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# 52013SC0336

**COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on indices used as benchmarks in financial instruments and financial contracts /\* SWD/2013/0336 final \*/**

  

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 obligations[110]. Some
respondents to the consultation, mainly benchmark administrators, believe that
“non-binding principles combined with industry codes will deliver the
transparency and governance arrangements that are necessary to ensure the
integrity of benchmarks”[111].

Impacts on users and other
bodies:
this
option would not provide the required degree of consumer and investor
protection for
the existing risks by not ensuring robust governance and controls as administrators
would not have legal obligation to do so and as explained under the no action
option, they cannot fully internalise the benefits of investing in robust
governance. In consequence, users of benchmarks who responded to the
consultation, such as Caixabank, state that: “Benchmarks codes of conduct
should be as detailed as possible and sponsors governance should be supervised
by an official institution”[112].

9.3.3. Option 3 Mandate adequate
management systems and effective controls

This option provides a
tool for enforcing robust governance and controls to address the shortcomings
identified in benchmark’s provision and contribution activities and reduce the
risk of manipulation. It also provides a level playing field in governance and
control requirements for benchmark administrators and contributors within the
EU and legal certainty on their obligations. These requirements would take into
account the nature, scale and complexity of the benchmarks provided or
contributed to by the entities, as well as the nature and range of activities
undertaken in the course of the provision or contribution.

Impacts on administrators
and contributors: on one hand, it would impose a higher
regulatory burden for benchmark administrators and contributors as they would
be obliged to modify their management systems and controls. On the
other hand, these requirements would provide entities with legal certainty on
their obligations and create a level playing field in the EU, making benchmarks
provided in the EU more competitive globally.

Impacts on users and other
bodies: this option
would provide the required degree of consumer and investor protection as it
would effectively reduce the risk of manipulation by ensuring robust governance
and controls. A
significant number of respondents, mainly users and public institutions,
believed that “governance should be mandated and supervised by an official
institution”[113].

9.3.4.
The preferred options

|| Impact on stakeholders || Effectiveness || Efficiency

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

Option 2 Supervisory authorities to issue non-binding principles for the benchmark industry as well as contributors to benchmarks on appropriate governance and controls ||  (-)Users: no required degree of consumer and investor protection (-)Administrators and contributors: low regulatory burden but lack of EU level playing field and uncertainty on obligations (--) Regulators: lack of enforcement tool || ( -) Lack of enforcement tool (-) Does not effectively reduce the risk of manipulation (-) EU unlevel playing field for administrators and contributors || (+)Low regulatory burden  (-) Non-proportionate to risk

Option 3 Mandate adequate management systems and effective controls for both administrators and contributors to benchmarks ||  (+) Users: reduces risks of manipulation (+) Administrators and contributors: EU level playing field and legal certainty on obligations but higher regulatory burden || (+) Enforcement tool (+) Effectively reduces risk of manipulation (+) EU level playing field and legal certainty for entities || (-) Higher regulatory burden.  (+) Proportionate to risks

Based on the analysis
above, option 3 receives the highest score as it provides a tool for enforcing
the implementation of robust governance and controls which effectively address
the risk of benchmark manipulation. This option also enhances benchmarks’
reliability and ensures a level playing field for EU benchmarks’ administrators
and contributors. Finally, although it imposes a higher compliance burden on
benchmarks’ administrators and contributors, it also provides legal certainty
on their obligations, reducing their potential liabilities and the risk of
large fines for manipulation.

The main governance and
control requirements for addressing the shortcomings are identified in the
table below[114]. To ensure a
proportionate approach, these requirements would be calibrated to the risks
posed by different types of administrators and contributors and to adapt to the
requirements of different sectoral or critical benchmarks; smaller administrators
of benchmarks that pose less risk may therefore be subject appropriately
tailored and proportionate requirements.

Enhancement of || Requirements

Governance || \* Setting adequate management structures which effectively address conflicts of interest, such as Chinese walls, conflict reporting mechanisms and whistle-blowers policies \* Ensuring well defined responsibilities in the provision of and contributions to benchmarks \* Ensuring legally binding codes of conduct are in place and signed by all relevant parties in order to assure the direct and indirect application of legal requirements and best practice in the provision of and contributions to benchmarks \*Ensuring independence in the provision of or contributions to benchmarks \*Ensuring complaints and outsourcing procedures are in place to guarantee benchmarks administrators and contributors accountability to users \*Ensuring due diligence of personnel as well as appropriate skills and training and right incentives are in place to avoid conflicts of interest

Controls || \*Ensuring regular controls on the benchmark provision and contribution processes, particularly regarding management of conflicts of interest and use of discretion and data quality \*Ensuring periodic internal or external audits (as adequate and proportionate to risks identified on administrators and contributors management systems and processes are regularly and thoroughly carried out and that their outcomes are public and their recommendations swiftly implemented

The option package
presented so far effectively and efficiently addresses the risks of benchmark
manipulation by addressing the issues linked to:  conflicts of interest; use of
discretion; insufficient underlying data; and lack of robust governance and
controls. However, in the absence of effective oversight, it would not ensure
compliance with the requirements identified and it would not guarantee that
problems are addressed.  Additional options to address the issues of lack of
transparency and inappropriate use of non-robust, unsuitable or
unrepresentative benchmarks would also be required.

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

Option || Description

Option 1 No action (baseline scenario) || Lack of transparency requirements for the benchmark industry. Transparency voluntarily applied to different degrees by different benchmark administrators and contributors. The degree of transparency will determine whether users are able to assess benchmarks’ robustness and adequacy for their purposes. Benchmark administrators may be liable where contractual relationships with users exist and required to ensure the suitability of benchmarks.

Option 2 Require transparency on methodology, underlying data, process and purpose || Mandate full transparency by requiring clear disclosure of how a benchmark is calculated, the underlying data used, what it is intended to measure and any risks that might mean the benchmark becomes unreliable or unfit for use. However, in some cases, it may be necessary to allow for either delayed publication or partial publication of underlying data if this would ensure the integrity of the benchmark.

Option 3: Assessment of suitability of benchmarks’ use for retail contracts || Where a financial entity, such as a bank, intends to enter into a financial contract with a retail consumer which references a benchmark, the financial entity should assess the suitability of the benchmark for this use.

Option 4: Mandatory notification of benchmarks use || Users of benchmarks would be required to notify the benchmark administrator of their use. The benchmark administrator would then determine whether that use was suitable.

9.4.1. Option 1 No
action (baseline scenario).

Transparency is
necessary to allow users to make adequate assessments about benchmarks
robustness, reliability and adequacy for their purposes. It is also important
to ensure confidence in benchmarks. Responses to the public consultation
indicate that while a desirable characteristic, transparency is not always
provided and or provided on a consistent basis. In the absence of further
action, the current situation would persist meaning users would not be
assured of the integrity of benchmarks and not able to make informed
assessments about their suitability.

Existing EU legislation
contains a number of provisions to ensure the suitability of use and robustness
of benchmarks. Article 40(1) of Markets in Financial Instruments Directive[115] requires
that “any financial instruments admitted to trading in a regulated market
are capable of being traded in a fair, orderly and efficient manner”.
Article 37(1)(b) of the Implementing Regulation that "the price or other
value measure of the underlying must be reliable and publicly available".

Many responses to the
consultation were of the view that the appropriate delineation of
responsibilities was that index administrators should be responsible for
standards while users should be responsible for ensuring that the index was
appropriate and suitable for the purpose that they intended to use it for[116].

Finally, where the user
has a direct contractual relationship with the benchmark administrator through
for example a licensing agreement, they may have a contractual claim against
the benchmark administrator for any breach of those terms, although this may or
may not include any terms regarding the robustness, representativeness and
fitness for purpose. Where the user does not have a contractual relationship
with the benchmark administrator, usually, they will not have a right of action
against them.

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

Transparency on data and
methodology would allow both the regulators and the public to evaluate whether
the benchmark is accurate and reliable.  Access to data and methodology would
mean that the benchmark can be back tested to assess accuracy and identify
vulnerabilities. Secondly, transparency about what the benchmark measures, how
it should be used and its shortcomings would inform users about the economic
reality a benchmark is intended to measure and any shortcomings it may have in
tracking this.

However, in some cases, it
would still be necessary to allow for delayed or partial publication if full
and contemporaneous publication would result in serious adverse consequences
for the contributors or adversely affected the benchmark’s integrity. 
Publication could only be delayed to the extent it significantly diminished
these consequences. The underlying data would be provided to regulators who
could verify its integrity on behalf of the users. Costs could be therefore
higher but this would be offset by the benefits of reducing the incentives to
manipulate.

Set against these
benefits, the costs of providing this information would be small. Firms already
have internal guidance on methodology and collate the input data. Publishing
this data would not therefore involve significant costs. The possibility of
allowing for delayed or partial transparency of underlying data when justified
reduces possibility of transparency having negative effects on integrity and
reducing incentive to contribute and ensures proportionality.

