Benchmarks: restoring confidence in the financial markets

Benchmarks are widely used to track market developments. As many financial transactions are linked to them, they can determine who benefits from investing in a particular financial product. However, financial scandals involving benchmarks such as Libor and Eurobibor have shown that they are susceptible to manipulation.On 7 April the economic affairs committee votes on new rules to ensure the full transparency of all benchmarks used in the EU.

Watch the committee meeting live online on Thursday 7 April from 9.00 CET.

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 such as interest rates on interbank loans in London (Libor) or in the euro zone (Euribor), They are often used as references in financial and commercial contracts, together with other benchmarks such as prices of gold or crude oil and foreign exchange rates (such as the euro against the dollar).

For example a mortgage interest rate may be determined as the Euribor rate plus a certain premium. Also, the value of financial derivatives – which are bets on how financial products and indices from mortgages to interest rates will behave in the future – is strongly linked to benchmarks. The latter largely determine if investors (banks being among the largest) will make or lose money from them.

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.

Banks engaged in manipulation to increase their profits or to cut their losses from investments linked to those benchmarks, which happened at the expense of other organisations, such as pension funds. Banks also appeared healthier than they were, thereby avoiding costly recapitalisation and regulatory intervention.

Click here for more news from the European Parliament.

New legislation

The new regulation would introduce three benchmark categories with a strict regime for systemically important benchmarks (Libor and Euribor). All benchmark administrators would have to be authorised by a competent authority or registered, even if they provide only non-significant benchmarks. Data used to set the benchmark will be subject to quality standards. Critical benchmark administrators would have to have a clear organisational structure to prevent conflicts of interest. You can find out more by reading Parliament’s press release.

Compliments of the European Parliament