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EU parliament requires transparency, robustness and accuracy on regulatory financial benchmarks

Legislators all over the world continue to introduce new financial regulatory compliance rules. This time, it is the European Union-European Parliament that is set to make it harder to manipulate financial benchmarks on London (Libor) or in the euro zone (Euribor). These are used as references in financial and commercial contracts, together with other parameters such as prices of gold or crude oil and foreign exchange rates.

The new regulation would introduce three reference categories with a strict regime for systemically important benchmarks (Libor and Euribor). All benchmark administrators would have to be authorised by a competent authority or registered, even if they provide only non-significant parameters. Data used to set the benchmark will be subject to quality standards. Critical benchmark administrators would have to have a clear organisational structure to prevent conflicts of interest.

What are benchmarks?
Benchmarks are indices such as interest rates on interbank loans in London (Libor) or in the euro zone (Euribor), they are often used as references in financial and commercial contracts, together with other benchmarks such as prices of gold or crude oil and foreign exchange rates (such as the euro against the dollar).

Manipulation of benchmarks
Financial scandals involving benchmarks such as Libor and Euro LIBOR are susceptible to manipulation. The new rules will ensure transparency of all benchmarks criteria used in the EU for robustness and accuracy of parameters. Banks engaged in manipulation can increase their profits or cut their losses from investments linked to those benchmarks. In other situations financial institutions, banks or pension funds can avoiding costly recapitalisation and regulatory intervention on references linked to benchmarks;
  • A mortgage interest rate may be determined as the Euribor rate plus a specified premium.
  • Value of financial derivatives - which are bets on how financial products and indices from mortgages to interest rates will behave in the future

Cash cow
For benchmarks to serve their purpose, they have to be both reliable and neutral. However, their daily value is determined by the actions of a few big market players. In 2012-2013, authorities in Europe and the US carried out investigations into the manipulation of Libor and Euribor. In December 2013, the European Commission fined eight banks a total of €1.7 billion for taking part in illegal cartels seeking to influence Libor and Euribor. Several more banks were fined for similar offences in 2014.

Find more details by reading Parliament's press release. http://www.europarl.europa.eu/news/en/news-room/20151123IPR03987/MEPs-strike-deal-on-robust-and-transparent-benchmark-setting