Impact on stakeholders: on one
side, many administrators[117] supported
transparency[118]  but noted
that it should be proportionate[119] and that “more
transparency should apply if more judgement is exercised[120]”. For the
majority of users, transparency was an important factor in choosing to use a
benchmark[121] and there is
a need for enhanced transparency[122]. This view was shared
by regulators[123] and public
bodies[124].

On the other side, some contributors
and administrators were of the view that full transparency of underlying data
may have a negative impact and that anonymity or delayed transparency may be
necessary in some cases[125]. Some public
bodies, such as the ESRB: “Support a form of lagged transparency to markets
at large[126].

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

The scope of an EU
initiative applies to benchmarks used to reference financial instruments.
However benchmarks may also be used to reference retail financial contracts; in
particular, interbank interest rate benchmarks such as EURIBOR are used to
reference mortgages. Directive 2008/48/EC on Consumer Credit[127] allows the
use of indexes or reference rates as a basis of changes of borrowing rates,
without regulating the nature and suitability of those rates in credit
contracts. Besides publicly provided rates (such as EURIBOR) the indexes
provided and published by the creditors themselves are also used. However the benchmark may
be chosen not because it is suitable for the consumer or mortgagee but rather
because it suits the lender or mortgagor[128] as the
result of uneven bargaining power or the use of standard terms. The choice of
benchmark may
also bias comparability of cross-border credit offers. Option 3 therefore
provides that where a financial entity such as a bank intends to enter into a
financial contract with a consumer where the payments are referenced by a
benchmark, it should assess the suitability of the benchmark for this use and
warn the consumer if it is unsuitable. However, an appropriate level of
transparency on benchmarks purpose, methodology and underlying data will be
necessary for the appropriate assessment of suitability.

Furthermore, in the
absence of a requirement to assess suitability of benchmarks for referencing
retail financial contracts, as this issue is not specifically addressed by the
requirements under the CCD and the legal text of the MCD under negotiation,
different Member States would adopt divergent approaches to ensuring the suitability
of benchmarks for their use in retail financial contracts.  This would lead to
uneven levels of consumer protection across different Member States and it
would not ensure the optimum level of protection for consumers. Thus, a unified
requirement for a benchmark suitability assessment for retail financial
contracts is required.

Impact on administrators
and contributors: administrators would need to clearly specify any
suitable or unsuitable uses of their benchmarks on their benchmark statement
and they could face contingent costs if their benchmarks would not be fit for
the specified purposes, for example in the event of manipulation. Most administrators
did not believe that special provisions should apply in relation to retail
contracts, but some considered that in some circumstances the use of benchmarks
by retail consumers should be restricted[129].

Impact on users and
other bodies: this option benefits consumers by ensuring that important
contracts are not referenced to unreliable benchmarks. It would impose costs on
lenders who would, inter alia, have to make an assessment recorded in writing
and may have to use different benchmarks if the current benchmarks they use are
unsuitable. However in most cases the enhanced transparency proposed under this
initiative, in particular the provision of the benchmark statement by the
benchmark administrator should facilitate any assessment. Providing such an
assessment should be a matter of good practice and therefore may not impose
significant costs on users. According to consultation responses, most users
believed that retail users and investors should be protected due to their
particular vulnerabilities”[130]. However
some felt that there was no particular distinction to be made between retail
and other users[131].

9.4.4. Option 4: Mandatory
notification of benchmarks’ use

One of the key reasons
why some users are not protected against the use of unreliable benchmarks is
that the benchmark administrators frequently do not know who the user is and
what they are using it for[132]. As a result
the benchmark administrator does not have any liability to the user.

Option 4 would propose
to address this shortcoming by requiring any user of a benchmark to notify the
benchmark administrator of its use. The benchmark administrator would then
provide an assessment to the user of whether the benchmark is suitable and
would be liable to the users in respect of its assessment of suitable use. This
option could have a positive impact in respect of enhancing consumer protection
for the most widely used benchmarks but it would also imply high additional
costs for benchmark users. Many benchmarks, such as strategy indices, are only
used by a small group of licensed users so this measure would impose a cost but
provide no benefit. For the most widely used indices such as EURIBOR, this
measure would provide a benefit but at a potentially prohibitive cost. EURIBOR
is used to reference millions of mortgages and this would therefore require
millions of notifications to EBF-EURIBOR and millions of suitability
assessments. The costs of performing these would therefore require the hiring
of hundreds of additional staff; the overall burden would probably make the
benchmark uneconomic. In addition there is a danger that benchmark administrators
would simply adopt a defensive approach to any suitability assessment and
declare all but a narrow set of uses as unsuitable.

Impact on stakeholders: although
this option was not specifically raised in the consultation, a number of
responses identified that it was difficult for benchmark administrators to know
who was using their benchmarks and for what purposes.

Impacts on users and other
bodies: users and
other bodies were divided, with associations representing consumers, such as
the European Consumer Organisation (BEUC) defending that users were at a
particular disadvantage and required additional protections[133]. This option
would enhance the protection of users of benchmarks and reduce their costs.

9.4.5. The preferred options

|| Impact on stakeholders || Effectiveness || Efficiency

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

Option 2 transparency on methodology, underlying data and purpose whilst allowing for delayed or partial transparency of underlying data when justified ||  (+)Administrators and contributors: Minimal additional cost and reduction of transparency obligations when justified (+)Regulators and users: transparency on methodology and suitable use but higher costs for lenders and indirectly users || (++) Allow users and regulators to assess accuracy and reliability of benchmark  (+) Reduces possibility of transparency having negative effects on integrity and reducing incentive to contribute || (+) Small costs to benchmark administrators but significant benefit to users and regulators (+) Proportionate as it allows for reduced transparency when justified

Option3 Assessment of suitability of benchmarks’ use for certain retail contracts: ||  (-) Administrators:  potential contingent costs if benchmarks unfit for specified purposes (++)Users: Increases accountability to retail consumers and user || (+) Provides consumers with recourse against administrators for malfeasance (+) Levels bargaining power between consumers and lenders || (+) Additional cost to banks providing mortgages but significant benefit to users in terms of investor protection

Option 4 Mandatory notification of benchmarks || (++) Administrators: Imposes a duty of care on benchmark administrators (-) Users: enhances consumer protection but at a high cost || (-) No effect for many small benchmarks (+) Effective for unlicensed users of widely used benchmarks (-) Easy to circumvent by declaring benchmarks unsuitable for most uses || (--) Very large additional cost for the most widely used benchmarks which could prejudice their viability (-) additional costs for users

Based on the analysis
above, options 2 and 3 receive the highest score. Option 2 allows for the
correct assessment of benchmark appropriateness by users by ensuring
transparency on benchmarks’ methodology, underlying data and purpose.  Option 3
contributes to the use of robust and reliable benchmarks to reference retail
financial contracts by requiring to perform a benchmark suitability assessment
for certain retail contracts to ensure the use of benchmarks which are fit for
purpose.

9.5. Ensure effective supervision of benchmarks

Option || Description

Option 1 No action (baseline scenario) || No supervision of benchmarks at European level. Contributions to and provision of CIBOR in Denmark and LIBOR in UK to become regulated activities in 2013. No other national or supranational supervisory powers over EU benchmarks administrators and contributors. IOSCO and ESMA/EBA have issued non-binding principles on benchmarks. ESMA and EBA do not currently have the legal power to issue binding guidelines or supervise EU benchmarks’ administrators and contributors.

Option 2 Private benchmark provision, independent private oversight || A committee, consisting of independent experts from the private sector, but not including representatives of the benchmark administrator,, would oversee the respect by the benchmark administrator of standards of governance.

Option 3 Private benchmark provision, public supervision and enforcement || The provision of benchmarks would become a regulated activity, subject to a registration obligation for benchmark administrators with supervision by competent authorities. Competent authorities would have enforcement and sanctioning powers. Contributors to benchmarks located in the EU would be subject to direct supervision if they are already regulated entities under financial or other European regulation. Administrators would be required to adopt a code of conduct be signed by the benchmark administrator and benchmark contributors which would be legally binding. For ‘critical’ benchmarks enhanced oversight provisions would apply. Sub-options on optimum level of supervision by: national supervisory authorities (NSAs), European Supervisory authorities (ESMA), or (NSAs) coordinated by colleges of national supervisors with ESMA participation and mediation for critical benchmarks.

Option 4 Public provision of critical benchmarks || Existing (e.g. central banks) or newly created public entities could be mandated to provide critical benchmarks of European dimension.

