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130918 Proposal En

130918 Proposal En

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Published by: MarketsWiki on Sep 23, 2013
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Brussels, 18.9.2013COM(2013) 641 final2013/0314 (COD)Proposal for a
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCILon indices used as benchmarks in financial instruments and financial contracts
(Text with EEA relevance){SWD(2013) 336 final}{SWD(2013) 337 final}
PROPOSAL1.1. General context, grounds for and objectives of the proposal
An index is a measure, typically of a price or quantity, determined from time to time from arepresentative set of underlying data. When an index is used as a reference price for afinancial instrument or contract it becomes a benchmark. A wide variety of benchmarks arecurrently produced using different methodologies by different providers, ranging from publicentities to independent dedicated benchmark providers.The settlements reached by several competent authorities with a number of banks concerningthe manipulation of the LIBOR and EURIBOR interest rate benchmarks have highlighted theimportance of benchmarks and their vulnerabilities. Allegations of attempted manipulation of commodity price assessments provided by commodity price reporting agencies (PRAs) arealso under investigation by the competent authorities and IOSCO has carried out a review of oil price assessments by PRAs. The integrity of benchmarks is critical to the pricing of manyfinancial instruments, such as interest rate swaps, and commercial and non-commercialcontracts, such as mortgages. If a benchmark is manipulated this will cause significant lossesto some of the investors that own financial instruments whose value is determined byreference to the benchmark. By sending out deceptive signals about the state of an underlyingmarket it may distort the real economy. More generally concerns about the risk of benchmark manipulation undermine market confidence. Benchmarks are susceptible to manipulationwhere conflicts of interest and discretion exists in the benchmark process and these are notsubject to adequate governance and controls.The first part of the Commission’s response to the alleged manipulation of LIBOR andEURIBOR was to amend the existing proposals for a market abuse Regulation (MAR) andcriminal sanctions for market abuse Directive (CSMAD) to clarify that any manipulation of  benchmarks is clearly and unequivocally illegal and subject to administrative or criminalsanctions.However, changing the sanctioning regime alone will not improve the way in which benchmarks are produced and used; sanctioning does not remove the risks of manipulationarising from the inadequate governance of the benchmark process where conflicts of interestand discretion exist. Secondly, in order to protect investors and consumers, it is necessary that benchmarks are robust, reliable and fit for purpose. In the light of these considerations, this proposal for a regulation has four main objectives that aim to improve the framework under which benchmarks are provided, contributed to and used: – 
to improve the governance and controls over the benchmark process and in particular ensure that administrators avoid conflicts of interest, or at least manage themadequately; – 
to improve the quality of the input data and methodologies used by benchmark administrators and in particular ensure that sufficient and accurate data is used in thedetermination of benchmarks; – 
to ensure that contributors to benchmarks are subject to adequate controls, in particular to avoid conflicts of interest and that their contributions to benchmarks are subject toadequate controls. Where necessary the relevant competent authority should have the power to mandate contributors to continue to contribute to benchmarks; and
to ensure adequate protection for consumers and investors using benchmarks byenhancing transparency, ensuring adequate rights of redress and ensuring suitabilityis assessed where necessary.
1.2. Existing provisions in the area of the proposal
Union law currently addresses certain aspects of the use of benchmarks: – 
The proposals for a Market Abuse Regulation (MAR)
in Articles 2(3)(d) and 8(1)(d)and for a Criminal Sanctions for Market Abuse Directive (CSMAD)
(MAR has beenthe subject of a political agreement by the European Parliament and the Council inJune 2013) clarify that any manipulation of benchmarks is clearly and unequivocallyillegal and subject to administrative or criminal sanctions. – 
The Regulation on Energy Market Integrity and Transparency (REMIT)
provides thatthe manipulation of benchmarks that are used for wholesale energy products isillegal. – 
The Markets in Financial Instruments Directive
requires that any financialinstruments admitted to trading in a regulated market are capable of being traded in afair, orderly and efficient manner. The Implementing Regulation
of that Directivefurther specifies that the price or other value measure of the underlying must bereliable and publicly available. – 
Article 30 of the European Commission Proposal on the Markets in FinancialInstruments Regulation (MiFIR)
(which is currently being negotiated by theEuropean Parliament and the Council) contains a provision requiring the non-exclusive licencing of benchmarks for clearing and trading purposes. – 
The Prospectus Directive and Implementing Regulation
provide that where a prospectus contains a reference to an index, the issuer should set out the type of theunderlying and details of where information on the underlying can be obtained, anindication of where information about the past and the further performance of theunderlying and its volatility can be obtained, and the name of the index. If the indexin question is composed by the issuer, the issuer also needs to include a descriptionof the index. If the index is not composed by the issuer, the issuer needs to clarifywhere information about the index can be obtained, and where the underlying is aninterest rate the issuer needs to provide a description of the interest rate. – 
The Undertakings for Collective Investment in Transferable Securities Directive
  provides that UCITS funds may only hold a maximum share of instruments issued bythe same body in their portfolio. Member States may raise the limits that apply tohow much of its total portfolio a UCITS may hold to a maximum of 20% for investment in shares or debt securities issued by the same body when it concerns an
COM(2011) 651 final 2011/0295 (COD) http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0651:FIN:EN:PDF
Brussels, 20.10.2011 COM(2011) 654 final 2011/0297 (COD) http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0654:FIN:EN:PDF
REMIT regulation: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:326:0001:01:EN:HTML
MIFID Article 40(1): http://ec.europa.eu/internal_market/securities/isd/mifid_en.htm
MIFID Implementing Regulation Article 37(1)bhttp://ec.europa.eu/internal_market/securities/isd/mifid2_en.htm
Directive 2003/71/EC and Regulation (EC) No 809/2004, Annex XII, item 4.2.2
Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC), Article 53

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