TABLE OF CONTENTS

1. Introduction. 1

2. Procedural Issues and Consultation of Interested Parties. 2

2.1. Consultation of interested parties. 2

2.2. Steering group. 2

2.3. Impact Assessment Board. 3

3. Policy context. 3

3.1. The current EU legislative framework on benchmarks. 3

3.2. Nature and size of the market concerned. 4

3.2.1. What are benchmarks and how are they produced?. 4

3.2.2. Calculation Methodology. 5

3.2.3. Benchmark industry size. 6

4. Problem Definition. 6

4.1. Problem 1. Risk of benchmark manipulation. 7

4.1.1. The problem drivers. 7

4.2. Problem 2: use of benchmarks which are not robust, reliable or fit for purpose. 12

4.2.1. The problem drivers. 12

5. Baseline scenario – how would problems evolve without EU action?. 15

6. Subsidiarity and proportionality. 17

7. The scope of the initiative. 18

7.1 Defining the scope by benchmark characteristics. 19

7.1.1. Scoping for the main problem drivers: discretion and conflicts of interest 19

7.1.2. Scoping for impact and vulnerability: published indices. 19

7.1.3. Scoping for impact and vulnerability: ‘financial’ benchmarks. 19

7.1.4.Scoping: targeting critical or important benchmarks. 20

7.2. Defining the scope by actors. 20

7.2.1. Entities producing benchmarks. 20

7.2.2. Entities contributing to benchmarks. 21

7.2.3 Users. 22

8. Objectives. 22

8.1. General, specific and operational objectives. 22

8.2. Consistency of the objectives with other EU policies. 22

9. Analysis of policy options, impact and comparison. 22

9.1. Limit incentives for manipulation. 22

9.1.1. Option 1 No action. 23

9.1.2. Option 2 Manage and disclose conflicts of interest 23

9.1.3. Option 3 Structural Separation. 23

9.1.4. The preferred options. 24

9.2. Minimise discretion - ensure benchmarks are based on sufficient, reliable & representative data. 25

9.2.1. Option 1 No action. 25

9.2.2. Option 2 Require the use of transaction data if available and reliable, otherwise well founded and verifiable discretion 25

9.2.3. Option 3 Mandatory use of transaction data only. 26

9.2.4. Option 4 Mandate contributions. 27

9.2.5. The preferred options. 28

9.3. Policy options to ensure internal governance and controls address risks. 29

9.3.1. Option 1 No action. 30

9.3.2. Option 2 Authorities to issue comply or explain guidelines. 30

9.3.3. Option 3 Mandate adequate management systems and effective controls. 31

9.3.4. The preferred options. 31

9.4. Enhance transparency and ensure the use of robust and reliable benchmarks. 33

9.4.1. Option 1 No action. 33

9.4.2. Option 2 Require transparency on methodology, underlying data process and purpose whilst allowing for delayed or partial transparency of underlying data when justified. 33

9.4.3. Option 3: Assessment of suitability of benchmarks’ use for certain retail contracts. 34

9.4.4. Option 4: Mandatory notification of benchmarks’ use. 35

9.4.5. The preferred options. 36

9.5. Ensure effective supervision of benchmarks. 37

9.5.1. Option 1 No action. 37

9.5.2. Option 2 Private benchmark provision, independent private oversight 38

9.5.3. Option 3 Private benchmark provision, public supervision and enforcement 38

9.5.4. Option 4 Public provision of critical benchmarks. 40

9.5.5. The preferred options. 40

9.5.6. Supervisory structure. 41

10. Preferred options package. 42

11. Cost-benefit analysis and administrative burden calculation. 44

11.1 Costs-Benefit Analysis. 44

11.1.1. Estimated compliance costs for administrators of benchmarks. 44

11.1.2 Compliance costs for contributors to benchmarks. 45

11.1.3 Estimated costs of supervision. 46

11.1.4 Estimated costs for creditors and credit intermediaries required to assess benchmarks’ suitability to reference retail financial contracts. 48

11.1.5 Benefits. 48

11.2 Administrative burden calculation. 49

11.2.1 Estimated administrative costs for administrators. 49

11.2.2. Estimated administrative costs for contributors. 49

11.2.3 Estimated administrative costs of supervision. 50

12. International impact. 50

12.1. Consistency with international legislation. 50

12.2. Confidence in European benchmarks. 50

12.3. Regulatory arbitrage and risks of de-location. 51

12.4. Impact on non-EU firms and their market access. 51

13. Impact on fundamental rights. 52

14. Social impacts. 52

15. Choice of instrument to ensure an effective response. 53

15.1. Non-legislative cooperation between Member States with principles by ESMA and EBA. 53

15.2. Propose new stand-alone EU legislation on benchmarks in a Directive or a Regulation. 53

16. Monitoring and evaluation. 54

Annex I: Glossary. 56

Annex II: Summary of the public consultation on benchmarks. 59

Annex III: EU and internationalwork streams on benchmark rates reform.. 65

Annex IV: Findings evidencing the risk of benchmark manipulation. 69

Annex V: Key Recommendations of the Wheatley Review.. 72

Annex VI: IOSCO’s Principles for Oil Price Reporting Agencies. 74

Annex VII: Benchmarks industry and size of financial markets impacted. 76

Annex VIII: Magnitude of the problem of benchmarks manipulation. 80

Annex IX: What are benchmarks? Definition, main types, common characteristics. 83

Annex X: Cost benefit analysis and administrative burden calculation. 87

ANNEX XI: Impact on fundamental rights. 99

Annex XII: Consistency of the objectives with other EU policies. 99

Annex XIII: Defining the scope. 99

Annex XIV: Illustrative example of the potential risk of manipulation based on the use of discretion and conflicts of interests for any hypothetical benchmark. 99

ANNEX XV: Summary of complaint lodged by Mr. X (Bulgarian citizen) to the ombudsman. 99

ANNEX XVI: Summary of complaint lodged by Mr. X (Polish citizen) to DG SANCO.. 99

ANNEX XVII: Summary record (by the Commission services) of ECON public hearing on "Tackling the culture of market manipulation - Global action post Libor/Euribor". 99

Annex XVIII: Summary record (by the Commission services) of open hearing on ESMA/EBA consultation paper on “Principles for Benchmarks-Setting Processes in the EU”, 99

Annex XIX: Bibliography. 99

Annex XX: Overview of the wide range and variety of indices and price assessments used as benchmarks. 99

1. Introduction

An index is a statistical measure, typically of a price or quantity, calculated or determined from a representative set of underlying data. If this index is used as a reference price for a financial instrument or a financial contract it becomes a benchmark. A wide variety of benchmarks are currently produced by a number of different types of benchmark administrators. Benchmarks differ in terms of the underlying data used, how the underlying data is collected, how the index is calculated and how they are disseminated to the ultimate user.

The manipulation of the interest rate benchmarks LIBOR and EURIBOR has highlighted both the importance of benchmarks and their vulnerabilities[1]. The integrity of benchmarks is critical to the pricing of many financial instruments, such as interest rate swaps and forward rate agreements, and commercial and non-commercial contracts, such as supply agreements, loans and mortgages. They also play an important role in risk management.

Benchmark manipulation can cause significant losses to consumers and investors and distort the real economy. The risk of manipulation alone can raise doubts about a benchmark’s integrity which can then undermine market confidence. The first part of the Commissions response to the alleged manipulation of LIBOR and EURIBOR, was to amend the existing proposals for a market abuse Regulation (MAR)[2] and criminal sanctions for market abuse Directive (CSMAD)[3] to clarify that any manipulation of benchmarks is clearly and unequivocally illegal and subject to administrative or criminal sanctions. However, changing the sanctioning regime alone is not sufficient to improve the way in which benchmarks are produced and used. This impact assessment therefore aims to identify the key issues and shortcomings in the production and use of benchmarks in order to assess the need for EU action to ensure the future integrity of benchmarks.

Action at EU level may also be required due to the global nature of benchmarks and the need to develop the EU position in relation to national, European and international initiatives in response to the manipulation of benchmarks. Current initiatives on benchmark reform in the EU include the Wheatley Review of LIBOR and its subsequent regulation in the United Kingdom[4] and the regulation of CIBOR in Denmark[5]. Besides, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published non-binding Principles for Benchmarks-Setting Processes in Europe[6] on 6 June 2013 and the EBA issued non-binding recommendations to EBF-Euribor following their review of EURIBOR in January 2013[7]. The European Commission has also undertaken investigations into possible cartels in relation to EURIBOR and prices for a number of oil and biofuels products published by the price reporting agency Platts[8].

The International Organization of Securities Commissions (IOSCO) published Principles for Financial Benchmarks on 17 July 2013[9]. Previously, IOSCO had published Principles for oil price reporting agencies oversight in October 2012[10]. Further work is being conducted at FSB, G20 and BIS level, with the creation by the FSB of the Official Sector Steering Group (OSSG)[11].

This document is the impact assessment accompanying the benchmarks initiative. It does not pre-judge the final form of any decision to be taken by the European Commission.

2. Procedural Issues and Consultation of Interested Parties 2.1. Consultation of interested parties

On 3 September 2012 the Commission services launched a three month public consultation on a possible framework for the regulation of the production and use of indices serving as benchmarks in financial and other contracts. The consultation closed on 29 November 2012 with 84 contributions received. On their responses, stakeholders acknowledge the weaknesses in the production and use of benchmarks, and broadly support action at EU level, even though there are different preferences with regard to its form. Respondents also emphasise the need for international coordination, and careful calibration of the scope of any initiative. The non-confidential contributions have been published on the Commission website[12] and a summary is provided in annex II. The views from stakeholders have been taken into account by the Commission Services when analysing the problems, objectives and potential options covered by this impact assessment.

