The European Union is planning to hand the scandal-ridden Libor supervision from the London-based U.K. Financial Conduct Authority to the European Securities and Markets Authority (ESMA) in Paris. The Brussels-based European Commission has proposed to move the supervision to ESMA because the rates will affect the administrators, consumers and banks in multiple countries across Europe.
ESMA has already started reviewing benchmarks. Today, it issued guidance to banks, urging them to make sure that their pay policies don't give rise to any conflict of interest. The move may upset U.K. chancellor George Osborne, who has already taken several bold measures to restore faith in Libor benchmarks. The draft proposal will be published this summer.
Oversight of critical benchmarks by a national regulator won't be effective and sufficient in terms of addressing the risks, according to a copy of the draft proposal received by Jim Brunsden of Bloomberg Businessweek. It said that supervision and authorization can be most effectively carried out by ESMA.
Regulators around the world have been working on alternatives to Libor after the British and U.S. authorities uncovered several large banks manipulating the benchmark rate. Barclays PLC (NYSE:BCS) (LON:BARC), UBS AG (NYSE:UBS) and Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) have paid a combined total of about $2.5 billion in penalties. More than a dozen other banks are still under investigation.
More Transparency in Libor
EU’s financial services chief Michel Barnier said that the European Commission aims to bring more transparency by establishing good governance rules. A framework will also be established, detailing how the benchmarks should be supervised. The proposal will give another boost to ESMA, which has been consistently been given greater responsibilities.
The European Commission's proposal comes only a few weeks after the EU launched an investigation into oil price manipulation by European oil giants. In May, regulators carried out unannounced raids at the offices of several oil companies for the possible manipulation of the benchmark rates, which are reported by a price reporting agency Platts.
ESMA will get the power to force banks into participating in panels that submit data to set critical benchmarks like Libor, Euribor and others.