9.5.1. Option 1 No action (baseline scenario)

Under the no action
option, there would not be any European supervisory instrument to enforce the
compliance with the requirements on the enhancements in the benchmark setting
process. Only the UK and Denmark have currently or will have in 2013
supervisory powers over administrators of and contributors to LIBOR and CIBOR.
Regarding currently existing independent private oversight, there exist
independent industry oversight committees for some benchmarks (such as LSE or
IPRO) but not for all of them. This leads to a lack of EU enforcement and
oversight of the benchmark setting process in the EU and creates an unlevel
playing field across administrators and contributors of benchmarks. Finally,
for benchmarks for which there is private oversight in place, it does not
guarantee the independence of the oversight bodies.

9.5.2. Option 2 Private benchmark
provision, independent private oversight

This option provides for
the enhanced oversight of benchmarks and their compliance with industry code of
business rules. Furthermore, oversight committees composed of market experts
may count with an in deep market knowledge and the appropriate skills to
perform the task of benchmark oversight and provide flexibility in the
oversight of different types of benchmarks. As a result, this would be an
appropriate option according to about a fourth of respondents to the
consultation, mainly benchmark administrators such as Rate Validation Services
(RVS), which recommends that: an independent advisory board, made up of
“eminent individuals” drawn from academic, regulatory and business backgrounds
should oversee the services.

However private sector
experts, as market participants, may suffer from conflicts of interest similar
to those affecting administrators and contributors. Thus, it may be difficult
to ensure their independence from the entities on which they exercise their
oversight. Furthermore, in opposition to public supervision, oversight
committees could only monitor compliance with conduct of business rules, but
not with public regulation and they could not encourage compliance through
enforcement and sanctioning powers. Thus, it would not strengthen
accountability of benchmark administrators and contributors to public
authorities. Because of these reasons, about two thirds of respondents to the
consultation call for the involvement of public authorities in the oversight of
European benchmarks, including users, contributors, some administrators and
important public institutions such as the ESRB which states that: “competent
authorities should be provided with supervisory tools in order to make
supervisory oversight more effective”[134].

Impact on administrators
and contributors: this option would imply a low compliance burden
for administrators and contributors. However, there would be a lack of coordination
across different EU jurisdictions, which would lead to an unlevel playing field
and a lack of accountability from administrators and contributors.

Impact on users and other
bodies:
this
option would not provide accountability to the public authorities or a tool for
enforcement of compliance. Thus, it would not effectively enhance the
reliability of benchmarks and provide investor and consumer protection.
Furthermore, this option would apply directly to administrators of benchmarks,
but only indirectly to contributors as the independent industry committees
would not have direct oversight on them. According to the existing evidence
(such as in the LIBOR case, oil prices attempted manipulation, etc.) a high
risk of attempted manipulation and conflicts of interest exist at contributor
level for benchmarks.

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

While there is broad
agreement in the consultation responses on the need for enhanced supervision,
there are mixed views about whether benchmarks provision should be publicly
supervised. Benchmark administrators generally oppose their functions becoming
a regulated activity and advocate for private oversight, but investors and
other benchmark users broadly support the regulation of benchmark provision.

This option would ensure
supervision of benchmark administrators to the highest possible level by
requiring them to become regulated activities. Concerning contributors, only
those who are already regulated entities would be supervised in order to ensure
proportionality, whilst the rest would sing a legally binding code of conduct
with the benchmark administrator. Thus, this option would provide authorities
with a tool for enforcement of compliance and accountability of administrators
and contributors whilst respecting proportionality. It would ensure the
independence of the supervisor as it would be a public authority and it would
allow for market choice, innovation and competitiveness as benchmark provision
would remain in private hands. About two thirds of respondents to the public
consultation called for public oversight of the benchmark setting process,
including users of benchmarks, market authorities, contributors and even some administrators.
According to the CFA[135] Institute: public
institutions should have a role in the supervision and oversight of benchmarks.

Impact on administrators
and contributors: making benchmark provision a regulated activity
would increase the administrative burden, mainly for administrators, but also
for contributors and these costs would be passed on to users. However, it would
also give administrators and contributors legal certainty on their obligations.
In view of this, whilst most administrators support self-regulation in their
responses to the consultation, some support regulation, such as EBF-EURIBOR: Euribor
supports the introduction of European public supervision on benchmarks before
and after the fixing delivery. However, other administrators warn of the
potential negative effects: regulation should not be too prescriptive and
burdensome because it could mean the costs for producing a benchmark become
prohibitive[136] and it could
discourage participation[137].

This option respects the
principle of proportionality, in particular as it would not regulate
contributors to benchmarks which are not already regulated (see section 7.2.).
Some concerns have been raised regarding the impact of any initiative on small
index administrators who do not wish or know their benchmarks are used to
reference financial instruments.  To address this, regulators would be required
to notify benchmark administrators if their benchmarks are used to reference
financial instruments and so they wold come within the scope.  Until this would
be done, the benchmark administrator would have a defence. Once notified, if
they would not wish to become subject to the initiative, they could enforce
their intellectual or other property rights to stop their benchmarks being used
to reference financial instruments. An appropriate period of time to enforce
these rights would be provided for.

Costs for contributors[138] would be
lower than for administrators, as all contributors under scope are already
regulated entities and the requirements for contributors would be less than for
administrators. However, benchmark administrators could benefit from the
enhanced robustness of their benchmarks, and contributors from clear
guidelines, which would allow them to better manage their risks and avoid large
fines. Finally, markets would benefit from more robust benchmarks and since
most benchmark administrators and contributors are also market players and
users of benchmarks, the benefits of enhanced benchmarks would be shared.

Impact on users and
other bodies: this option would allow for the maximum level of consumer
and investor protection, by ensuring compliance and accountability. Thus, it
would increase benchmark reliability whilst maintaining market choice of
benchmarks. According to most users responding to the consultation, including
the Financial Services Users Group: there is need for regulation, oversight,
sanctions and redress mechanisms[139].The existence
of a college of competent authorities for critical benchmarks would facilitate
information sharing and coordination in the supervision of critical benchmarks whilst
allowing for proportionality and respecting subsidiarity.

9.5.4. Option 4 Public provision
of critical benchmarks

Only
benchmarks of critical importance which are fundamental to the smooth running
of the markets and the real economy could be considered to be public goods
justifying their provision by public entities. Most respondents to the public
consultation agree that most ‘non-critical benchmarks’ are not public goods,
and best provided by the private sector, which guarantees competitiveness and
innovation in their provision. However, a few respondents to the consultation
consider that: some benchmarks may need to be provided publicly.[140][141]

Impacts on administrators
and contributors: according to most respondents to the
consultation benchmarks should not be provided by public authorities unless
strictly necessary for financial stability, as it would only be proportionate
in this case. Public provision would eliminate competition in the provision of
benchmarks, limit innovation and adaptation to market needs, as well as choice.
Furthermore, it would come at a high cost to the EU benchmark industry as the
transfer of benchmark provision to the public sector will carry the loss of
jobs, income and investments in innovation on this field. It would also imply
high costs for the public sector, as it would not be competitive in the
provision of benchmarks and it would need to acquire the knowledge, skills,
systems, etc. to do so. Also, it may also deter contributors from contributing
as they may be reluctant to disclose sensitive information or commercial
secrets to public authorities. Finally, as expressed by some administrators:
a producer must have the depth of knowledge and experience to produce an
effective product. Such expertise may not reside in a public institution[142].

Impacts on users: the main
advantage of this approach is that it might reduce conflicts for benchmarks,
which are of ‘critical’ importance and thus enhance market stability. However,
whilst this option would reduce conflicts of interest in the provision of critical
benchmarks some respondents to the consultation state that: public bodies
may also be subject to conflicts of interest (but to a lesser extent) and
industry administrators are better positioned to design, construct and produce
benchmarks or indices that meet users' specific needs[143].

9.5.5. The preferred options

|| Impact on stakeholders || Effectiveness || Efficiency

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

Option 2 Private benchmark provision, independent private oversight || (+) Administrators and contributors: low compliance burden and flexibility but lack of legal certainty (--) Users: lack of accountability of administrators and contributors and no enforcement of compliance. Lack of benchmark reliability. || (--) Lack of independence of the supervisor (--) No tool for enforcement of compliance (-) Lack of accountability of administrators and contributors (+)Use of industry knowledge (-)EU unlevel playing field || (+) Low administrative and compliance burden

Option 3 Private benchmark provision, public oversight and enforcement ||  (-) Administrators and contributors: higher compliance burden and accountability (+) Users: accountability and enforcement of compliance. Reliable benchmarks but higher costs (+) Regulators: tool for ensuring compliance and accountability but higher costs and need for resources and capabilities. Coordinated supervision and information sharing || (++) Independence of the supervisor (++) Tool for enforcement of compliance (+) Accountability of administrators and contributors (+)EU level playing field ||  (-) Higher compliance costs and cost for users and supervisors

Option 4 Public provision of critical benchmarks ||  (-) Administrators and contributors: cost to EU benchmark industry. Reduced competitiveness and market choice (-) Users: reliable benchmarks but reduced choice and suitability and contractual continuity issues || (+)Eliminates most conflicts of interest (+) Tool to address specific critical benchmarks with strong social benefits (--) Benchmarks with high integrity but possibly not competitive or fit for purpose (--) Reduces competiveness and choice || (--) Very high cost of EU industry and public sector

The preferred option is
option 3 because it ensures the competitiveness of the EU benchmarks industry
and improves the integrity of EU benchmarks. It also ensures the maximum level
possible of investor and consumer protection and the accountability of
benchmark administrators and contributors. It ensures that benchmark provision
remains within the private sector allowing for innovation, competitiveness and
free market choice.

