EU bids to regulate finance benchmarks

The European Union wants to regulate financial benchmarks that are used in transactions worth trillions of dollars globally, an effort to prevent market manipulations such as the one involving LIBOR, an interest rate banks use to borrow from each other.

The European Commission, the executive arm of the 28-nation European Union, on Wednesday unveiled draft legislation that tightens the financial instruments' oversight, increases transparency and introduces stiff fines for manipulations.

Under the proposal, national regulators and a coordinating European body are granted new powers to investigate possible rigging or conflicts of interests and can issue fines of up to 10 percent of a firm's revenue.

The London interbank offered rate, or LIBOR, is an average rate that measures how much banks expect to pay each other for loans. It underpins trillions of dollars in contracts around the world, including mortgages, bonds and consumer loans. As a result, its manipulation can cause significant losses to consumers and investors and distort the real economy.

"Market confidence has been undermined by scandals and allegations of benchmark manipulation," said EU Commissioner Michel Barnier, who is in charge of financial services. "Some banks lied about the going interest rates by manipulating the index," he added.

"Today's proposals will ensure for the first time that all benchmark providers have to be authorized and supervised; they will enhance transparency and tackle conflicts of interests," he added.

The LIBOR scandal emerged last year when authorities realised banks including Royal Bank of Scotland, Barclays and Switzerland's UBS were submitting false data to gain market advantages for their own trades.

U.S. and U.K. regulators fined RBS more than $US460 million for rate-rigging. Barclays' role led to a $453 million fine and the resignation of chief executive, Bob Diamond. Swiss bank UBS was fined $1.5 billion.

The Commission's proposal targets the LIBOR and EURIBOR interest rates, but its scope includes many other benchmarks that are used to reference financial instruments. It foresees particularly tough oversight of all benchmarks used to reference instruments worth more than 500 billion euros.

An initial idea to hand oversight of the benchmarks like LIBOR and EURIBOR to a European agency was thrown out amid resistance from Britain which is home to the bloc's biggest financial industry and concerns that the relatively small European ESMA agency doesn't have the resources for the job, according to EU officials.

However, if national regulators cannot reach an agreement between them on a particular case, the Paris-based ESMA, or European Securities and Markets Authority, will be able to decide by binding mediation, according to the proposal.