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Friday, June 07, 2013

Open Europe publishes Commission regulation which seeks to move Libor oversight to Paris

As the FTT threat wanes (a sizeable victory for the UK we might add) another battle threatens to flare up in the wider debate about financial regulation within the EU – albeit a smaller but still concerning one.

As the FT reported yesterday, there is a regulation in the pipeline in which the Commission proposes significantly stepping up the regulation of benchmark indexes and rates used in financial markets and contracts. In particular though, it proposes moving the supervision of key benchmarks, such as Libor, to the European Securities and Markets Authority (ESMA).

As we did consistently throughout the FTT debate, we have got our hand on, and have exclusively published these latest plans – see here.

What are the key points of the plans?
  • The main focus of the regulation is to move the oversight of thousands of benchmarks used in trillions of dollars’ worth of financial contracts and instruments away from self-regulation (or from being unregulated) to being under direct supervision.
  • However, importantly, the proposal sees the most important benchmarks, such as Libor and Euribor, being supervised by ESMA since, in the Commission’s view, fractured oversight harms the single market.
  • The plan also looks to step up the legal liability involved in the benchmarks (making any manipulation a criminal offence across the board) but also allowing supervisors more control to compel participation in certain benchmarks and allow for consistent oversight.
Open Europe's take on the plans
  • First, let’s make it clear that Libor has patently failed and needs to be reworked. Everyone accepts that. However, the UK is currently in the midst of doing just this, following the recommendations of the Wheatley Review earlier this year (which happen to line up closely with those of IOSCO the international body looking into this issue).
  • This makes the proposal particularly badly timed. It is ultimately based on an outdated view of Libor which is already under review and beign changed. In fact, if you look at the substance of the UK review and the international recommendations (upon which the Commission based its proposals) they line up fairly closely with the EU plans other than where the control rests.
  • The Commission justification for needing an EU regulation on this issue also seems a bit of a stretch to us. Sure, some of these benchmarks are used in the rest of Europe but they are also used all over the world. However, all those involved in Libor will have a presence in London. As is well known, the large majority of European trades which involve many of these benchmarks will also take place in London. Why the oversight should not be focused there is still not clear.
  • There is also rightly a significant concern over the rigidity of the Commission proposal. Firstly, the plan to base all submissions off actual transactions seems unrealistic. This issue came up in the initial debate about reworking Libor – ultimately, there are not nearly enough interbank transactions to actually produce the rates for the ten currencies and the 15 different maturities which Libor currently covers.
  • Linked to the above point is the concern about the ability to force banks to comply and take on significant legal and regulatory responsibility for their submissions. Ultimately this is a large liability to take on off the back of what is still an estimate.
  • This is a very technical subject. It is almost impossible to lay down all the rules and structures for how various benchmarks should be judged. Surely, the approach varies wildly depending on the benchmark and may even change depending on the wider economic and financial circumstance. This raises two concerns: the rigid framework presented may leave substantial grey areas but more importantly a lot of power for setting the technical details will be left up to the Commission, after the political negotiations have finished. As we saw with the bankers bonus’ regulation this can has a very large impact on the scope and practical implementation of the rules.
  • It sets a worrying precedent, especially as the ECB is set to take over as the single eurozone supervisor and the potential for eurozone caucusing on this issue increases. As we saw with the regulation over Credit Rating Agencies (CRAs) over the last few years this can be dangerous. The initial drafts of the CRA regulations are quite similar to this one, however, worryingly it has extended and escalated over time. The UK government should look to tackle this issue head on to avoid a similar scenario.
Overall then, although Libor needs to be reworked and better supervised, it’s not clear why this needs to be done at the EU level, particularly when the UK is in the middle of its own reworking. The rigidity of the proposal also raises questions about its practical implementation. At the very most, there could be an EU directive on this issue setting out a broad approach with room for national flexibility. Ideally though, this should be left to individual states where the rules can be drawn by those who are most impacted by them and closer to the stakeholders. This should of course be combined with on-going global cooperation as is already underway.

Thankfully, it seems we are not the only ones with these concerns and some watering down of these rules already looks likely.


Anonymous said...

The EU has attacked the UK in one shape or form EVERY day for the past 7-10 days.

France had 53 private equity managers based in Paris a year ago. Guess how many are still there? I hear the number is 3 - even Sarko had left.

France has little or no finance left after Hollande (75% income tax) and the EU screwed up the zone's banks.

We can all see that it this is yet another attack on the UK by an increasingly spiteful and bitter EU.

The purpose and location of ESMA needs to be reviewed to reflect the fact that France has no finance left and cannot handle what little it does have.

It is NOT in the UK's sovereign interests to let France, ESMA or anyother EU country have control of this function. The UK is the No. 1 financial centre and all regulators MUST reside there.


Anonymous said...

Why is LIBOR even necessary at all? There's already the SONIA rate, which is based on actual transactions.

Ending Libor is better than trying to mend it.

Denis Cooper said...

Here's my take on the plans:


I wonder whether Thatcher ever imagined that this kind of thing could be the consequence of that Single European Act she pressed for and had approved by Parliament without a referendum, even though it abolished national vetoes and so destroyed the basis for the popular consent to EEC membership in the 1975 referendum.

christhai said...

The spiteful French FTT's demise, is not a British victory, sadly.

Our pathetic and tragically pro-EU Government did nothing, it was when the Controllers of the EU, the Germans, worked out how much the FTT was going to cost them and the Dutch joined in the chorus that the FTT song changed from a French anthem to a dirge.

Rodney Atkinson said...

Thatcher like most politicians was easily seduced by words which were deliberately misleading. "Single Market" intimated free trading market competition but MEANT the opposite: a political construct, a trade block, regulated by the authoritarians in Brussels Paris and Berlin.

What a shame the British political class turned out to be the suckers our continental enemies always thought we were!!

Rodney Atkinson

Anonymous said...

Again, mor disinformation from Open Europe.

Here's what's really going on per LIBOR and the UK's finances generally per the EUSSR:


Anonymous said...

Just another power grab by the unelected political failures, the eussr commission. It is time to dismantle this part of the eussr completely, and ban any current or previous commisar from holding any political position again.

Rollo said...

The key point of the plan is to eliminate London as the prime financial centre of the EU, and perhaps the world, and trying to centre it in Paris and Frankfurt.