9.5.6. Supervisory structure

This
option, determines the competent authority for the supervision of different
benchmarks’ administrators, for which different options are compared in the
chart below. Contributors to benchmarks would be supervised by their current
supervisors, as according to this option only already regulated contributors
would be directly supervised.

Supervision by: || Impact on stakeholders || Effectiveness || Efficiency

Current lack of supervision || 0 || 0 || 0

Option 1. National supervisory authorities (NSAs) in the countries where benchmark administrators are established || (-) Administrators, contributors and users: effective for national benchmarks but not for critical benchmarks with cross-border impacts or contributors (-) Regulators: NSAs best equipped to supervise national benchmarks but need for  coordination in the supervision of critical benchmarks with cross-border impact or which contributors are based in different Member States || (-) It does not provide the necessary level of coordination in the supervision of critical benchmarks where contributors are based on different Member States, or which have a large impact in several Member States, such as Euribor ||  (-)Lack of coordination and information for supervision of critical benchmarks

Option 2. European supervisory authorities, ESMA || (+)Administrators, contributors and users: Maximum level of coordination in the supervision of European benchmarks (-) Regulators: NSAs best equipped to supervise national benchmarks or critical benchmarks with no cross-border impact for which administrators and contributors are all based in the same Member State || (-)Not all benchmarks provided in the EU are set or used or require supervision at EU level || (-)NSAs best equipped to supervise national benchmarks

Option 3. National supervisory authorities (NSAs). For critical benchmarks coordination by colleges of national supervisors with the participation and binding mediation by ESMA when necessary. Supervision of regulated contributors by their current CAs. ||  (++)Administrators, contributors and users: Highest level of coordination in the supervision of critical benchmarks but flexibility and respect of subsidiarity and proportionality (++) Regulators: NSAs best equipped to supervise national benchmarks Colleges of competent authorities would facilitate coordination and information sharing. Participation and mediation by ESMA would ensure coordination and effective supervision. ||  (++) Allows for the supervision of benchmark administrators and contributors at national level whilst ensuring coordination and effective supervision of critical benchmarks through the colleges of supervisors (++) Allows for the effective resolution of disagreements in colleges of supervisors for critical benchmarks through binding mediation by ESMA || (+)NSAs best equipped to supervise national benchmark administrators and contributors  and colleges to ensure coordination and information sharing (+) ESMA best equipped to coordinate the supervision and mediate in colleges of supervisors for critical benchmarks

The
preferred option would be option 3 as it would guarantee the most effective
level of supervision for critical benchmarks which failure
would have a significant cross-border impact or which contributors are based in
different Member States.

Benchmark
administrators and contributors would be regulated by the supervisor of the
Member State in which they are located. However, the failure of critical
benchmarks could have a significant impact outside the jurisdiction where their
administrator is located. Furthermore, where the contributors to critical
benchmarks are located in different Member States, their effective supervision
would be difficult if it is spread amongst a number of national supervisors.
Therefore, for critical benchmarks, supervision by a college of national
supervisors should be required. This would be necessary in order to ensure the
effective exchange of supervisory information among competent authorities and
their coordination in the supervision of critical benchmarks. However, there
could be instances where different national supervisory authorities could disagree
on important issues. Therefore, ESMA should sit in the colleges of supervisors
for critical benchmarks and have binding mediation powers to intervene in case
disagreement on important issues.

10. Preferred options package

The chart below provides
a summary of the comparison of all options analysed against their effectiveness
and efficiency in achieving the main objectives of this initiative on
benchmarks.

|| || Effectiveness || Efficiency || Consistency

Operational objective / Policy issue || Policy options || Integrity & reliability || Lower risk manipulation || Appropriate use and suitabilityy || Continuity\* || Costs  & proportionality || Consistency

Baseline || No policy change || 0 || 0 || 0 || 0 || 0 || 0

Limit incentives and opportunities for manipulation || Manage and disclose conflicts of interest || (+) || (+) || (-/+) || (+) || (+) || (++)

Structural separation || (+) || (++) || (-) || (--) || (--) || (-)

Sufficient data and minimised discretion || Transaction data if available and reliable, otherwise well founded and verifiable discretion (ex-post checked) || (++) || (++) || (+/-) || (+) || (+/-) || (+)

Mandatory use of transaction data only || (+) || (+) || (-) || (--) || (--) || (-)

Mandate contributions for critical benchmarks only || (+) || (+) || (+) || (++) || (+/-) || (+)

Ensure robust governance and controls address risk || Supervisory authorities to issue non-binding guidelines for administrators & contributors || (-) || (--) || (+/-) || (+) || (+/-) || (-)

Mandate adequate management systems and effective controls || (++) || (++) || (+) || (+) || (+/-) || (++)

Enhance transparency and ensure the use of robust and reliable benchmarks || Require transparency on methodology, underlying data process and purpose || (+) || (+) || (++) || (+) || (+) || (++)

Assessment of suitability of benchmarks’ use for retail contracts || (+) || (+) || (++) || (+/-) || (+/-) || (++)

Mandatory notification of benchmarks || (-) || (-) || (+) || (--) || (--) || (-)

Ensure effective oversight || Private benchmark provision, independent private oversight || (-) || (--) || (-) || (+) || (+/-) || (-)

Private benchmark provision, public supervision and enforcement || (++) || (++) || (+) || (++) || (+/-) || (++)

Public provision of critical benchmarks || (+) || (+) || (--) || (--) || (--) || (--)

Impacts: from very positive ++
to positive +; very negative – – to negative –; +/- mixed; n.a.; 0 = baseline
(baseline impact is assumed to be 0 for the sake of comparison with other
options)

\* Continuity: ensuring the
continuity of benchmarks provision is a constraint under which this proposal is
being developed.

The preferred options
presented in the table above have been selected in accordance with the option
analysis on section 9.  However they would only be fully effective in achieving
the objectives of this initiative when implemented as a package as on their own
they address just some of the drivers of benchmark manipulation and the use of unreliable
benchmarks. Therefore implementing them on their own would not ensure a
comprehensive and coherent approach to these problems. For example implementing
governance requirements would address part of the problem, but in the absence
of measures in relation to conflicts of interest and the exercise of
discretion, the incentive and opportunities to manipulate benchmarks would
remain and so the objective of restoring the integrity of benchmark would not
be achieved. In particular, in the absence of effective oversight, provided
through the public supervision, these requirements would not be adhered to
whilst also maintaining private provision of benchmarks. As a result, the
package ensures the continuity, competitiveness and innovation in benchmark
provision and thus the competitiveness of the EU benchmark industry.

The package of preferred
options provides a clear delineation of responsibilities and obligations in
respect of the benchmarks process, eliminating loopholes and reducing the
possibilities of overlaps and underlaps in supervision. Benchmark contributors
are made responsible for ensuring that the data that they submit is accurate
and is not manipulated.  Benchmark administrators are made responsible for the
process as a whole and in particular checking the input data and ensuring the
integrity of the benchmark calculation. Users are assured that the benchmarks
provided in the union are robust, reliable and fit for purpose, given
sufficient information to make an appropriate choice of benchmarks and their
rights of action are enhanced in the event these standards are not met.

This package is
proportionate; many of the measures are by their nature inherently
proportionate; the requirements in relation to the use of transactions data
will affect large and small administrators equally as will the requirement on
transparency.  The requirements in relation to governance, controls and the
management of conflicts of interest may have a disproportionate effect on
smaller administrators. Therefore provision is made to ensure that measures in
this respect are less onerous for smaller administrators.

Regarding the preferred
options package compatibility with the legislation on benchmarks adopted in the
UK and Denmark, most measures included in the UK and Denmark reform packages coincides
with the options analysed in section 9 and retained as part of the preferred
options package above (i.e. options on the use of transaction data, managing
conflicts of interest, setting up adequate systems and controls, etc.) and the
measures which have not been retained are still compatible with the preferred
options package. For example, the measure of trusting the provision of LIBOR to
a new administrator under the UK regulation has been analysed under the option
of structural separation of the administrator, but it has not been retained as
it has not proven efficient or proportionate for the wide scope of our
initiative. However, this option would still be compatible with the
requirements of the Commission initiative as the latter does not pre-empt it. The
option of reducing currencies and tenors to ensure they are based on sufficient
and reliable transaction data would be a sub option of the requirement to use
transaction data.