The Commission services also participated in the public hearing on tackling the culture of market manipulation - global action post LIBOR/EURIBOR (please see summary in annex XVII) held by the European Parliament on 26 September 2012 and the open hearing by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) on their consultation paper on “Principles for Benchmarks-Setting Processes in the EU” on 13/02/13 (please see summary in annex XVIII).

2.2. Steering group

DG Internal Market and Services (DG MARKT) is the lead Directorate General (DG) for the initiative on benchmarks[13]. Work on the Impact Assessment started in September 2012 with the first meeting of the inter-service steering group on 16 October 2012, followed by 3 further meetings, on 10 January, 8 February and 17 June 2013. The following DGs and Commission services participated in the meetings: Internal Market and Services, Secretariat General, Legal Service, Competition, Economic and Monetary Affairs, Agriculture, Climate Action, Energy, Health and Consumers, Industry and Entrepreneurship and Justice. The contributions of the members of the steering group have been taken into account in the content and structure of this impact assessment. DG MARKT has also consulted all other relevant commission services as part of the inter-service consultation process, including DG Communication Networks Content and Technology and DG Mobility and Transport.

2.3. Impact Assessment Board

DG MARKT services met the Impact Assessment Board on 20 March 2013. The Board analysed this Impact Assessment and delivered its opinion on 20 March 2013. During this meeting the members of the Board provided DG MARKT services with comments to improve the content of the Impact Assessment that led to the following key modifications to the text:

· Enhancement of the problem definition section, in particular regarding the risks from the benchmark’s users point of view;

· Development of the baseline scenario section to explain why the combination of sanctions foreseen in the MAR/MAD proposals and the IOSCO and ESMA/EBA principles for benchmarks are not sufficient to address the problems identified. Also by providing greater detail of the situation prevailing in different Member States and the solutions adopted by the UK and Denmark;

· Streamlining of the options package, in particular of the options on use and transparency and adding measurable objectives;

· Reviewing and enhancing the accuracy of the cost-benefit analysis, in particular by reviewing the estimated cost of supervision, better assessing the benefits and specifying the methodology followed; and

· Enhancement of the analysis of international impacts (third country regime) and the assessment of proportionality.

3. Policy context 3.1. The current EU legislative framework on benchmarks

In both the US and the EU, there are a number of provisions which address certain risks with regard to benchmarks, notably the risk of manipulation and their robustness. There are no specific provisions on the governance of benchmarks, how they are provided (provision structure) and how they are calculated (methodology).

With regard to the manipulation of benchmarks that are used to price financial instruments, the proposal for a Market Abuse Regulation (MAR) contains a provision explicitly banning any behaviour which distorts the value of a benchmark in articles 2(3)(d) and 8(1)(d). The European Parliament and the Council reached a political agreement on the MAR on 26 June 2013. In the US, a similar provision is already in force under the Dodd-Frank Act in article 753. The latter US provision, however, only applies to manipulation of benchmarks that affect commodity prices. It prohibits manipulation by false reporting[14], but it explicitly excludes mistakes in good faith[15].

In the US, the robustness of benchmarks is addressed through the core principles that apply to trading venues on which commodity derivatives may be traded[16]. To maintain its standing, a designated contract market or a swap execution facility "shall permit trading only in swaps that are not readily susceptible to manipulation". In the EU, a similar rule is in force under the Markets in Financial Instruments Directive (MIFID) which requires that "any financial instruments admitted to trading in a regulated market are capable of being traded in a fair, orderly and efficient manner"[17]. The implementing regulation of that directive further specifies that "the price or other value measure of the underlying must be reliable and publicly available"[18].

In addition, article 30 of the European Commission proposal for a Markets in Financial Instruments Regulation (MiFIR), addresses non-discriminatory access to and the obligation to licence benchmarks[19].

Where a prospectus contains a reference to an index the EU Prospectus Directive and Implementing Regulation[20] requires the issuer to set out the type of the underlying and details of where information on the underlying can be obtained, an indication of where information about the past and the further performance of the underlying and its volatility can be obtained, and the name of the index. If the index in question is composed by the issuer, the issuer also needs to include a description of the index. If the index is not composed by the issuer, the issuer needs to clarify where information about the index can be obtained, and where the underlying is an interest rate the issuer needs to provide a description of the interest rate.

Finally, undertakings for collective investments in transferable securities (UCITS) type collective investment funds are only allowed to hold a maximum share of instruments issued by the same body in their portfolio. Member States may raise the limits that apply to how 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 index which the UCITS wants to replicate[21]. This applies provided the composition of the index is sufficiently diversified, the index represents an adequate benchmark for the market to which it refers; and it is published in an appropriate manner. Under the Regulation on energy market integrity and transparency (REMIT)[22], the manipulation of benchmarks that are used for wholesale energy products is also illegal.

3.2. Nature and size of the market concerned 3.2.1. What are benchmarks and how are they produced?

A benchmark is usually calculated from a set of underlying data using a formula, typically an average. However this calculation is often more complex, may vary depending on circumstances and in particular involves the exercise of discretion. In some cases, rather than a calculation, an “assessment” is made on the basis of a judgment using the underlying data. The calculation or assessment normally involves rules on which data to include, how they are weighted, and how other information is taken into account when computing the index which is then used as a reference price or benchmark in a financial contract or instrument. See annex IX: What are benchmarks? Definition, main types of benchmarks and common characteristics.

3.2.2. Calculation Methodology

At heart the calculation of an index may be a relatively simple mathematical exercise such as taking a simple average. However for nearly all widely used indices some judgment or discretion also needs to be exercised. When calculating a benchmark, like a stock index, it may be necessary to regularly re-base the index to include other stocks – which may involve a degree of discretion. Or discretion may need to be exercised when there is not enough underlying data available or it is not representative. Discretion may also be required in choosing who the contributors of the data are. The integrity of the benchmark administrator and the underlying data is therefore of critical importance.

Figure 1 Stages of the benchmark production process

The graph above shows the different stages of the benchmark setting process as well as the main types of stakeholders who use benchmarks or are involved in their setting process:

Main entities in the benchmark production process (figure 1) - Benchmark contributor: the person contributing to benchmark data submissions which are used for the calculation of the benchmark. They are often market participants in the relevant instrument. Examples include regulated firms such as banks or brokers, and unregulated such as oil and energy traders. They may exercise discretion depending on whether their contributions are objective data based on transactions or subjective estimates or in terms of what data to submit. - Benchmark calculator: an entity calculating a benchmark on behalf of the administrator. - Benchmark administrator: the person responsible for the administration, calculation and publication of the benchmark. It may outsource the calculation or publication. It may exercise discretion when, for example, deciding which contributors should submit underlying data and when calculating of the benchmark. - Benchmark user: a person that uses a benchmark for example in a financial instrument or contract.

The table below sets out some of the main benchmarks and their characteristics, in particular their risks (identified in the problem definition section) in respect of the reliability and transparency of their underlying data and the use of discretion:

Usual characteristics of main benchmarks

|| Contributor Characteristics || Administrator Characteristics || Users || Conflicts of interest

Benchmark || Source of data || Exercise of discretion & input data || Calcul. method || Exercise of discretion || Size of markets which reference the benchmark || Conflicts of interest affecting stakeholders

Interbank lending (IBOR) || Panel/ 4 to 40 banks || Discretion exercised as estimates or committed quotes || Trimmed average || Composition of the panel and exclusion of non -compliant data || Estimated USD 500-600 trillion (Dec. 2011, notional amount) || - Contributor banks also use the benchmarks - Administrators – often banking federations represent the banks which are both contributors and users

Other interest rates benchmarks e.g. EONIA, Sonia, OIS || Panel/ Various contributors, often linked to the relevant IBOR panel || Discretion exercised as either transactions or quotes || Simple, volume weighted or trimmed average || Limited to more extensive || Estimated USD 402 Trillion (Dec. 2011, notional amount) || - Contributor banks also use the benchmarks - Administrators – often banking federations represent the banks which are both contributors and users

Commodity price assessments by PRAs || Survey/ Commodity market participants || Discretion exercised as either: transactions quotes or estimates. || From arithmetic averages to subjective assessments || Various, from deciding what data and information to include and who to weight it || Estimated USD 3.7 Trillion (notional amount/Dec. 2010) for derivatives. Estimated physical contracts value USD 5 Trillion (physical market annual production 2009/10) || - Contributors include commodity traders and commodity market participants who also use the benchmarks for pricing contracts - Administrators may have a close relationships with users or contributors

Equity indices || Panel of exchanges (may be a single exchange) || No discretion exercised by contributor -transaction data || Price or Volume Weighted average || When rebasing or adjusting for free float || Estimated USD 2.3 Trillion/ total tracked by ETF and MTF in Dec. 2010) || - Administrators of equity strategy indices use the indices in financial instrument which they sell to clients -

The table above highlights the key characteristics of a selection of benchmarks; in particular it should be noted that for all benchmarks there is discretion – either at the input data or the administrator level and conflicts of interest exist. Therefore, in all these benchmarks, both the incentives and the opportunities for manipulation exist. And therefore the potential for manipulation exists in the same way as has been demonstrated in the cases of EURIBOR and LIBOR. Please see an illustrative example of the potential risk of manipulation based on the use of discretion and conflicts of interests for any hypothetical benchmark in annex XIV.

