EU seeks closer scrutiny of benchmarks in wake of Libor scandal

Financial benchmarks must be more closely supervised, with fines in place to dissuade any manipulation, the European Union’s executive proposed on Wednesday, in a bid to draw the lessons from the Libor interest rate-rigging scandal.

“Benchmarks are at the heart of the financial system,” said the EU’s market regulation commissioner, Michel Barnier.

“They are critical for our markets, as well as the mortgages and savings of millions of our citizens. Yet until now they have been largely unregulated and unsupervised,” he added.

There had been suspicions about rate-rigging during the 2008 financial crisis, but the scandal reached full force last year when Britain’s Barclays bank became the first to settle a fine for attempting to falsify Libor.

Swiss banking giant UBS was later also fined, while Germany’s Deutsche Bank is being probed too for rigging the Libor rate – a benchmark set for millions of daily financial transactions and a reference for everything from mortgages to credit cards.

Investigators suspect that lenders understated the interest rates that are used to calculate Libor, since high rates are generally interpreted as a sign of financial weakness in a banking institution.

EU competition regulators are also investigating whether benchmark cartels existed involving Libor and Euribor, the interest rate used by European banks.

“Benchmark manipulation can cause significant losses to consumers and investors, distort the real economy, and undermine market confidence,” the European Commission noted.

The EU’s executive pointed to estimates that financial instruments and contracts referenced by benchmarks have a total value exceeding €1,000 trillion ($1,335 trillion).

The commission has already brought forward proposals seeking to criminalise the manipulation of financial benchmarks.

But it went a step further on Wednesday by suggesting that prior authorisation should be required for providing benchmarks; that “colleges of supervisors” working with the European Securities and Markets Authority monitor key benchmarks; and that “sufficient and accurate data” be used to set benchmarks in a transparent way.

It also spelled out what the fines should be for benchmark manipulation, calling for sanctions on individuals to reach up to €500,000 and for sanctions on companies to reach up to €1 million or 10 per cent of their total turnover – whichever is higher.

The commission proposals would have to be approved by EU member states and the European Parliament to become law.

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