Regarding the measures
under the Danish legislation, although most have also been retained, the
introduction of alternative benchmarks such as CITA has been analysed and
discarded under the option 9.5.4. Public provision of benchmarks, as its
analysis has proven that benchmark provision should be competitive and market
driven in line with stakeholders’ views. Nevertheless, the measures under the
preferred options package are compatible with the public introduction of
alternative benchmarks by Member States.

Overall, the preferred
options package effectively, efficiently and proportionately enhances the
reliability of EU benchmarks and ensures the appropriate use of robust and
reliable benchmarks in the EU. As a result it protects the users of benchmarks,
consumers and investors and assures that financial markets serve the real
economy.

11. Cost-benefit analysis and administrative burden
calculation

11.1 Costs-Benefit
Analysis

In this section the
Commission services provide a cost-benefit analysis (CBA) of the preferred
options package. Please see annex X for calculations and further details.

11.1.1. Estimated compliance costs for administrators
of benchmarks

The estimated compliance costs for administrators
of benchmarks reflect additional costs resulting from their obligations under
the preferred options package and not their total costs relating to benchmark
provision. They derive from the obligations on the table below:

Obligation || Requirement || One-time costs || Recurring costs (yearly)

1. Provision of benchmarks becoming a regulated activity || Application for registration and compliance with registration conditions || \* Application for authorization (€9.5 M) \* Application for controlled functions (€9.5 M) \*Upgrading governance procedures for compliance (€10M) || Compliance monitoring (€ 5 M)

2. Transparency obligations on calculation and underlying data || Publishing comprehensive information on benchmark calculation and underlying data || Recurring || Included under administrative burden (€ 2 M)

3. Disclosure requirements on internal procedures, policies and conflicts of interest || Adjusting disclosure systems, policies and procedures || Included under administrative burden (€ 2 M) || Only one-off costs as it will be maintained and monitored by regular members of staff and compliance officer

4. Systems and controls || Upgrading systems and controls to comply and maintaining them || Record keeping device included in admin. burden (€ 6 M)and upgrading systems and controls  (€ 10 M) || Maintaining systems and controls (€ 5 M)

5. Issuing legally binding codes of conduct to be signed by contributors || Drafting codes of conduct and publishing on website || Included in administrative burden,   (€ 1 M) || Only one-off costs as it will be maintained and monitored by regular members of staff and compliance officer

6. Internal and external audits || Cooperation with audits and record keeping || Recurring || Internal audit performed by staff. External audit (€ 5 M)

7. Complains procedure || Implementing and supporting the complains procedure || Included in administrative burden,  (€ 1 M) || Only one-off costs as it will be maintained and monitored by regular members of staff and compliance officer

The
estimated compliance costs for administrators would be composed of one-time
costs in the order of € 49 million for all EU administrators (approx. € 98,000
per administrator) and recurring costs of about € 17 M for all EU (approx. €
34,000 per administrator yearly). These costs would only apply to benchmark administrators
under the scope. As many of these are financial institutions, which are already
regulated entities, they will have many of the systems, controls, procedures
and personnel in place to comply with the requirements of this initiative.
However, as it is complex to separate business as usual costs from additional
costs deriving from this initiative the estimates assume they do not have them
in place. These are just averaged estimates and the real costs of compliance
for administrators would also vary in relation to the nature and number of
benchmarks provided, as monitoring and ensuring compliance would present
different degrees of complexity and requirements would be proportional to the
risks posed by these benchmarks (critical vs. non-critical, transaction vs. estimates based,
etc.).

11.1.2 Compliance costs for
contributors to benchmarks

The estimated compliance
costs for contributors to benchmarks reflect additional costs resulting from
their obligations under the preferred options package and not the total costs
linked to their contributions. Contributors under scope would already be
regulated entities, and would have many of the systems, controls and procedures
in place to comply with the requirements of this initiative. This has been
taken into account of in the estimates of the costs deriving from the
obligations presented on the table below, which are broad estimates:

Obligation || Requirement || One-time costs || Recurring costs (yearly)

1. Provision of benchmarks becoming a regulated activity || Application for registration and compliance with registration conditions || \* Application for controlled functions      (€ 4 M) \*Upgrading governance procedures for compliance (€ 4 M) || \* Compliance monitoring ( € 1 M)

2. Transparency obligations on calculation and underlying data || Publishing comprehensive information on benchmark calculation and underlying data || Recurring || Included under administrative burden (€ 0.5 M)

3. Disclosure requirements on internal procedures, policies and conflicts of interest || Adjusting disclosure systems, policies and procedures || Included under administrative burden     (€ 1 M) || Only one-off costs as it will be maintained and monitored by regular members of staff and compliance officer

4. Systems and controls || Upgrading systems and controls to comply and maintaining them || Upgrading systems and controls (€ 4 M) || Maintaining systems and controls    (€ 1 M)

5. Legally binding codes of conduct to be signed by contributors || Drafting codes of conduct and publishing on website || It will be drafted by administrators and they just need to sing it and publish on their website || N.A

6. Internal and external audits || Cooperation with audits and record keeping || Recurring || Internal audits (€ 1 M)

The estimated compliance
costs for contributors to be composed of one-time costs in the order of € 13
million for all EU (approx. € 26,000 per contributor) and recurring costs of
about € 3.5 M for all EU (approx. € 7,000 per contributor yearly). These costs
would only apply to contributors to benchmarks under scope which are regulated
entities. As these normally are large size institutions, such as financial
institutions, with yearly turnovers in the order of millions and even billions
of Euros[144]. These costs
would not represent a large burden for these institutions as many of them will
have most of the systems, controls, procedures and personnel in place to comply
the requirements of this initiative and in consequence their costs will be much
lower. Finally, these are averaged estimated costs, and the real costs will
depend on the number and nature of benchmarks to which different contributors
provide submissions or underlying data[145].

11.1.3 Estimated costs of
supervision

Regarding the
costs of supervision of benchmark administrators, under the preferred option it
would be for national authorities to supervise national non-critical benchmarks
under the coordination of ESMA. ESMA would also participate and mediate in the
colleges of supervisors for critical benchmarks, including exercising binding
mediation when necessary. This would involve additional costs for national competent
authorities (NCAs) for the supervision of benchmarks administrators and
supervised contributors and for ESMA for the participation and mediation in the
colleges of supervisors for critical benchmarks.

As for contributors
which also already regulated entities, financial institutions, their activity
of contributing to benchmarks would also be supervised, this would imply
additional costs for NCAs in charge of their supervision.

The estimates provided in the table below are
based rough extrapolation of the supervisory costs estimated for the regulation
of LIBOR by the UK FSA and the Commission own estimates of ESMA cost for
coordination of the supervision of critical benchmarks by NCAs in the colleges
of supervisors. The latter costs for ESMA have been estimated by the Commission
to be an initial operational expense € 0.275 M, mainly
for IT systems and recruitment of staff, and a recurring expense of € 0.324 M
yearly for the employment of 2 members of staff to carry out these duties.

Estimated one-off costs of supervision of
benchmark administrators and contributors:

|| Individual costs[146] || Number of EU competent authorities[147] || Total costs

One-time costs for supervision of administrators and contributors[148] || ~ € 0.1 to 0.5 M || 56 || ~  € 5.6 to 28 M

Estimated recurring cost of supervision of
benchmark administrators and contributors[149]:

|| Individual costs[150] || Number of CAs || Total costs

Recurring costs for  supervision of administrators  (yearly) || ~ € 0.1 to 0.5 M ||  28[151] || ~ € 2.8 to 14 M

Recurring costs for supervision of contributors (yearly) || ~ € 0.04 to 0.3 M || 28 || ~ € 1.1 to 8.4 M

Total recurring costs of supervision || ~ € 0.14  to 0.8 M (per Member State) || || ~ € 3.9 to 22.4 M

It needs to be considered that regulatory
requirements would vary widely across different jurisdictions and for the
supervision of different types of administrators and contributors. Because of
this reason, a wide range is provided for estimated supervision costs as they
could be up to 80% lower for the supervision of administrators of and
contributors to non-critical benchmarks and also vary widely across different
jurisdictions.

The cost above would be
higher for Member States in which a large number of benchmarks are provided and
used to reference financial contracts. It has been assumed that although some
authorities would need to supervise a relatively large number of benchmark administrators
and contributors, there would be significant economies of scale in their
supervision.

Finally, recurring costs
of supervision of this initiative derive mainly from the cost personnel to carry out
these tasks. Thus, the cost associated by this initiative will have an impact
on creation of new jobs in Europe[152].

