodities benchmarks.
The draft law is expected to propose that ESMA directly
regulates such benchmarks that are deemed to be of pan-EU
critical importance to markets, with Libor and its continental
equivalent Euribor almost certainly falling into this category.
Some widely used oil benchmarks could also be included and
this part of the market is already being probed by Brussels.
"Benchmarks have a global relevance," an official familiar
with Barnier's proposal said. "There should be a European
dimension to their supervision."
Libor was not regulated until Britain's new Financial
Conduct Authority was set up in April this year and if approved,
its supervision of the interest rate would shift to Paris.
The ESMA principles do not broach the issue of whether banks
should be compelled to contribute to interest rate benchmarks to
ensure there are enough quotes to make them representative.
Several banks have pulled out of panels that compile Libor and