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Benchmarks: restoring confidence in the financial markets

Plenary Session Article - Economic and monetary affairs18-05-2015 - 13:21
 
House mortgage concept image © BELGA_EASYFOTOSTOCK   New EU rules set out to improve the transparency of benchmarks used by the financial markets © BELGA_EASYFOTOSTOCK

Benchmarks are widely used to track market developments, however financial scandals involving benchmarks such as Libor and Eurobibor have shown that they are susceptible to manipulation.On 18 May MEPs debate new rules to ensure the full transparency of all benchmarks used in the EU and vote on them the next day. Dutch Alde member Cora van Nieuwenhuizen, who wrote the report with recommendations, said: “It is a major step forward in ensuring the future robustness and accuracy of benchmarks.”


What benchmarks are


Benchmarks are indices that measure the performance of something, from interest rates at the interbank market in London (Libor) or in the euro zone (Euribor), to commodities such as gold or crude oil and foreign exchange rates (euro against dollar or British pound against dollar). They are often used as references in financial and commercial contracts, for example a mortgage interest rate may be determined as the Euribor rate plus a certain premium.

 

Manipulation of benchmarks


For benchmarks to serve their purpose, they have to be seen as reliable and neutral. However, their daily value are often 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.


New legislation


The Parliament’s report seeks to clearly distinguish between critical, or systemically important, and less critical benchmarks in order not to needlessly increase the work of administrators of smaller indices. However, critical benchmarks that track a large volume of trade will have to comply with principles set out by the International Organisation of Securities Commissions (IOSCO) about how they are produced and calculated. They will be overseen by a college of supervisors chaired by the European Securities and Markets Authority (ESMA) and comprising national supervisors.


The MEPs already adopted tougher sanctions for financial market abuse in 2013.


The debate on the financial benchmarks is the first item on the plenary agenda on Monday afternoon. Watch it live from 17.00 CET.


This article was originally published on 30 March 2015.

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REF. : 20150328STO38902
 
 
   
Learning the lessons from the Libor scandal
 

In the wake of the Libor scandal, MEPs have backed measures to ensure the reliability of benchmarks used to price loans, mortgages and financial transactions.