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

Under the preferred
options package, where a financial entity such as a bank intends to enter
into a financial contract with a consumer where the payments are referenced by
a benchmark, it should assess the suitability of the benchmark for this use and
warn the consumer if it is unsuitable. However, as benchmark suitability
assessment would normally be performed as part of the general financial product
suitability assessments
required the Consumer Credit Directive (CCD)[153] and the
Mortgage Credit Directive (MCD)[154], it is assumed that systems
will already be in place and staff trained to perform these assessments. Thus,
training material, procedures and IT systems would just need to be updated to
comply with this requirement and the benchmark suitability assessment would
require just an additional ¼ of an hour per 'non-intermediated' transaction for
suitability assessment. In consequence, creditors and credit
intermediaries will face limited additional one-off and recurring costs[155].

11.1.5 Benefits

The
main benefits derived from this initiative are reducing the risk of
manipulation of benchmarks, enhancing their reliability and contributing to
their appropriate use In consequence, this proposal will contribute to enhanced
market fairness and ensure consumer and investor protection. Such benefits are
difficult to quantify. However, given the global importance of robust and
reliable benchmarks for maintaining market stability and restoring confidence
in financial markets, the benefits would outweigh the costs. The high level
objectives and benefits of this initiative are presented on the table below:

Objectives || Benefits

Reducing the risk of benchmark manipulation || \* Enhanced financial stability and restored confidence in financial markets

Enhancing the  reliability of benchmarks || \* Enhanced fairness, integrity and efficiency of financial markets

Ensuring the appropriate use of robust and reliable benchmarks || \* Enhanced consumer and investor protection

On
top of the high level benefits specified above, other benefits of this
initiative are:

·
the
effective management of conflicts of interest;

·
proactive
supervision of the benchmark provision process which will allow for early
identification of and reaction to potential issues;

·
increased
accountability and oversight of administrators and contributors to benchmarks;
and

·
ensuring
continuity of benchmarks for existing contracts and certainty for new
contracts.

Another
important benefit is reducing the potential detriment to borrowers and
investors caused by benchmark manipulation. Italian consumer groups Adusbef and
Federconsumatori, which filed a complaint in July 2012[156], estimated
that EURIBOR manipulation affected 2.5 million Italian households with
mortgages tied to Euribor, costing them 3 billion euros ($3.7 billion), based
on record 2008 Euribor rates. The number of households affected in Spain is
estimated to be 18 M[157]. Although at
the moment it is not possible to quantify the total impact of benchmark
manipulation[158] on EU
consumer and retail investors, these figures provide an idea of the large impacts
of manipulation on investors and retail financial consumers. Thus, the benefits
of avoiding large losses to investors and consumers in the future and enhancing
their protection are undeniable.

Furthermore,
the large amount of fines already paid by the financial industry for the
attempted manipulation of LIBOR, currently in the order of 3 billion Euros, and
the fact that some analysts consider these fines small in comparison to the
potential illicit gains by financial institutions manipulating these benchmarks
in prejudice of their counterparties[159] provide an insight of
the need to enhance market efficiency, integrity and fairness. This initiative
is key in achieving these objectives.

Finally,
although the benefits of ensuring robust and reliable benchmarks and their
appropriate use are difficult to quantify, these will definitively contribute
to the achievement of the general EU financial policy objectives of restoring
confidence in financial markets and financial stability.

11.2 Administrative
burden calculation

In this section the
Commission services provide an estimate of the administrative burden for
benchmark administrators and contributors resulting from the preferred options
package. The
administrative requirements under the preferred option package are proportional
to the shortcomings identified and broadly in line with requirements under the
international on-going work streams on reform of
benchmark provision and use.

11.2.1 Estimated administrative
costs for administrators

Estimated combined one time and recurring
administrative burden for administrators: approx. € 10 M one-off costs on the
first year (€ 20,000 € avg. per administrator) and € 4,000 recurring costs per administrator
yearly (but this would vary according to the nature and the number of
benchmarks which they provide) and € 2 M yearly total recurring costs for all
benchmark administrators in the EU. However, as many benchmarks will already
have appropriate transparency in place their costs may be lower.

11.2.2. Estimated administrative costs for contributors

The estimated administrative
costs for contributors would be composed of one time and recurring costs:
approx. € 1 M one-off costs on the first year for all EU contributors (approx.
€ 2000 per contributor) and € 1,000 yearly avg. recurring costs per
contributor, but this would be proportionate to number of benchmarks to which
they contribute, and € 0.5 M yearly total for all contributors in the EU. These
normally are large size institutions, such as financial institutions, with yearly
turnovers in the order of millions and even billions of Euros[160].Thus, these
costs would not represent a large burden for these institutions as many of them
will have most of the systems, controls, procedures and personnel in place to
comply the requirements of this initiative and in consequence their costs will
be much lower. Finally, these are averaged estimated costs, and the real costs
will depend on the number and nature of benchmarks to which different
contributors provide submissions or underlying data[161].

11.2.3 Estimated administrative costs of
supervision

The administrative costs
of benchmark supervision under the preferred option package, they would broadly
match the cost of supervision estimated under section 11.1.3.

12. International impact

Financial
markets are global markets, and benchmarks are produced and used on an
international basis; therefore, any EU legislation would have an impact on
third countries and the approach taken by third countries would impact on the
effectiveness of the EU legislation. For this reason coordination at
international level is necessary, and any measure should be taken in the light
of the following impacts:

·
Confidence
in European benchmarks;

·
Regulatory
arbitrage and risks of delocation;

·
Market
access to non-EU firms.

12.1. Consistency with
international legislation

The
Commission is participating in IOSCO’s Board Level Task Force on Financial
Market Benchmarks reform with observer status to facilitate
international coordination. The proposed legal framework is consistent with the
international Principles for Financial Benchmarks published by IOSCO in July
2013. Therefore, we assume that any regulatory initiatives in other important
jurisdictions would also be developed along the same lines.

In
addition, this initiative is broadly consistent with the IOSCO report on Principles
for Oil Price Reporting Agencies (PRAs)[162], which sets
out principles intended to enhance the reliability of oil price assessments
that are referenced in derivative contracts. Please
see annex VI: IOSCO’s Principles for Oil Price Reporting Agencies.

12.2.
Confidence in European benchmarks

Because most
other major jurisdictions do not currently impose the same level of regulatory
requirements, it is likely that EU-based benchmark administrators and
contributors would initially be subject to more burdensome rules than their
non-European counterparts. However in light of the IOSCO principles on
benchmarks, and in the aftermath of the TIBOR, EURIBOR and LIBOR events, many
other countries are likely to  strengthen their rules and benchmark administrators
may voluntarily choose to follow the IOSCO principles on benchmarks; most PRA’s
producing oil benchmarks have chosen to incorporate IOSCO principles on oil
benchmarks[163].
Furthermore, new measures would enhance and certify the integrity and
reliability of benchmarks, which could provide a competitive advantage to
European firms by strengthening their reputation and confidence on the
benchmarks they produce.

12.3.
Regulatory arbitrage and risks of de-location

The
legislative proposal would include a third country regime to ensure that
benchmarks used in the Union, independently from where they are provided, are
sufficiently robust. This regime would mitigate the risk of regulatory
arbitrage. In addition, the third country regime should be proportionate, thus,
taking into account the application of IOSCO principles might be considered, if
IOSCO principles are sufficiently robust and if there is an authorisation
system and an on-going oversight regime by regulators in the third country, to
allow their use in EU financial contracts; therefore a commodity benchmark
produced by a benchmark administrator located in a non-Union jurisdiction could
be used in the Union as a reference to; for example; a derivative if that
jurisdiction has in place legislation governing the regulation and supervisions
of benchmarks that broadly meets the IOSCO standards.

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

This
initiative is intended as part of a coordinated international approach to
address the vulnerabilities of benchmarks. Benchmarks produced outside the
Union may be used in the Union provided that they are sufficiently robust.
Compliance with international standards such as the IOSCO principles, if they
are sufficiently robust and supervised, might be considered as the appropriate
level of equivalence. A level playing field is thus ensured by the fact that
other jurisdictions would be taking similar legislative initiatives in line
with the IOSCO principles.

As regard
entities located outside the EU that contribute to benchmarks calculated in the
EU, these would, be subject to the codes of conduct of EU regulated benchmark administrators.
For critical benchmarks, the application of additional requirements and powers
would also be ensured. This would contractually impose on them similar
obligations to governance and control obligations that apply to Union based
contributors. These contributors will also be subject to the Market Abuse
Regulation. Compliance with codes of conduct established in accordance with the
legislative framework would provide a degree of legal certainty and may
constitute a cost effective tool to ensure compliance with these rules.

Third
countries could be positively impacted as the EU regulatory framework would
improve the integrity and accuracy of benchmarks produced in the EU. Because a
number of the world’s most important benchmarks, notably LIBOR, EURIBOR, and a
number of energy market benchmarks, are produced in the EU, users of those
benchmarks in third countries would be able to rely on more robust benchmarks
in the future.

