A benchmark is an index (statistical measure), calculated from a representative set of underlying data, that is used as a reference price for a financial instrument or financial contract, or to measure the performance of an investment fund.

The manipulation of the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR) has resulted in multi-million euro fines on several banks in Europe and the US, and allegations of manipulation of commodities (e.g. oil, gas and biofuel). Given that the prices of financial instruments worth trillions of euro depend on benchmarks, and millions of residential mortgages are also linked to them, their manipulation can cause significant losses to consumers and investors, distort the real economy, and undermine market confidence.

In this context, the Commission proposed in September 2013 a draft regulation on indices used as benchmarks in financial instruments and financial contracts (the "Benchmarks Regulation"). The Regulation was published in the Official Journal on 29 June 2016, and applied as of 1 January 2018. It introduced a common framework to ensure the accuracy and integrity of indices used as benchmarks in financial instruments and financial contracts, or to measure the performance of investment funds in the Union.

The Regulation provides that by January 2020, the Commission should review and submit a report to the European Parliament and to the Council on this Regulation and in particular on (a) the functioning and effectiveness of the critical benchmark, mandatory administration and mandatory contribution regime; (b) the effectiveness of the authorisation, registration and supervision regime of administrators and (c) the functioning and effectiveness of Article 19(2) (commodity benchmarks as critical benchmarks), in particular the scope of its application.

On 24 July 2020, the European Commission published a proposal for a Regulation amending the Benchmark regulation. The main preoccupations behind the proposal are

• the phasing-out of the London Interbank Offered Rate (LIBOR) index, which is likely to create problems for those contracts that have been concluded before the adoption of the Benchmark Regulation and may lack any contractual “fall-back” provisions that deal with the permanent discontinuation of an index;
• the fact that, the reference to foreign exchange spot rates in EU-traded currency forwards or swaps will no longer be allowed after the end of the transition period in article 51 of the Benchmark Regulation, resulting in the loss of access to certain hedging tools against the volatility of currencies, that are not freely convertible into their base currency.

To tackle these challenges, the proposed amendments would (i) empower the European Commission to designate a statutory replacement rate that would replace the reference to LIBOR and (ii) exempt specified third-country spot foreign exchange benchmarks from the scope of the Regulation where they fulfil certain criteria.

On 18 September 2020, the European Central Bank published its opinion on the Regulation Proposal. 

On 7 October 2020, the Council published its mandate for negotiations with the European Parliament.

The European Economic and Social Committee adopted its opinion on 27 October 2020. 

On 19 November 2020, the Committee for Economic and Monetary Affairs of the European Parliament adopted its draft report. The draft report was tabled for plenary. Meanwhile, the decision was taken to open interinstitutional negotiations. On 23 November, the Committee decision to enter into interinstitutional negotiations was announced in plenary and on 25 November it was adopted by plenary. 

In accordance with the provisions of Article 294 of the TFEU and the Joint declaration on practical arrangements for the codecision procedure, a number of informal contacts have taken place between the Council, the European Parliament and the Commission with a view to reaching an agreement on this file at first reading.
In this context, the rapporteur, presented a compromise amendment (amendment number 2) to the abovementioned proposal for a Regulation on behalf of the Committee on Economic and Monetary Affairs. This amendment had been agreed during the informal contacts referred to above.

On 10 December, the text agreed at 1st reading interinstitutional negotiations was approved by the ECON committee.

When it voted on 19 January 2021, the EP plenary adopted the compromise amendment (number 2) to the proposal for a Regulation. The Commission's proposal, as thus amended, constitutes the Parliament's first-reading position, which reflects what had been previously agreed between the institutions.

The Act was adopted by the Council on 2 February 2021 and it was published in the Official Journal of the EU on 12 February.

References:

•  European Parliament Legislative Observatory (OEIL) - Exemption of certain third country foreign exchange benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation   
• European Commission Communication ‘Commission Work Programme 2020 – A Union that strives for more’ COM(2020) 37 final
• European Commission Work Programme 2020 Annex I: new initiatives
• European Commission, Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1011 as regards the exemption of certain third country foreign exchange benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation, Brussels, 24.7.2020, COM(2020) 337 final, 2020/0154 (COD)

Author: Angelos Delivorias, Members' Research Service, legislative-train@europarl.europa.eu