EU tightens grip over interbank rates

European proposal seeks to regulate financial benchmarks to prevent rigging

PUBLISHED : Friday, 20 September, 2013, 12:00am
UPDATED : Friday, 20 September, 2013, 3:51am


The European Union wants to regulate financial benchmarks used in transactions worth trillions of US dollars around the world in an effort to prevent market manipulations such as the one involving Libor.

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

Under the proposal, national regulators and a co-ordinating European body would be granted new powers to investigate possible rigging or conflicts of interests and could issue fines of up to 10 per cent of a firm's revenue.

The London interbank offered rate (Libor) is an average rate that measures how much banks expect to pay each other for loans. It underpins trillions of US dollars of 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. [Wednesday's] proposals will ensure for the first time that all benchmark providers have to be authorised and supervised; they will enhance transparency and tackle conflicts of interests."

The Libor scandal emerged last year when the authorities realised banks - including Royal Bank of Scotland (RBS), Barclays and UBS - were submitting false data to gain market advantages for their own trades.

American and British regulators fined RBS more than US$460 million for rate-rigging. Barclays' role led to a US$453 million fine and the resignation of chief executive Bob Diamond. UBS was fined US$1.5 billion, including a US$100 million fine imposed on subsidiary UBS Securities Japan in the United States.

The EU proposal targets the Libor and Euribor interest rates, but its scope includes many other benchmarks that are used to reference financial instruments.