13. Impact on fundamental rights

An
assessment was made of the preferred policy options for the initiative on
benchmarks to ensure their compliance with fundamental rights[164]. This
entailed identifying which preferred options could affect fundamental rights
embodied in the EU Charter of Fundamental Rights ("CFR") and
assessing whether any restrictions on fundamental
rights imposed by these options were necessary, proportionate, provided for by
the law and respecting the essence of these rights and freedoms.

Most
of the preferred options considered as part of this impact assessment do not
interfere with any of the fundamental rights in the CFR, rather they serve to
reinforce the right to consumer protection (Article 38). However, certain
preferred options were identified which might impact on certain rights and
freedoms. These are:

1.
Benchmark provision and contribution to a benchmark would become a
regulated activity;

2.
Regulated benchmark administrators in the EU would be subject to
supervision by competent authorities equipped with enforcement powers including
powers to access premises and data traffic records; and

3.
Regulated benchmark administrators and submitters would be required
to keep documents and records in relation to submissions for an appropriate
period of time and make these available to competent authorities on request.

The
following fundamental rights of the EU Charter of Fundamental Rights are of
particular relevance to these options:

·
respect for private and family life, Article 7

·
protection of personal data, Article 8

·
freedom of expression and information, Article 11

·
freedom to conduct business, Article 16

·
consumer protection, Article 38

Consumer
protection would be promoted, whereas the other rights would be to some extent
limited by the preferred options. Limitations on these rights and freedoms are
allowed under Article 52 of the Charter. However, any limitation on the
exercise of these rights and freedoms must be provided for by the law and
respect the essence of these rights and freedoms. Subject to the principle of
proportionality, limitations may be made only if they are necessary and
genuinely meet the objectives of general interest recognised by the Union or the
need to protect the rights and freedoms of others. A detailed analysis of why
such limitations are necessary with regard to the production and use of
benchmarks is provided for in annex XI.

14. Social impacts

The options
considered in this impact assessment would increase investor protection,
thereby also benefiting institutional investors such as pension funds who
invest in financial instruments in order to secure a higher rate of return for
pension policy holders. It would also benefit consumers which mortgages are
referenced to benchmarks within the scope by contributing to the fairness and
accuracy of their mortgage repayments.

It would
also benefit consumers and businesses, including SME’s, by ensuring that the
benchmarks to which the financial instruments they use to hedge their risks and
finance their spending and investments more accurately reflect economic
reality.

It can be
anticipated that greater market integrity would lead to higher investor
confidence and greater participation in financial markets. In addition, by
contributing to reducing markets' disorder, these options should improve the
stability and reliability of financial markets. As a result, it would be easier
for enterprises to raise capital to grow and create more jobs.

Given
the proportionality of the costs for administrators of benchmarks and
flexibility provided by this initiative in terms of adapting the requirements
to administrators of non-critical benchmarks, it is not likeable that a
significant number of benchmark administrators may discontinue their benchmark
provision. Thus, a reduction in the number of jobs created by this industry is
not estimated as a consequence of this initiative. On the opposite, most recurring
costs of compliance with this initiative derive from the cost of staff to carry
out these tasks. Thus, the cost associated by this initiative will have a
direct impact on the creation of new jobs in the financial industry in Europe.

Finally, it
does not appear that the preferred options identified would have any direct or
indirect impacts on environmental issues. Although oil and other commodity
prices have a direct impact on the environment through their impact on supply
and demand, the options identified here would not have a straightforward effect
on the levels on these prices. They would ensure prices better reflect economic
reality, but this does not entail a general bias to pushing prices up or down.

15. Choice of instrument to ensure an effective
response
15.1. Non-legislative cooperation between Member States with principles
by ESMA and EBA

One option
to achieve the objectives of this initiative would be through cooperation
between the authorities in the EU Member States, coordinated by ESMA, EIOPA and
EBA. ESMA and EBA published non-binding Principles for Benchmarks-Setting
Processes in Europe on 6 June 2013 and the EBA issued non-binding
recommendations to EBF-Euribor following their review of EURIBOR in January
2013 and to national competent authorities (NCAs) on the supervision of
contributing banks.

The
disadvantage of this approach is that it is voluntary; because there is no
legal basis for EBA and ESMA to issue binding guidelines, market participants
may opt not to follow these proposals. In the absence of EU legislative action,
there would be no obligation on Member States to implement a framework for
benchmarks, and the Commission would not be able to take action against Member
States that did not act, or which took a different approach than that proposed
by ESMA and EBA.

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

Currently most
Member States do not regulate the production of benchmarks; to date only
Denmark and the UK have implemented legislation that regulates benchmarks. This
illustrates the likelihood of divergent responses by Member States to
addressing this issue. A divergent approach is likely to remain because the
interests of Member States differ because of the international nature of
benchmarks: a benchmark may be produced in Member State A, based on
contributions from Member State B and used in Member State C. Each of the
Member States’ interests and ability to regulate such a benchmark would differ;
Member State C would be interested in the protection of users but this could
only be fully achieved by ensuring the reliability of production in Member
State A, and the integrity of contributors in Member State B. In the absence of
a Union legislative framework, the individual national actions would 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.

Having
discarded the option of a non-legislative instrument, this leaves the option of
a harmonising legal instrument, either a Directive or a Regulation. A
harmonising legal instrument would ensure that all Member States applied the
same regulatory framework based on the same principles, thereby ending the
current fragmented regulatory response and reducing compliance costs.

Traditionally,
the main legislative instrument chosen for EU financial services legislation
has been a Directive. This was because the legislative proposals mainly sought
to approximate national rules on the taking up of business and the provision of
services in a gradual manner. The choice of a Directive enables Member States
to integrate rules into their different legal systems, while allowing some
margin to extend EU rules to areas uncovered by the EU legislation.

However, a
Directive is not the right choice of instrument in view of the objectives of
this initiative. A Directive would leave scope for Member States to maintain
divergent rules, whereas a Regulation would ensure uniform rules. The
provisions to be applied to benchmarks are likely to be prescriptive in laying
down some general requirements and the cross border nature of benchmarks
creates a need for maximum harmonisation of these requirements. Again if the
benchmark is contributed to in one member state, produced in another and used
in a third, a maximum harmonisation framework would be easiest for administrators
and contributors to comply with and for users to understand. In addition
certain of the preferred options require a Regulation to be effective. Only a Regulation
can implement these important options and deliver investor protection and
financial stability objectives.

Nevertheless,
a Regulation can leave some flexibility for national competent authorities in
applying the rules. While a Directive requires national implementing provisions
to be adopted, leaving scope for interpretation of the Directive, a Regulation
is directly applicable without requiring national legislation, thereby ensuring
greater legal certainty for those subject to the legislation.

Implementation
of a Directive into national law can also be a time consuming process. In
contrast, a Regulation is immediately applicable after adoption by the
legislator and, while it is likely to require binding technical standards to be
adopted through delegated acts in certain areas to ensure consistent
application, these can be prepared in parallel to the process for adoption of
the legislation. Further, a regulation does not require any monitoring of
correct implementation by the Commission, and those concerned by the provisions
of a Regulation would be able to depend on them immediately. Finally, a
Regulation could be directly invoked by concerned parties before national
administrations and courts, whereas this applies only in very limited
circumstances for Directives.

For all
these reasons, the Commission services consider that a Regulation rather than a
Directive is the most appropriate instrument for this initiative.

16. Monitoring and evaluation

The
Commission is the guardian of the Treaty and therefore would monitor how Member
States are applying the changes proposed in the legislative initiative on
benchmarks. When necessary, the Commission would pursue the procedure set out
in Article 226 of the Treaty in case any Member State fails to respect its
duties concerning the implementation and application of Community Law.

The
evaluation of the consequences of the application of the legislative measure
could take place three years after the entry into force of the legislative
measure, in the context of a report to the Council and the Parliament on the
effectiveness of the legislative initiative and appropriateness of the sectoral
approach.

The
evaluation should measure the accomplishment of the measurable objectives
previously determined in the objective tree:

a) Reduce
the number of cases of benchmark manipulation

b) Reduce
the number of findings of inappropriate governance and controls

c) Reduce
the number of benchmarks vulnerable to manipulation

d) Increase
the number of benchmarks based on sufficient and representative data

e) Increase
the number of statements on benchmarks purpose and methodology

Indicators
and sources of information that could be used in the evaluation are as follows:

a) Data
on the variance of benchmarks produced before and after the implementation of
the proposals;

b) Data
on the number of breaches of the market abuse regulation in respect of
benchmarks and on the number of on-site inspections, supervisory measures and
sanctions and penalties imposed;

c)
Data on the number of breaches of
the Regulation on benchmarks and on the number of on-site inspections,
supervisory measures and sanctions and penalties imposed;

d) Data
on the number of civil actions for failure to comply with this regulation by
users of the benchmark against administrators and contributors

e) Number
of complaints received by the Commission from benchmark users

f)
The costs of producing benchmarks and the fees charged for the
licensing;

g) A
report, which could be undertaken by ESMA, on the experience gained by
regulators in enforcing the initiative and how cooperation has worked.

