Today's proposals follow a period when, in the words of Single Market Commissioner Michel Barnier, "some banks lied about the interest rates they obtained in order to earn even more money" or to "mask their own fragility".
Mr Barnier said that "those guilty of manipulation should go to prison, given the seriousness of the consequences."
He estimated at EUR 500 trillion - or five plus fifteen zeros – the value of markets affected by LIBOR and EURIBOR, with a similar sum at stake as far as other financial benchmarks used across the EU are concerned.
Many of those other benchmarks – which are also covered by the proposals - are applied to commodity markets such as oil, where the Commission has in parallel launched a far-reaching competition investigation.
40% of household lending is at variable interest rates linked to LIBOR or EURIBOR, so hundreds of millions of ordinary members of the public are also directly affected by manipulation, with further indirect damage to household finances coming from the manipulation of oil and energy markets and from the knock-on effects of the destruction of confidence in financial markets.
Rejecting media suggestions that the Commission had opted for too weak a regime, Mr Barnier said: 'On the contrary I have chosen to be pragmatic and operational and to give the lead responsibility to the supervisor where the relevant benchmark is compiled, London for LIBOR and Brussels for EURIBOR. I have confidence in the Belgian and British regulators and their application of the new legislation."
In particular the proposal:
Improves the governance and controls over the benchmark process
The activity of the provision of benchmarks will be subject to prior authorisation and on-going supervision at national and European level. The proposal requires that administrators avoid conflicts of interest where possible, and manage them adequately where they cannot be avoided.
Improves the quality of the input data and methodologies used by benchmark administrators
It requires that sufficient and accurate data be used in the determination of benchmarks, so that they represent the actual market or economic reality that the benchmark is intended to measure. The data should come from reliable sources, and the benchmark should be calculated in a robust and reliable way. This also means that transaction data are to be used when possible with verified estimates allowed when it is not.
Ensures that contributors to benchmarks provide adequate data and are subject to adequate controls
The administrator will produce a code of conduct which clearly specifies the obligations and responsibilities of the contributors when they provide input data for a benchmark. These include obligations on handling conflicts of interest.
Ensures adequate protection for consumers and investors using benchmarks
It enhances transparency of the data used to calculate the benchmark and of the way in which the benchmark is calculated. There will also be a statement explaining what the benchmark intends to measure and what its vulnerabilities are. The proposal also requires banks to assess suitability for consumers where necessary, for instance when drawing up mortgage contracts.
Ensures the supervision and viability of critical benchmarks
Critical benchmarks will be supervised by "colleges", or panels, of supervisors, led by the supervisor of the benchmark administrator – London regulators in the case of LIBOR - and including the European Securities and Markets Authority (ESMA). In cases of disagreement within the college, ESMA will be able to decide by binding mediation. Other additional requirements are imposed on critical benchmarks, including the power for the relevant competent authority to compel contributions.
The proposals will now be discussed by the European Parliament and national Ministers.