3.2.3. Benchmark industry size

The size of the benchmark industry measured by the revenues it generates (around EUR 2 billion for financial and commodity benchmark administrators world-wide) and the number of persons employed (ranging from a few to 1600 employees per enterprise, depending on the nature of the administrator) does not fully capture its relevance. The volume of markets impacted by benchmarks is a much better indicator of its relevance. Estimates suggest that the size of the markets impacted could be over EUR 1,000 trillion[23]. However, because this figure is the aggregation of heterogeneous and non-comparable financial instruments and contracts, the market value is not the only indicator of the magnitude; benchmarks may have a more significant impact on certain markets than a comparison of the market value might suggest. For a detailed explanation on how these estimates were produced see annex VII on benchmarks industry and size of financial markets impacted and Annex VIII on magnitude of the problem of benchmark manipulation.

4. Problem Definition

This section examines the main issues associated with benchmark provision and their consequences. The central problem is the lack of integrity of benchmarks, which mainly manifests itself in the risk of benchmark manipulation. This risk of manipulation is a problem for all users of benchmarks, whether institutional or retail users. The main drivers of benchmark manipulation are conflicts of interest and discretion. In addition, benchmarks may not be as robust as required for the purposes for which they are used. The use of benchmarks which are not robust, reliable or fit for purpose affects all investors and it is mainly driven by poor transparency and the subsequent use of unsuitable benchmarks. However retail investors and consumers are more vulnerable because they often lack the skills to assess a benchmark’s robustness, and because the use of standard terms or uneven bargaining power means that in practice they are unable to exercise a choice about which benchmark to use. The figure below provides an overview of the various problems, their drivers and their consequences.

Problem Tree

4.1. Problem 1. Risk of benchmark manipulation

There is ample evidence that conflicts of interest together with the inappropriate use of discretion, ineffective governance and lack of transparency lead to the tangible risk of benchmark manipulation. For example, since June 2012 three large financial institutions - Barclays, UBS and RBS - have been found liable for the attempted manipulation of LIBOR, EURIBOR and TIBOR by the UK and US financial authorities. They have agreed to pay settlements in the order of $ 2.6 billion. According to various estimates, interest rate benchmark manipulation could cost the banking industry tens of billions of USD. (See annex IV on Findings evidencing the risk of benchmark manipulation).When combined with ineffective governance and supervision the risk of manipulation is increased, with potentially large impacts on citizens and investors (e.g. pension fund assets’ returns are often priced by reference to financial benchmarks). The ESRB states that “competent authorities should be provided with supervisory tools in order to make supervisory oversight more effective and should be enabled to impose sanctions for the manipulation of benchmark indices consistently across the EU”[24].

In most cases, the value of a benchmark directly determines the value of the financial instruments or payments under contracts which reference it. Therefore, changing the value of a benchmark results in a direct transfer of money from one party to the other. According to the Global Financial Markets Association (GFMA) Principles for Financial Benchmarks, the integrity of benchmarks is critical to the effective functioning of markets and investor confidence[25]. The European Consumer Organisation (BEUC) notes that the lack of confidence in benchmarks is the direct result of their potential lack of integrity. BEUC cites concern over interest rates, oil and other commodity prices, and electricity prices[26].

4.1.1. The problem drivers

Discretion and insufficient underlying data

The problem of benchmark manipulation is driven mainly by the combination of conflicts of interest and the existence of discretion which is not subject to adequate governance and controls. The risk of manipulation observed in many benchmarks is caused primarily by the discretion submitters have when selecting data for submission to the calculator, and the discretion calculators have when processing these data.

For some benchmarks, submitters have the freedom to provide a subset of data without the calculator being able to verify whether these submissions are representative[27]. In addition, some benchmarks rely on assessments from contributors with little possibility for ex post verification against real data. For example, often, interest rate benchmarks are based on surveys of a limited number of voluntary contributors and discretion is applied in their assessment. Furthermore, contributors may be reluctant to provide complete data to benchmark administrators if this could entail disclosing sensitive commercial data or information which could damage them, in particular when their contributions are published. This is evidenced in the attempted manipulation of LIBOR by Barclays where incorrect submissions were provided in order to present a misleading picture of the bank’s credit standing. See annex IV Findings evidencing attempted manipulation of benchmarks.

Benchmark calculators typically have some discretion as to how they weigh the received data, for instance when the relative weight given to quotes versus transactions. Because they may not have all market data at their disposal, they may also need to assess the representativeness of the observed transactions in light of the whole market. They will also need to consider if and how to include submissions which they suspect are inaccurate.

Evidence of risk of manipulation of benchmarks based on methodology and the use of discretion

There have been allegations of potential manipulation in relation to benchmarks also in the oil and gas sectors. The Commission has recently undertaken an investigation into a possible cartel in relation to the potential submission of distorted prices by contributors to some of Platts oil and biofuels products assessed prices in order to manipulate those[28]. According to IOSCO’s report on principles for oil PRAs, the method of calculation by the PRAs can be almost entirely subjective. The methods of reporting data range from the almost entirely subjective approach adopted by some price reporting agencies, based on the first-hand extensive trading experience of its reporters, to the almost entirely mechanical approach of APPI based on data submitted in writing to an accounting firm by a panel of traders. The two most significant PRAs in the oil market, Argus and Platts, use a combination of mechanistic analysis and judgment[29]. Please see annex IV Findings evidencing the risk of benchmark manipulation.

Indeed, discretion can exist to a greater or a lesser degree. However, even equity indices that are based on objective real transaction data and use a fixed formula to calculate their value do involve discretion from time to time, in particular when they are rebased or when free float adjustments are performed. The evidence suggests that there are no indices without any discretion, as even the most ‘objective’ involve discretion about the methodology used by benchmark administrators to produce them. The risk of manipulation exists also in cases where the benchmarks are set according to objective transaction data and predetermined formulas, such as for equity strategy indices. According to EDHEC Risk Institute’s response to the Commission public consultation on benchmarks[30], this is due to inherent conflicts of interest, for example when index administrators are the same entities (or very close to them through commercial relationships) as the entities providing the investment services to clients (investment banks or funds) whose returns and performance are linked to these indices.

Finally, contributors may choose not to submit data at all, as evidenced by the fact that banks have withdrawn from the EURIBOR panel following its alleged manipulation and some contributors to gas price assessments by PRAs have also stopped contributing following the UK authorities’ investigation into the potential manipulation of the NBP gas price published by ICIS Heren[31]. Continued participation exposes them to reputational and regulatory risk, as well as large fines. The refusal to contribute to a benchmark may reduce its robustness and representativeness of the market, and thereby hurts the accuracy of the benchmark.

Risks posed by contributors leaving panels of critical interbank interest rate benchmarks such as EURIBOR

Several contributing banks have recently left the EURIBOR and other Euro system rates panels, ostensibly because continued participation exposes them to reputational and regulatory risk. This raises the concerns because the reliability and representativeness of critical benchmarks depends on having sufficient and accurate underlying data and the departure of contributors could lead to their unreliability or discontinuance. In particular EURIBOR is important in the transmission of monetary policy and for financial markets stability and is discontinuance or unreliability could generate serious contractual continuity and legacy issues. Commissioner Barnier and the ECB issued statements on 8 February 2013 expressing their concern about the recent departures from the EURIBOR panels and the possibility of mandating contributions for critical benchmarks[32].

Conflicts of interest

The consultation responses highlight the major role that conflicts of interest play in creating the incentives to manipulate benchmarks. Conflicts of interest exist in particular where the contributors or administrators are also the users of the benchmark and so can benefit from changes in the value of the benchmark or where their performance is determined in relation to the level of the benchmark. Where these conflicts are unmanaged both the incentive and the opportunity may exist to manipulate the benchmark.

Masamichi Kono, Chairman of the IOSCO Board, stated at the European Parliament's public hearing on benchmarks that: “the governance structure over the benchmark setting process and procedure may not be strong enough to address the conflicts of interest which may exist in the benchmark setting process”[33] As an example of conflicts of interest at administrator level, the Wheatley Review identified the conflict that existed because the British Bankers Association (BBA) represents banks which are both users of and in many cases contributors towards the rates as a governance shortcoming. It therefore recommended that the BBA should transfer responsibility for LIBOR to a new administrator[34].

Regarding an example of a conflicts of interest at contributor level, when a contributor is asked to supply actual data on oil transactions to a benchmark, it might only submit transactions with low prices and leave out transactions they have entered into at high prices if they have oil purchasing contracts or derivatives that are priced by reference to that benchmark.

Lack of effective governance and supervision

When conflicts of interest are combined with a lack of effective governance, controls and supervision in benchmark provision, the incentives, means and opportunity for manipulation are present in the benchmark setting process[35]. The issues compromising the integrity of benchmarks will not be adequately addressed when benchmark administrators cannot internalise the benefits of robust contributions and benchmarks, or the risks associated to their lack of their integrity[36]. This is the case for published indices or indices which are otherwise generally available to the wider public because the figures are onwardly distributed or cannot be restricted. Where an index is subject to public or unrestricted use, not all users pay for the use of the benchmark; therefore the administrator may not be able to afford adequate governance. This creates a market failure; the benchmark administrator may not have the income and incentives to implement governance and control procedures commensurate with the risks that the benchmark poses to the users. As importantly, where an index is published, its use may become so widespread that it becomes critical, or at the least have significant impact on markets and investors.

