EU prepares for clampdown on Libor-style indexes

Wed Sep 5, 2012 8:17am EDT
 
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By John O'Donnell

BRUSSELS (Reuters) - The EU executive opened talks with the financial industry on Wednesday on how to impose curbs on financial market benchmarks and indexes, marking the start of a regulatory clampdown following rigging in London's inter-bank lending market.

The European Commission spelt out its concerns about the indexes that are used to set borrowing rates and other prices in financial and commodity markets. In parallel, the Commission's antitrust arm is investigating the Libor (London Interbank Offered Rate) and Euribor benchmarks.

"The international investigations underway into the manipulation of Libor have revealed yet another example of unacceptable behavior by banks," Michel Barnier, the European commissioner in charge of regulation, said in a statement.

"Wider work is required to regulate how indices and benchmarks are compiled, produced and used."

The Commission, which drafts laws for the bloc's 27 member states, issued a public questionnaire that is likely to be the precursor to stricter curbs for financial benchmarks. Officials flagged the risk of granting too much freedom to the compilers of indexes.

INTEGRITY

In particular, the questionnaire cited the Libor rate, which is set by estimates from large banks of how much they believe they have to pay to borrow from each other, and then used to determine interest rates on over $500 trillion of contracts globally.

"The integrity of indices is vulnerable whenever discretion is exercised," officials wrote in the report. "If an index is based on actual transaction or other verifiable data, the contributor of the data does not generally need to exercise discretion."   Continued...

 
European Commissioner for Internal Market and Services Michel Barnier arrives for a meeting of the European People's Party (EPP), ahead of a two-day European Union leaders summit, in Brussels June 28, 2012. REUTERS/Sebastien Pirlet