A European watchdog in Paris is going to snatch regulatory control of Libor from the British — or so the European Commission is proposing. It is the stuff of nightmares for the UK Treasury. The political land-grab is the most striking element of a broader shake-up to restore faith in the largely unregulated and, in some cases, shockingly amateur business of compiling benchmarks for everything from heating oil and coal to mortgage rates.
What is the Commission up to? The crux of the draft proposal, which we obtained and wrote about in today’s paper, is ending self-regulation for thousands of indices. All benchmarks must be authorised by a regulator, but there is a sliding scale of regulatory intrusiveness. In the naughty corner are Libor and Euribor, inter-bank lending benchmarks deemed important enough to require direct supervision by the European Securities and Markets Authority, an EU watchdog in Paris. Brussels argues the users, contributors and fallout from problems are EU-wide, so therefore deserve EU oversight.
Is this a bit heavily handed? The stakes are high. The benchmark industry generates around €2bn in revenue but the Commission estimates the size of related markets approach €1,000,000bn. Given many benchmarks have never been touched by law, there is a risk that the voluntary contributors may simply decide the legal risks aren’t worth it. When it comes to Euribor and Libor, the Commission’s answer is to give Esma powers to compel banks to submit transaction data or complete questionnaires on prices or bids. But contributions to the less important benchmarks won’t be mandatory.
Hadn’t these benchmarks already been reformed? Global regulators have launched a big clean up in the wake of the Libor scandal. While its rules to tighten governance go further than expected, the Commission vision, especially when it comes to methodologies, is largely aligned with the guidance from Iosco, the umbrella group of financial regulators. So for instance, Michel Barnier, the EU commissioner in charge of the proposal, stops short of requiring benchmarks to be based purely on transactions and allows a hybrid methodology where necessary, which uses survey results to estimate prices. The UK, of course, also launched its own big Libor reform project led by Martin Wheatley, the UK financial regulator. The Commission sides with most of his substantial findings but decides it should all be overseen from Esma in Paris rather than London.
Could they have done more to annoy London? Probably not, at least in terms of the governance. The Treasury will see this as another Brussels masterplan to centralise power and will probably rue the decision not to sue when Esma was made regulator for credit rating agencies (they almost did to show this went beyond the EU treaties). The real sting though will be the fact that it comes so soon after the UK’s own clean-up. What does it say about the Commission’s faith in the proud UK regulators? On top of that, the Commission opted for the European financial watchdog in Paris to do the job, rather than the European Banking Authority in London, which was at least politically a bit more palatable. For now though the official response from London is relaxed; they are confident of their arguments, have shown they are able to reform Libor, know this isn’t a London problem and not too worried about the power all going to Paris.