By contrast, where a benchmark is privately produced for a specific user, or a restricted set of users who have a direct relationship with the administrator, the risks are greatly reduced. The users in these cases are able to dictate and pay for governance, controls and methodology that meet their quality and risk demands. The benchmark administrator knows who is using the benchmark and for what purposes and so can take full account of these risks when exercising any judgment or exercising any discretion in relation to the calculation.

Evidence on ineffective governance of conflicts of interest in benchmarks’ setting:[37]

- Settlements for attempted manipulation of LIBOR and EURIBOR by several banks (including Barclays, UBS and RBS) and investigation into the manipulation of these and other benchmarks by international bodies[38]

- Wheatley review identification of weaknesses in LIBOR governance in 2012[39]

- Preliminary areas of potential concern identified on IOSCO's consultation on Oil price assessments by PRAs[40]

-Proven cases of attempted manipulation of oil price assessment by Platts in the US (Marathon Petroleum $1m settlement by the CFTC in 2007) and the physical natural gas market, (Energy Transfer Partners, $10m by the CFTC)[41]

- Ongoing investigation of the European Commission services into a possible cartel in relation to the alleged submission of distorted prices by contributors to some of Platts oil and biofuels products published prices in order to manipulate those[42]

- The FCA (previously FSA[43]) is investigating claims by an employee of a PRA that there have been attempts to manipulate the price of the gas wholesale market similar to that of LIBOR[44]

- The Office of Fair Trading (OFT) published a report in January 2013 in which it states that: “most supply contracts between wholesalers and retailers in the UK are based on Platts reported prices for wholesale petrol and diesel. Therefore, any distortion or manipulation of these reported prices could directly influence pump prices”[45]

- Although no formal investigation has been opened, the CFTC is examining the setting of the spot prices for gold and silver markets in London concerning whether these setting processes are transparent[46]

Even where governance arrangements have been set up to reduce manipulation, the lack of effective enforcement has often meant that these are disregarded. For instance, Chinese walls between traders and treasury, which are vital to avoid conflicts of interest influencing rate submissions, were often not respected by the staff of banks contributing to LIBOR[47]. This highlights that in many cases benchmark administrators and supervisors do not have either the resources or the incentives to police the governance frameworks they design. It also draws attention to the fact that benchmark submission, production and use are unregulated activities in most jurisdictions worldwide[48]. As a result, most authorities do not have supervision and enforcement powers over the setting processes and actors, which prevents the effective oversight of benchmarks and enforcement of compliance with minimum standards in their provision[49].

Finally, the fact that benchmarks are global in nature and produced by diverse organizations may lead to a lack of coordination in their supervision and create difficulties in the control of their production and use. This is highlighted by BAFIN’s response to the Commission consultation on benchmarks stating that: there is a need for credible governance structures in the benchmark setting process and that adequate controls must be in place, as well as adequate processes for identifying, avoiding and, if this is not possible, managing conflict of interest and an appropriate degree of formal oversight and regulation[50]. For example, commodity price assessments by PRAs are used to reference commodity financial instruments worth billions of Euros[51], but are not supervised by financial or commodity market authorities in most jurisdictions.

4.2. Problem 2: use of benchmarks which are not robust, reliable or fit for purpose

Where a benchmark is not robust and is subject to the risk of manipulation, its use may harm investors or other users. More sophisticated users, such as banks and other wholesale market participants, may however have a good understanding of the risks posed by the benchmarks’ lack of robustness and absorb this risk, or be able to take appropriate mitigating measures. However retail consumers may not be fully informed of the nature of the benchmark to which a financial contract they enter into is referenced and may not have any choice about the benchmark used. For example, a mortgage contract may reference a benchmark and the mortgage holder may not be able to appropriately assess the risks this benchmark poses or change the benchmark if they wish to, as a result of the use of standard terms in the mortgage contract.

In its contribution to the Commission’s consultation, the Financial Services Users Group (FSUG) noted a “potential for indices and benchmarks to be misused by product manufacturers, distributors, and advisers in the sale, advertising, marketing and promotion, and distribution of financial products and services; and reporting on the performance of financial products and services to ordinary financial users”. They note that there are risks of “deliberate or reckless mis-selling of inappropriate products or misrepresenting of potential risks and rewards of financial products to users – for example, borrowers being locked into expensive mortgages or loans” and “financial users making sub-optimal choices and decisions pre-sale, at point of sale, and post-sale”. The FSUG concludes that “Most types of financial products are susceptible to this form of misuse including investment, insurance, savings, and mortgage products. Moreover, the potential for misuse can occur along the entire financial supply chain – in wholesale, institutional and retail markets”.

The use of benchmarks which are not robust, reliable or fit for purpose can have a significant impact on retail investors and consumers. There is no consolidated data on the value of mortgages referenced to EURIBOR in the EU, and there are no reliable estimates of potential losses. For some Member States, however, indicative data is available. For instance, 18 million mortgages in Spain and many other loans to individuals, companies and public bodies are estimated to be referenced to EURIBOR[52]. Italian consumer groups Adusbef and Federconsumatori have filed complaints in which they estimate that the manipulation of Euribor affected 2.5 million Italian households through Euribor based mortgages, costing them 3 billion euros[53]. Furthermore, according to press reports, some of the largest European pension funds are considering to pursue legal claims against banks fined for manipulating LIBOR, in view of the large losses that they and their clients may have suffered as a result of LIBOR manipulation[54]. Please see Annex VII for the size of the benchmark industry and the market impacted.

4.2.1. The problem drivers

The problem of the use of benchmarks which are not robust, representative or fit for purpose is mainly driven by the lack of transparency about benchmark’s purpose and the use of unsuitable benchmarks. . Especially for retail investors, the use of benchmarks in financial contracts by credit institutions without an assessment of their suitability is an important factor in the use of benchmarks which are not robust, reliable or fit for purpose.

Concerning consumer protection, the Consumer Credit Directive (CCD) includes rules on the disclosure of adequate information, as well as the soon to be adopted Mortgage Credit Directive (NCD)[55] which also includes the requirement to recommend suitable credit agreements. However, those EU consumer protection rules do not address the particular issue of the suitability of benchmarks for retail financial contracts. Furthermore, unequal bargaining power and the use of standard terms means that consumers may have a limited choice about the benchmark used. Consumers may as well lack the necessary knowledge or experience to appropriately assess benchmark suitability. This leads to un-harmonised EU consumer protection rules on the use of suitable benchmarks to reference financial contracts and to a sub-optimal level of consumer protection in the EU.

Lack of transparency about a benchmark’s purpose

Benchmarks measure a particular market or economic reality. For example the EURIBOR rate is intended to reflect the cost of unsecured interbank lending and was intended to be used as a benchmark interest rate in interbank loan agreements. In many cases there is a lack of transparency about what a benchmark is intended to measure, in what circumstances it provides a reliable measure and other risks associated with its use. In the case of EURIBOR it may not have been clear what type of prime bank lending rate it measured and that the calculation methodology did not work well in periods of low liquidity. If this transparency is lacking, users may not be able to make appropriate decisions about which benchmark to use. When this occurs, economic decisions will be based on distorted values, leading to a less than optimal allocation of assets.

Evidence about lack of transparency on the inappropriateness of some benchmarks for their use in retail financial contracts

- EURIBOR is currently being challenged as a reference rate for mortgages by the People’s Campaign in Spain, concerning the lack of transparency surrounding the way the rate is set and the lack of accountability for the unreliability of the rate in times of market stress and low liquidity.[56]

- The Commission services have received complaints from Polish citizens about the lack of transparency on the inappropriateness of WIBOR (Polish interbank interest rate) for consumer credit agreements. They cited two different reasons: the insufficient number of transactions on WIBOR3M and WIBOR6M tenors, which are the most widely used to reference consumer credit borrowing rates; and the fact that the cost of capital comes from deposits and not from interbank loans for the majority of Polish banks. The complainants argue that these two factors mean that the WIBOR benchmark is not necessarily well suited for use in consumer credit agreements and this fact was not adequately communicated to them. The use of an insufficient number of transactions would mean that the nature of the benchmark has changed. If the administrator has allowed this to happen without appropriately informing the users, it is also evidence of a lack of accountability on its part.

Use of unsuitable benchmarks

In a recent joint letter to Commissioner Barnier, the three European Supervisory Agencies EBA, ESMA, and EIOPA argued that “wider work is required to regulate how indices and benchmarks are compiled, produced and used”[57]. With regard to this latter element, the main problem is the use of unsuitable benchmarks. Even benchmarks which adequately measure the economic reality for which they are intended may have a harmful impact when used for other purposes. Often benchmarks are used to reference retail financial contracts without an appropriate assessment of their suitability for this purpose. This problem is accentuated by a lack of understanding on the part of those entering into contracts referenced to them, especially when they are retail investors or consumers. The problem is compounded by a lack of choice, as often retail market participants do not have the bargaining power to demand tailored terms[58]. This risk is identified by Finance Watch, which notes that “financial institutions with high bargaining power may be able to impose the linkage of contracts to inappropriate benchmarks”[59].

Another factor in the use benchmarks not based on their suitability (robustness and reliability) is network effects making a particular benchmark the established unit of measure[60]. For example mortgages may be referenced to EURIBOR because it facilitates the bank's risk management rather than as a result of an assessment of suitability based on its robustness and reliability. The EURIBOR rate may then be used because the bank is able to impose its standard terms in negotiations.

The Bank for International Settlements (BIS) warns that “if reference rates are not used properly, economy-wide financing conditions may change in unpredictable and unintended ways. For instance, an increase in the common bank risk component of reference rates could translate into a tightening of credit conditions well beyond interbank lending if such reference rates were used on a large scale for the pricing of corporate bonds, household mortgages or consumer loans”.

The examples in the chart below evidence how consumers can be harmed by the use of benchmarks which are not suitable, robust or reliable for referencing consumer contracts.

Complaints of Spanish and Italian consumers about non-robust, unreliable or unsuitable benchmarks (EURIBOR and LIBOR) being used to reference retail consumer contracts

- Upcoming trial to determine whether a bank mis-sold interest rate swaps pegged to Libor to a care home administrator in the UK in 2007 and 2008[61].

- Annex XV provides a summary of a complaint lodged by a Bulgarian citizen to the ombudsman about irregular practices of creditors who themselves establish reference indices for the borrowing rates for consumers. According to the complaint, the choice of these indices is not based on suitability for consumers but on the commercial interests of creditors taking advantage of the uneven bargaining power of their clients.- Italian prosecutors in the city of Trani opened a criminal probe into alleged manipulation of Euribor and Libor, following complaints filled by consumer groups Adusbef and Federconsumatori[62].

- Freddie Mac (FMCC) sued Bank of America Corp., UBS AG (UBSN), JPMorgan Chase & Co. (JPM) and a dozen other banks over alleged manipulation of LIBOR, saying the mortgage financier (and in consequence its shareholders) suffered substantial losses as a result of the companies’ conduct[63].

5. Baseline scenario – how would problems evolve without EU action?

In the absence of EU action a number of national and international regulatory initiatives have been launched. Within the EU, the UK and Denmark have adopted legislation to address the concerns with regard to benchmarks. Concerning UK legislation, although all benchmarks are under scope, currently it only specifies LIBOR as a regulated benchmark[64]. The Wheatley Review of LIBOR, which informed the UK legislation on benchmarks, recommended that: “further work is undertaken on other important benchmarks at an international level. In particular, work should be undertaken to develop and agree an overarching international framework that could be used as a guide for sponsors of benchmarks, regulatory authorities and other relevant participants.[65] This work should be taken forward by IOSCO, through the Board Level Task Force, and the European Commission, coordinated by the Financial Stability Board (FSB)”[66].Under the newly adopted UK legislation on benchmarks, the submission and administration of LIBOR, as well as key individuals, are now regulated by the FCA which has issued rules and guidance covering the systems, controls and codes of practice and policies to manage conflicts of interest of entities administering and submitting to LIBOR. As regards input data LIBOR submissions should, so far as possible, be supported by transaction data. The British Bankers’ Association will be replaced as administrator of LIBOR by NYSE-Euronext in early 2014. Finally, a new offence of making false or misleading statements, in relation to LIBOR has come into effect, which is covered under MAR/MAD in EU legislation. Currencies and tenors of LIBOR rate will be reduced to ensure that only reliable ones based on sufficient data are provided.

Regarding the Danish government legislation on CIBOR, supervision of rate-setting was transferred to the Danish Financial Supervisory Authority from 1 January 2013 and contributing to this benchmark was made a regulated activity. Rules were implemented to improve both, governance, in particular in relation to the oversight committee, and transparency. In order to facilitate choice, the Copenhagen Interbank Tomorrow/Next Average (CITA) was introduced at the end of the 2012 as a supplement to CIBOR. CITA rate is a secured swap rate, based on transactions.

The requirements under the legislation adopted by the UK and Denmark coincide in most cases with the options considered and analysed in section 9. Analysis of policy options, impact and comparison. Some specific cases in which they do not coincide are presented under the preferred options package in section 10. However, even in those cases the requirements under UK and Denmark national regulations are compatible with the preferred options package.

In the absence of EU action, some Member States would be likely to legislate on this topic in order to implement the IOSCO Principles for Financial Benchmarks. However, as the IOSCO Principles leave flexibility as to the scope of their implementation and also concerning whether they should be implemented by legislation, a divergent approach in their implementation would be most likely. For example, the scope of UK legislation is as wide as IOSCO’s as all benchmarks are covered, although currently it only specifies LIBOR as a regulated benchmark. In contrast, the Danish legislation covers only interest rate benchmarks.

ESMA and EBA published non-binding Principles for Benchmarks-Setting Processes in the EU[67] on 6 June 2013 and the EBA issued non-binding recommendations to EBF-Euribor following its review of EURIBOR in January 2013[68] and to national competent authorities (NCAs) on the supervision of contributing banks. As mentioned on the report containing the ESMA-EBA Principles for benchmarks, these are aimed at bridging the gap until an EU framework on benchmarks is established and the ESAs call for EU regulation to be proposed by the Commission[69].

At EU level, the manipulation of benchmarks that serve as the basis for financial instruments is addressed in the proposal for a Market Abuse Regulation for which a political agreement between the European Parliament and the Council was reached in June 2013. While this prohibits manipulation and provides for ex post sanctioning, it neither improves the framework under which benchmarks are produced nor their governance.

Globally, the FSB is coordinating the international initiatives reviewing the regulatory frameworks for benchmarks worldwide. IOSCO published Principles for Financial Benchmarks on 17 July 2013[70]. In the absence of EU regulation, Member States would be likely to adopt legislation at national level implementing these principles which would be divergent. This could result in fragmentation of the internal market, since administrators and users of benchmarks would be subject to different rules in different Member States. Individual national actions would also be ineffective due to the lack of coordination across Member States.

IOSCO also published principles for oil price reporting agencies[71] in October 2012 to address risks identified in oil price assessment practices, which have been highlighted by the investigation launched by the Commission in May 2013 into a possible cartel regarding the potential submission of distorted prices by contributors to some of Platts oil and biofuels products published prices[72]. In gas markets, recent allegations of benchmark manipulation have led to investigations under competition legislation, and have underlined the need for the comprehensive rules introduced by REMIT[73].

A report entitled “Towards better reference rate practices: a central bank perspective” [74] was released on 18th March 2013 by a Working Group established by the Economic Consultative Committee (ECC) comprised of officials from 13 central banks and monetary authorities and chaired by Hiroshi Nakaso (Assistant Governor, Bank of Japan). The report provides recommendations on how to improve reference rate practices from a central bank perspective. The Working Group has identified an urgent need to strengthen the reliability and robustness of existing reference rates and a strong case for enhancing reference rate choice, and calls for prompt action by the private and the public sectors. Following from this work, the Official Sector Steering Group (OSSG)[75] which is composed of regulators and central banks of the major reference rates was set up in June 2013. This group will focus on important interest rate benchmarks and it will assess the relevant benchmarks against international standards, identify alternative benchmark rates and develop a contingency planning process in the event that one of the major benchmarks fails.

While the principles by IOSCO’s and ESMA/EBA and the work by the OSSG may stimulate action and encourage convergence in rules, given their non-binding nature, not all Member States may respond, and those that do may act in different ways. This could lead to a fragmented regime governing the use of benchmarks within the EU. While this is not a problem for benchmarks that are entirely national, for those that are widely used or produced across a number of Member States national action typically does not capture all links in the chain of a benchmark's production. Another drawback is that risks would be addressed by in a piecemeal fashion, but would not address all risks, or constitute an integrated framework. Fragmentation could also facilitate regulatory arbitrage, as benchmark production can be easily moved to other Member States. This would compromise benchmark quality. Besides, sanctions under the MAR proposal have a deterrent but not preventive effect and they address manipulation by contributors but do not cover the current deficiencies of the benchmark setting process regarding the lack of appropriate governance, controls and transparency by administrators and contributors.

Consequently, in the absence of European action, important benchmarks with a European dimension would be regulated only at the national level. Other critical benchmarks such as those for oil might continue to be self-regulated in some jurisdictions and so not address the fundamental conflicts of interest that exist. Allowing this baseline scenario to remain would result in the on-going lack of trust in benchmarks, contracts and financial instruments would continue to reference unreliable benchmarks and their prices would be distorted.

Finally, as there is an international consensus of the need for a coordinated approach on benchmarks’ reform, the Commission is participating in IOSCO and ESMA/EBA task forces on benchmarks’ reform in order to ensure the maximum level of alignment across these work streams and the Commission’s proposal. The third country regime envisaged under section 12.3. Regulatory arbitrage and risks of de-location will safeguard the global competitiveness of the European financial sector on this matter.

6. Subsidiarity and proportionality

According to the principle of subsidiarity (Article 5.3 of the TEU), action at EU level should be taken only when the aims envisaged cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the EU. While some benchmarks are national, the benchmark industry as a whole is international in both production and use. To date work to address the issues raised by benchmarks has been undertaken at both national and international level[76] and therefore there is clearly the potential for both approaches.

Subsidiarity in the regulation of indices

For some indices, there may be a case for maintaining national regulation since these types of index are not widely used outside that jurisdiction and are typically produced by entities located in that jurisdiction using data gathered only from that jurisdiction. However, many other indices such as euro interest rate benchmarks clearly involve cross jurisdictional issues. For example, the EURIBOR benchmark administrator, the EBF, is based in Brussels, while the calculations and dissemination are performed by Thomson Reuters, headquartered in New York. The submitting banks are based in a variety or Eurozone and non-euro zone jurisdictions, and the EURIBOR benchmark is used to price financial instruments and contracts across the Union and internationally. Similarly, many commodities markets, such as energy and oil, are global by nature and benchmarks in these sectors involve the same cross-jurisdictional issues. For such international benchmarks, purely national action could not effectively tackle the problems outlined above.

While action at national level in relation to national benchmarks may help ensure that any intervention is appropriately tailored to the problems, this may lead to a patchwork of divergent rules, could create an un-level playing field within the internal market and result in an inconsistent and un-coordinated approach. A patchwork of national rules would impede the opportunity to produce cross border benchmarks and therefore impede cross border transactions linked to them. In contrast, an EU initiative would help enhance the single market by creating a common framework for reliable and appropriately used benchmarks across different Member States.

Furthermore, based on the global nature of benchmarks, coordination of their reform at international level is needed to ensure effectiveness. This is evidenced by the FSB mandate to IOSCO to draft international Principles for Financial Benchmarks which were published in July 2013. In this context, action at EU level will contribute to the effective and consistent implementation of the IOSCO principles in the EU. In the absence of an EU harmonised framework for benchmarks, the individual national actions would also be ineffective, as there is no obligation or incentive on Member States to cooperate with each other and the absence of such cooperation leaves scope for regulatory arbitrage.

EU action is also necessary to protect consumers in regard to the use of benchmarks in financial contracts as inconsistent national rules on benchmarks would create obstacles to the cross-border provision of financial services to investors or consumers located in different Member States. It is also essential to allow investors and consumers throughout the EU to take advantage of the increased reliability and transparency of benchmarks. Against this background EU action appears appropriate in terms of the principle of subsidiarity.

The principle of proportionality requires that any intervention is targeted and does not go beyond what is necessary to achieve the objectives. At the identification of alternative options, as well as throughout the analysis and comparison of options and their scope, the proportionality principle has been guiding the process. This has been achieved in two ways: firstly, by targeting only those benchmarks that may have a direct and certain economic impact if they are manipulated and secondly, and secondly, by identifying measures which by their nature do not involve issues of proportionality or where measures might impose a disproportionate burden, enabling those measures to be calibrated in a proportionate fashion.

For example, only those benchmarks that are used to reference financial instruments or financial contracts have been targeted, because these are the types of benchmark that would have a direct and certain economic impact if they were manipulated. Secondly, specific measures have been envisaged for critical benchmarks and for some specific sectoral benchmarks in order to ensure proportionality to the risks posed by these types of benchmarks and their specificities.

7. The scope of the initiative

This section sets out a scoping exercise given its relevance to the option analysis that follows. Policy action should be targeted at the problems and drivers – such as conflicts of interest and discretion. This section identifies the areas - the actors and benchmark types - where intervention will most effectively address these issues. In particular the scope is set to ensure that any measures only apply where necessary and proportionate. See annex XIII for a more detailed analysis.

7.1 Defining the scope by benchmark characteristics 7.1.1. Scoping for the main problem drivers: discretion and conflicts of interest

Stakeholder’s views: Many thought all benchmarks should be included as all were subject to the same vulnerabilities, others that subjective benchmarks should be subject to more onerous requirements[77] or that objective indices should be excluded[78].

The key problem driver is that wherever there is discretion which is subject to a conflict of interest, there is a risk of manipulation in the absence of adequate governance and controls. Therefore indices which involve discretion, either in their calculations or contributed data, should be subject to measures. While the degree varies, all indices involve some discretion. Therefore the scope should include all benchmarks, regardless of the method of calculation or the nature of the contributions.

7.1.2. Scoping for impact and vulnerability: published indices

Stakeholder’s views: Most recognised the distinction between published and non-published indices in respect of the market failures in section 4.2.1 and the greater risks that published indices pose[79]. Some argued measures for private or bilateral indices are not necessary[80]or possible[81].

Published indices are likely to be insufficiently robust because administrators fail to internalise the benefits of ensuring their reliability. They also inflict more damage on a wider population than indices which are not public. Therefore the options apply only to published benchmarks (and those otherwise available to the public even if they are not published e.g. due to leaks).

7.1.3. Scoping for impact and vulnerability: ‘financial’ benchmarks

Stakeholders’ views: Most agreed that a benchmark must be a reference for the price or the performance of a financial instrument or contract for it to cause economic harm or distort the information provided to users on the performance of financial instruments.

Where benchmarks are used as a reference price for a financial instrument or contract, any manipulation causes economic loss and where a contributor also uses a financial instrument that references it, there is an incentive to manipulate. Furthermore, were benchmarks are used to measure the performance of financial instruments they may be subject to conflicts of interests and their manipulation will lead to suboptimal investment choices by investors. Therefore benchmarks that price a financial instrument or consumer contract or that measure the performance of investment funds should be targeted, independently of the underlying values which they measure.

Why indices which measure non-economic values, such as weather indices, shall be included within the scope of this initiative when they are used as benchmarks?

Even if some indices, such as weather indices, measure non-economic values, they can still be used to reference financial instruments. Thus, even if those indices or their underlying data are initially of a "non-economic" nature, when they are used as benchmarks they will directly impact the returns or payments under listed financial instruments or financial contracts. In consequence, their lack of robustness or potential manipulation would have an adverse impact in those holding the financial instruments or contracts which they reference.

As an example, Eurex[82] and the CME Group[83] lists weather derivatives in several European cities. These are used by entities to manage weather related risks. These weather derivatives are referenced by indices which measure weather factors, for example Heating Degree Day (HDD) and Cumulative Average Temperatures (CAT) Indexes. Diverse entities enter these derivatives in order to transfer the risk associated with adverse weather events. Pension funds and other financial entities may also invest in these financial instruments. In consequence, these entities and their clients will be affected by the unreliability or manipulation of the indices which reference these financial instruments.

7.1.4.Scoping: targeting critical or important benchmarks

Stakeholder’s views: While many agreed that any proposal should apply to all benchmarks, others felt that less important indices should be excluded or thought that measures should be concentrated on the most important and risky sectors (in particular interest rate benchmarks).

For widely used benchmarks, even a minor manipulation may have a significant impact. The scope could therefore be restricted to critical benchmarks or specific sectors. However the vulnerability and importance of a benchmark varies over time. Defining the scope by reference to important or vulnerable indices would not address the risks that any benchmark may pose in the future and so this option has been discarded.

Sectoral Scoping: Because benchmarks sectors have different characteristics and vulnerabilities, a proportionate approach dictates that more focused and detailed provisions be applied sector by sector. This would also ensure that a disproportionate burden is not placed on small or low risk sectors. An international approach has been agreed for oil commodity benchmarks by IOSCO[84] and so detailed rules for this sector can be included in any initiative. A proportionate approach dictates that stronger safeguards are therefore required for critical benchmarks such as EURIBOR.

7.2. Defining the scope by actors 7.2.1. Entities producing benchmarks

Given the scope of targeted benchmarks, it is necessary to determine the activities in the benchmark process (submission, calculation and use), and so which entities, will be subject to the measures described in the options.

All benchmark administrators are potentially subject to conflicts of interest, exercise discretion and may have in place inappropriate governance and controls. Further, as they control the benchmark process, targeting these entities is the most effective and efficient way of achieving objectives. All EU based benchmark administrators producing ‘target benchmarks’ should therefore be in the scope of the options.

However, benchmarks that are provided by central banks are subject to control by public authorities and therefore it is not necessary that these benchmarks should be subject to supervision provided that they otherwise meet the standards and objectives of this initiative.

7.2.2. Entities contributing to benchmarks

Stakeholders’ views: there was a split between those who thought that administrators, contributors or both should be within scope. Some endorsed a proportionate approach of only targeting entities already subject to EU financial regulation[85].

Contributors are subject to conflicts of interest, exercise discretion and so may be the source of manipulation. The amended market abuse proposals[86] prohibit benchmark manipulation by contributors and so address the main risk that contributors pose. Contributing to a benchmark is a voluntary activity. If any initiative requires contributors to significantly change their business models, they may cease to contribute. However for entities already subject to financial regulation and supervision (supervised contributors) bringing the activity of contributing within scope would impose only a small marginal cost on them. It is therefore proportionate to include all supervised contributors within scope.

For contributors not subject to financial regulation and supervision (non-supervised contributors), authorisation or otherwise becoming subject to rules would impose significant costs. Financial regulators would also be ineffective supervising firms, such as agricultural entities, for which they have no expertise. Supervising non-supervised contributors would impose significant costs, provide minimal benefits and so they will not be within the direct scope. Nonetheless non-supervised contributors will be subject to the market abuse regulation and will be contractually bound to comply with the requirement of the administrators code of conduct.

Figure 2 Entities within the scope of the initiative

7.2.3 Users

Certain uses of benchmarks, such as exchanges listing instruments priced by reference to benchmarks, are already regulated. This initiative aims at providing users of benchmarks with reinforced protection.. In addition, specific consideration should be given to the use of benchmarks in contracts with consumers, such as mortgages.

8. Objectives 8.1. General, specific and operational objectives

The objectives tree below displays the relations between the general, specific and operational objectives of this initiative deriving from the problems identified in the problem definition section:

Objective tree

8.2. Consistency of the objectives with other EU policies

This initiative is closely related to the programme of reforms launched by the Commission following the start of the financial crisis. This programme implements the commitments made by the G20 and aims at tackling more structural issues in the EU financial sector and addressing the main sources of its vulnerability as revealed by the crisis. The building blocks of this financial reform package were set out in the Communication of 4 March 2009, Driving European Recovery, and the Communication of 2 June 2010 "Regulating financial services for sustainable growth". Overall, this initiative is consistent with the EU's growth and jobs objectives, in particular to ensure financial markets better serve the real economy. Please see annex XII for a detail analysis of consistency.

9. Analysis of policy options, impact and comparison

The options will be assessed primarily against their effectiveness in achieving the operational objectives as well as their efficiency in achieving these objectives for a given level of resources. The general coherence of options with wider EU proposals in the financial sector and their compliance with the principles of subsidiarity and proportionality will also be assessed.

9.1. Limit incentives for manipulation

Options || Description

Option 1 No action (Baseline scenario) || Lack of policies on conflict of interest management or non-enforceable if they exist. Lack of accountability.

Option 2 Manage and disclose conflicts of interest || Require benchmark administrators and contributors to manage and disclose conflicts of interest (including public disclosure of existing or potential conflicts of interest, conflicts of interest policies, appropriate management systems for reporting conflicts of interest, Chinese walls, remuneration non-linked to benchmark’s performance and whistle-blowing policies).

Option 3 Structural separation || Conflicts should not be permitted, meaning that both contributors to and administrators of indices should be independent from other parts of the business which have a stake in the market. This would mean structural reforms.

9.1.1. Option 1 No action (baseline scenario).

In the absence of further action, only some administrators and contributors will have conflicts of interest policies in place, and where they exist, they will not be enforceable. Thus, many contributors and administrators could exercise their discretion without being required to manage conflicts of interest and users would remain uncertain about whether conflicts exist and are being managed. Most respondents agree on the fact that: “as soon as an entity, private or public, has an interest in the level of the final fixing, there may be conflicts of interest[87], and a framework for managing conflicts of interest is critical in ensuring the representativeness and integrity of benchmarks” [88].

9.1.2. Option 2 Manage and disclose conflicts of interest

Under this option, benchmark administrators would need to identify instances of conflicts, such as where they benefit from the levels at which they set their benchmarks, from the composition of their indices, and where they can be influenced by their clients, owner or other interested parties when calculating the benchmark. Benchmark contributors would be required to identify where conflicts exist and how they manage them.

The advantage of this option is that it imposes the requirements for those performing calculations or submitting information to benchmarks to do so in an objective manner. By disclosing the conflicts it ensures that users are aware of risks to the benchmarks reliability and so enable them to choose a suitable benchmark. However, managing and disclosing conflicts alone may not suffice; to best enhance benchmarks’ reliability, it should be combined with requirements to minimise discretion and reinforce governance for benchmarks setting.

Impact on administrators and contributors: this option would result in higher compliance costs for administrators as they would need to implement policies to manage and disclose conflicts of interest (please see annex X on compliance cost). However, they would benefit from enhanced confidence in the benchmarks. Contributors would also face increased compliance costs, but they would benefit from lower risks of facing large fines for manipulation.

Impact on users and other bodies: a majority of consultation respondents support this approach; for example, the French Banking Federation states that: conflicts of interest should be made transparent and managed[89] and the CFA Institute adds that: “greater transparency underscores market discipline and helps mitigate conflicts of interest”.[90] Finally, users of benchmarks would greatly profit from transparency on potential conflicts of interest affecting benchmarks when making decisions on the use of benchmarks and from administrators and contributors effectively managing existing conflicts of interests.

9.1.3. Option 3 Structural Separation

Structural separation is effective in limiting the incentives for manipulation, but it is not demonstrably needed or possible for all benchmarks. Conflicts of interest are inherent to the benchmark rate setting process; those best able to contribute data are typically those who make use of it and so have an interest in its level. So it may not be possible to eliminate all conflicts through structural separation or where structural separation is imposed, it may not therefore be economic to continue to produce the benchmark. Therefore, although this option would reduce conflicts of interest, it would be disproportionate, and disincentive benchmark provision thereby creating continuity issues. Furthermore, structural separation does not guarantee that benchmarks would be provided in a reliable way and in some instances, it may reduce their quality by separating the expertise that is required to produce the index.

Impact on administrators and contributors: this option would significantly increase costs of provision of many benchmarks in a disproportionate way as it would require structural (legal and physical) separation for administrators and contributors. As a result, it would disincentive benchmark provision and remove contributor’s incentives to contribute. Thus, it would come at a high cost to the EU benchmark industry and to financial markets and users of benchmarks. In view of these issues, most administrators and contributors which responded to the consultation are against structural separation, although some independent benchmark administrators such as Stoxx state that: “the index administrator (or contributor) should not benefit from index levels”[91].

Impact on users and other bodies: this approach would provide a high level of integrity for benchmarks. However, as the cost of implementing the structural separation would probably be passed on to users, the latter would face higher costs and potentially a reduced choice of benchmarks. Most respondents do not support this option, with exceptions such as the European Consumer Organisation (BEUC), which supports structural separation of entities setting rates for consumer credit: “rates have to be out of the influence of lenders. Also, banks should not be free to alter rates at own discretion”[92].

9.1.4. The preferred options

|| Impact on stakeholders || Effectiveness || Efficiency

Option 1 No action (baseline) || 0 || 0 || 0

Option 2 Manage and disclose conflicts of interest || (+) Users: increases benchmarks reliability at a higher cost but proportional to risks (+) Administrators and contributors: increased costs but decreased risks || (+) Reduces conflicts of interest but does not eliminate them (+)Ensures that users are aware of risks || (-) Higher costs (+) Proportionate

Option 3 Structural separation || (+) Users: would create benchmarks with great integrity but reduce choice and increase costs (--)Administrators and contributors: would disincentive the provision of and contribution to benchmarks || (++) Limits conflicts of interest (-) Does not ensure benchmark reliability (--) Disincentives benchmarks provision and contributions. Continuity issues || (--) Large cost to EU industry and users (-) Disproportionate

Based on the analysis above, option 2 receives the highest score as it effectively and efficiently contributes to ensuring the integrity of EU benchmarks in a proportionate and consistent way.

9.2. Minimise discretion - ensure benchmarks are based on sufficient, reliable & representative data

Option || Description

1. No action (baseline scenario). || Currently non enforceable requirements on sufficient and representative data for benchmarks and justified use of discretion and they only apply to some jurisdictions and types of benchmarks. Lack of coordination for requirements across different types of benchmarks.

2. Require the use of transaction data if available and reliable, otherwise well founded and verifiable discretion (ex-post checked) || If available, sufficient, reliable and verifiable data should underlie benchmark rates setting and contributions towards them. Where transaction data is not available or reliable and discretion needs to be exercised, contributors and administrators should document and be able to justify any discretion they exercised. Where submissions are based on estimates, these estimates should be checked ex-post by the submitter (or benchmark administrator) against real transaction data where possible.

3. Mandatory use of transaction data only || Indices should rely solely on transaction data and benchmarks based on assessments or estimates would not be permitted.

4. Mandate contributions for critical benchmarks || Selected market participants (according to criteria such as representativeness or number of transactions) could be mandated to supply estimates or transaction information to administrators or calculators of critical benchmarks(please see “critical benchmark” (definition in annex I, glossary).

9.2.1. Option 1 No action (baseline scenario).

Where conflicts exist, the existence of discretion creates the opportunity for manipulation to occur and minimising discretion therefore helps ensure the reliability and integrity of benchmarks. Under the baseline scenario, these objectives will not be achieved due to the lack of incentives for contributors and administrators to minimise discretion in the benchmark’s methodology. Even if conflicts of interest are addressed through the options in section 9.1., the opportunity for manipulation will remain if appropriate methodologies are not in place and discretion is not minimised.

9.2.2. Option 2 Require the use of transaction data if available and reliable, otherwise well founded and verifiable discretion (ex-post checked))

This option is consistent with the views on benchmark methodology and underlying data of most respondents to the public consultation. It provides an instrument for ensuring that benchmark rates and contributions are based on sufficient and representative data and that discretion is justified, well founded and properly exercised. Thus, it reduces discretion, enhances the reliability of benchmarks and also reinforces the objective of enhancing transparency.

However, for benchmarks where the input data is not transaction data, in the case where one contributor would represent more than 50% of the transactions in the underlying market which the benchmark intends to measure, and thus of the weighted contributions, it would be relatively feasible for this contributor to manipulate the benchmark. Thus, provisions should be made to ensure that a firm which holds a dominant position in the underlying market to a benchmark is not able to abuse this position by influencing the price setting in the market through its contributions of input data to the benchmark setting. In this case, the administrator shall verify that any difference in the value of the input data of that contributor relative to the average value of input data from all other contributors is justified; where it is not justified, the administrator shall notify the relevant competent authority. This measure would be justified based on the need to ensure that benchmarks enhance transparency and thus competition in the markets which they intend to measure, and not the opposite.

Impact on administrators and contributors: for administrators and contributors, benchmarks provision would be more expensive as it would require investments to update models/systems/methodology to ensure their use of sufficient data and justified and appropriate use of discretion (please see cost benefit analysis in annex X). It could also disincentivise contributors as they would need to disclose transaction data if available and document/justify their contributions. On the other hand, it also would provide a safe harbour for administrators and contributors by clarifying their obligations and enforcing them[93]. Overall, this option would permit flexibility on methodology and underlying data, it would be proportionate and it would enhance benchmark reliability. It is supported by most respondents to the consultation, including Global Financial Markets Association (GFMA) which in its Principles for financial benchmarks[94] states that ‘sponsors (administrators) should ensure that there is a methodology for conducting the benchmark price assessment that relies on sound data and accurately reflects market conditions’.

Impact on users and other bodies: this option would reduce the potential for manipulation and so the risks to users. It would also allow for continuity in those benchmarks which could not be based exclusively on transaction data, thereby avoiding contractual continuity issues. Furthermore, it would enhance the reliability of benchmarks and would provide users with choice of benchmarks based on verifiable methodologies. In consequence, most institutions representing users, including Finance Watch and BEUC state that: “transactions should be used, and if not possible complemented by or checked against surveys”[95].

9.2.3. Option 3 Mandatory use of transaction data only

Under this option benchmarks should rely solely on transaction data; those based on quotes, indications of interest or estimates would not be permitted. The main advantage of this option is that it would ensure that all input data is verifiable and discretion in terms of the input data would be minimised. Thus, it would reduce the risk of manipulation and enhance benchmarks’ reliability. However, this option would present important disadvantages. Benchmarks which cannot be based on transaction data would be discontinued, and so would contracts or instruments based on them. Furthermore, although it ensures that benchmarks are based on verifiable data, it does not ensure that this data is sufficient or representative. More importantly it does not eliminate discretion by the administrator. If discretion is eliminated at the contributor level it may simply move the problem up to the administrator level.

Impact on administrators and contributors: mandating transaction data may require significant investments in data gathering systems where the data is not currently gathered. It would no longer be possible to produce many benchmarks. Contributors may be discouraged from participation by the requirement to provide transaction data which contains sensitive information. It could also have a negative impact on the fundamental right to conduct a business[96]. As a result, most consultation responses from administrators and contributors were against this approach and some highlighted that: “mandating the publication of transactions could jeopardise the production of benchmarks”[97].

Impact on users: users would be adversely affected by continuity issues where benchmarks could not be produced if based exclusively on transaction data. Therefore while many respondents “favour a calculation methodology based on actual transaction rates”[98]and consider that “transactions are the most relevant information and should take precedence”[99]others point out that “although benchmarks based on real transactions are preferred, this is not always possible[100] and estimates (or surveys) may be needed for illiquid markets”[101].

9.2.4. Option 4 Mandate contributions for critical benchmarks

This option addresses the problems which could lead to critical benchmarks based on voluntary contributions being discontinued or becoming unreliable due to insufficient contributions, in particular where market or regulatory burdens make voluntary contributions unattractive.

Where contributions are voluntary, there is a free rider problem in that entities that benefit from using the benchmark may choose not to incur the costs and risks of contributing to the benchmark. Where the continued existence of a benchmark is in the public interest because it is critical, it is therefore appropriate to mandate contributions to ensure the continued existence of this benchmark. (See chart on section 4.1.1. on the “Risks posed by contributors to critical benchmarks leaving panels and the “critical benchmark” definition in annex I, glossary). It would ensure the continuity of benchmarks which are of critical importance and particularly in times of market stress. However, although this option ensures sufficient data, on its own it does not ensure the data is representative or that any contributions are honest or reliable assessments. Furthermore, the implementation of this option would require that the majority of contributors to critical benchmark are supervised entities, as it would not be possible to mandate unsupervised entities to contribute to benchmarks and it would not be proportional to require contributors becoming supervised entities in order to mandate their contributions.

The implementation of this option (as well as of the suboption under 9.5.6. on colleges of supervisors for critical benchmarks) would also require determining specific parameters to identify which benchmarks are critical, for example, based on the value of contracts referenced to them in the EU and on whether their unreliability could have serious significant adverse implications. For example, in the recent review of STIBOR (Stockholm Interbank Offered Rate) the Central Bank of Sweden (Sveriges Riksbank), defined STIBOR as “of great significance for Swedish interest rates, the allocation of capital in society and for the functioning of the financial markets” as its family of benchmarks are used to reference the pricing of financial contracts in Swedish kronor corresponding to almost 50,000 billion Swedish krona (approx. 6 billion Euro).

Based on the fact that the Union financial system capital base has an approximate value of € 3.5 trillion, the failure of a benchmark which is used to reference financial instruments or contracts with a value of over € 500 billion would have a large adverse impact on financial stability and the real economy. Thus, benchmarks used to reference financial instrument or contracts worth over € 500 billion in the EU could be considered critical benchmarks.

Impact on administrators and contributors: for contributors which do not currently contribute to benchmarks or wish to do so, it would impose an additional obligation, but the additional costs would normally be low (please see annex X) as this is just a marginal activity in their business model (e.g. banks). Overall, this requirement would be proportionate for administrators and contributors to ensure the continuity of benchmarks of critical importance (such as EURIBOR) as discontinuity of such benchmarks (which reference billions of financial instruments and loans) could have significant consequences on financial stability and on consumers and investors.

Impact on users and other bodies: most respondents representing users who commented on the issue were of the view that mandatory reporting requirements could prove useful[102] in particular circumstances for certain markets[103], as it increased the share of the market that is represented by the benchmark. However it would not be appropriate for all markets and, a threshold (e.g. market share) is probably necessary to avoid excessive burden[104]. More generally the view seemed to be that any decision to impose such a requirement would require detailed consideration[105] of the market and issues[106].

9.2.5. The preferred options

|| Impact on stakeholders || Effectiveness || Efficiency

Option 1 No action (baseline scenario). || 0 || 0 || 0

Option 2 Require the use of transaction data if available and reliable, otherwise well founded and verifiable discretion (ex-post checked) || (++) Users: enhances reliability, contractual continuity and market choice (+) Administrators and contributors: increases costs, but provides flexibility on methodology and a safe harbour || (++) Increases transparency and reliability (+)Reduces and justifies the use of discretion, but not minimised to the maximum extent (+) Reduces the risk of manipulation (-)Transparency may disincentivise contributions || (-) Higher costs (+)Proportionate

Option 3 Mandatory use of transaction data only || (-) Users: Enhanced reliability but contractual continuity issues and reduced choice (--) Administrators and contributors; large investments, lack of flexibility and discontinuity || (-) Transparent, verifiable and reliable data but not sufficient or representative (++)Minimises discretion (-)Discontinuity as lack of flexibility in methodology (-)Disincentives contributors participation || (--) Serious costs for users if contractual discontinuity (--) Disproportionate for non-critical benchmarks

Option 4 Mandate contributions for critical benchmarks || (++) Regulators: continuity of critical benchmarks (+) Users: higher reliability but higher costs (-) Administrators and contributors: higher cost || (++) Ensures benchmark continuity and sufficient data (-) Does not ensure representativeness and reliability on its own (++) Enhances financial stability || (-)Benchmarks provision and use more costly (+) Proportionate for critical benchmarks

Options 2 and 4 are not mutually exclusive and based on the analysis above, they could be combined to address the deficiencies they present individually. Transaction data would need to be used when available and representative. Otherwise data that can be verified or ex post checked should be used whenever possible. Contributions could be mandated for critical benchmarks only if necessary.

This combination of options ensures that benchmarks are based on sufficient, reliable and verifiable data and that the exercise of discretion is minimised and justified, but allowing for proportionality, flexibility on methodologies and market choice of benchmarks. Therefore, it would effectively contribute to reducing the risk of manipulation without discouraging provision or contributions. However, these options to minimise discretion need to be combined with options to enhance transparency, governance and accountability in order to effectively reduce the risk of benchmark manipulation.

9.3. Policy options to ensure internal governance and controls address risks

Option || Description

Option 1 No action (baseline scenario) || Industry self-imposed regulation and non-legally binding principles and recommendations issued by IOSCO and ESMA/EBA on improvements to governance and controls.

Option 2 Supervisory authorities to issue comply or explain guidelines || Supervisory authorities to issue comply or explain guidelines for the benchmark industry as well as contributors to benchmarks on appropriate governance and controls.

Option 3 Mandate adequate management systems and effective controls || Mandate adequate management systems and effective controls for both administrators and contributors to benchmarks in order enhance the reliability of benchmark rates and contributions and address the risks of manipulation, including: adequate management structures and well defined responsibilities to deal with conflicts of interest, appropriate use of discretion, codes of conduct, internal and external controls and audits, complaints and outsourcing procedures and due diligence and appropriate skills and training of personnel.

9.3.1. Option 1 No action (baseline scenario)

Most responses to the public consultation as well as the main international work streams on the review of benchmarks (namely the IOSCO task force, the ESMA/EBA task force and the Wheatley Review)[107] have identified important shortcomings in the governance and controls of benchmark administrators and contributors and they have recommended addressing these shortcomings as a top priority. As benchmark administrators and contributors cannot fully internalise the profits that can be gained from marketing benchmarks with strong governance and controls, they do not have the incentives to implement robust governance unless it is enforced[108]. In addition, self-regulation does not ensure the necessary independence of the governance systems as entities are not obliged to separate management functions. According to most consultation responses, such as UK HMT’s: ‘a credible governance and regulation structure should have sufficient independence and powers to ensure that attempted manipulation of the benchmark does not occur’[109]. Under the no action scenario, the lack of enforcement and independence means that shortcomings in governance would not be effectively addressed.

9.3.2. Option 2 Authorities to issue comply or explain guidelines

The main advantage of this option is that it imposes a lower regulatory burden on benchmark administrators and contributors than legal requirements. However, as guidelines to be issued by supervisory authorities would be only on a comply or explain basis, whilst some benchmarks’ administrators and contributors would choose to implement their recommendations on the enhancement of governance and controls, others would not due to the lack of enforcement (ESMA and other supervisory authorities do not currently have the powers to issue binding guidelines or enforce them). Thus, this option would not effectively address the shortcomings identified in governance and control and minimise the risk of manipulation.

Impacts on administrators and contributors: this would create an unlevel playing field in governance and controls requirements for regulated (LIBOR, CIBOR) versus non-regulated benchmark administrators and contributors in the EU. Furthermore, although it would not impose a large additional regulatory burden on EU benchmark administrators and contributors, it would not provide them with legal certainty on their obligatio