Annex I: Glossary

Benchmark: any index by
reference to which the amount payable under a financial instrument or a
financial contract, or the value of a financial instrument is determined or is
used to measure the performance of an investment fund.

Benchmark
assessor:
a natural person employed by the benchmark administrator who calculates the
benchmark or is primarily responsible for overseeing the mechanism if the
calculation is performed algorithmically.

Benchmark
calculation: the process of calculating a benchmark.

Benchmark
calculator: an entity calculating a benchmark on behalf of a administrator
which outsources this activity to it.

Benchmark
process:
all the stages and processes involved in the production and dissemination of a
benchmark from the gathering of the input data and the calculation of the
benchmark based on the input data to the dissemination of the benchmark to
users including any review, adjustment and modifications to this process.

Benchmark
administrator: the natural or legal person that has control over the
provision of a benchmark.

Benchmark
user:
means any person who issues or owns a financial instrument or is party to a
financial contract which references a benchmark.

Calculation
agent:
means an agent of the benchmark administrator who conducts a benchmark
calculation.

Central
Counterparty:  an entity that interposes itself between the
counterparties to the contracts traded in one or more financial markets,
becoming the buyer to every seller and the seller to every buyer.

Contributor: any natural
or legal person providing any input data to an administrator, or to another
person for the purposes of passing to an administrator, that is required in
connection with the determination of that benchmark, and is provided for that
purpose.

Commodity
benchmark:
means a benchmark where the underlying asset is a commodity or commodities.

Consumer: a natural
person who, in financial contracts covered by this Regulation is acting for
purposes which are outside his trade, business or profession.

Creditor: a natural
or legal person who grants or promises to grant credit in the course of his
trade, business or profession as per the EU Consumer Credit Directive.

Credit
agreement:
an agreement whereby a creditor grants or promises to grant to a consumer
credit in the form of a deferred payment, loan or other similar financial
accommodation, except for agreements for the provision on a continuing basis of
services or for the supply of goods of the same kind, where the consumer pays
for such services or goods for the duration of their provision by means of
instalments as per the EU Consumer Credit Directive.

Credit
benchmark:
a benchmark where the underlying are credit default swaps or any similar
underlying that measure the credit of an entity or group of entities.

Credit
default swap: means a derivative contract in which one party pays a fee
to another party in return for a payment or other benefit in the case of a
credit event relating to a reference entity and of any other default, relating
to that derivative contract, which has a similar economic effect.

Critical
benchmark:
a benchmark, the majority of contributors to which are supervised entities,
that if it were to cease to be provided, would have a significant adverse
impact on the financial stability, or the orderly functioning of markets, or
consumers, or the real economy of one or more Member States.

Distribution
agent:
means an agent of the benchmark administrator who disseminates or distributes
the benchmark or is responsible for licensing the benchmark to users.

European
Banking Federation: the European Banking
Federation is the united voice of banks established in Europe. It is a forum
where best practices are exchanged, legislative proposals and initiatives are
debated and common positions adopted. Its members are the national banking
associations of the EU and EEA Member States.

Energy
market participant: means any person, including transmission
system operators, who enters into transactions, including the placing of orders
to trade, in one or more wholesale energy markets.

European
Systemic Risk Board: the ESRB is responsible for the
macro-prudential oversight of the financial system within the Union in order to
contribute to the prevention or mitigation of systemic risks to financial
stability in the Union that arise from developments within the financial system
and taking into account macro-economic developments, so as to avoid periods of
widespread financial distress.

Financial
benchmark:
a benchmark where the contributors are credit institutions or investment firms
or insurance firms and undertakings and the benchmark is primarily used as a
reference price for financial instruments.

Financial
contract:

(a)        any
credit agreement as defined in point (c) of Article 3 of Directive 2008/48/EC
of the European Parliament and of the Council ;

(b)        any
credit agreement as defined in point 3 of Article 3 of [Directive [2013/…/] of
the European Parliament and of the Council on credit agreements relating to
residential property];

Financial
instrument: any of the instruments listed in Section C of Annex I to
Directive 2004/39/EC for which a request for admission to trading on a trading
venue has been made or which are traded on a trading venue.

Free
float adjustment: method by which the market capitalization of an
index's underlying companies is calculated. Free-float methodology market
capitalization is calculated by taking the equity's price and multiplying it by
the number of shares readily available in the market. Instead of using all of
the shares outstanding like the full-market capitalization method, the
free-float method excludes locked-in shares such as those held by promoters and
governments.

Input
data:
the data in respect of the value of one or more underlying assets, or prices,
including estimated prices, or other values, used by the administrator to
determine the benchmark.

Investment
fund:
AIFs as defined in point (a) of paragraph 1 of Article 4 of Directive
2011/61/EU of the European Parliament and of the Council, funds and units
within the scope of Directive 2009/65/EU of the European Parliament and of the
Council.

Issuer
of a financial instrument: a legal entity governed by private or public
law, which issues or proposes to issue financial instruments, the issuer being,
in case of depository receipts representing financial instruments, the issuer
of the financial instrument represented.

Interest
rate benchmark: a benchmark where the underlying asset is an interest rate
or interest rates or from which an interest rate can be simply and
unambiguously be derived.

Located: in relation
to a legal person, the Member State or third country where that person’s
registered office or other official address is situated and in relation to a
natural person, the Member State or third country where that person is resident
for tax purposes

Management
body:
the governing body, comprising the supervisory and the management function,
which has ultimate decision-making authority and is empowered to set the
entity’s strategy, objectives and overall direction;

Mortgage
credit agreements under the EU mortgage credit Directive: credit
agreements which are secured either by a mortgage or by another comparable
security commonly used in a Member State on residential immovable property or
secured by a right related to residential immovable property. Also credit
agreements the purpose of which is to acquire or retain property rights in land
or in an existing or projected residential building and those for the purpose
of the renovation of the residential immovable property a person owns or aims
to acquire.

Panel
benchmark:
a benchmark the where the contributors are fixed over time or for a period.

Provision
of a benchmark:

(a)        administering
the arrangements for determining a benchmark; and

(b)        collecting,
analysing or processing input data for the purpose of determining a benchmark;
and

(c)        determining
a benchmark through the application of a formula or other method of calculation
or by an assessment of input data provided for that purpose.

Rebase: to establish
a new base level for (a price index, etc.).

Reference: in relation
to a financial instrument or financial contract and benchmark, that benchmark
is the reference to which the amount payable under that financial instrument or
that financial contract, or the value of that financial instrument is
determined;

Submitter: means the
natural person employed by the contributor for the purpose of contributing
input data.

Supervised
contributor: a supervised entity that contributes input data to an
administrator located in the Union

Trading
venue:
any regulated market, MTF or OTF as defined in article 2 MIFIR.

Transaction
data:
observable prices, rates, indices or values representing transactions between
unaffiliated counterparties in an active market subject to competitive supply
and demand forces;

Wholesale
energy market: any market within the Union on which wholesale energy
products are traded.

Annex II: Summary of the public consultation on benchmarks

DG MARKT services held a
public consultation between 15th September and 29th
November 2012. Responses to the public consultation were received from:

- Member States financial authorities;

- Administrators,
contributors and users of benchmarks;

- Exchanges and
clearers;

- Financial institutions
and their associated bodies;

- Non-financial institutions
in the energy and transport sectors; and,

- Individual citizens,
academics and associations.

(Please see list of
public contributors to the consultation in section 1.2).

1.1.
Summary
of the responses

Some 84 contributions
were received, of which 75 were authorised for publication, including 8 from
Member States (financial authorities and securities regulators), 9 from
exchanges and clearers, 17 from index administrators, calculators and
publishers and associated bodies, 33 financial institutions and associated
bodies (funds, banks, associations, investment funds, etc.), 3 from
non-financial institutions and 14 from others (citizens, academics,
associations, etc.). It should be noted that some institutions are both administrators
and users of benchmarks (e.g. exchanges) or contributors to and users of
benchmarks (e.g. banks).

Contributions received
from stakeholders varied in detail; the most developed comments were provided
by public authorities and stakeholders involved in benchmark provision,
submissions and use, as well as banks and exchanges.

Below are presented the
overall reactions to the main issues in the provision and use of benchmarks
raised in the public consultation document:

Global coordination: As
benchmarks are globally produced and used, the process of reforming benchmarks
should be coordinated at European and global level to ensure consistency and a
level playing field. Thus, any EU initiative on benchmarks should be
coordinated with the international consensus developed through the process that
the Financial Stability Board is co-ordinating and which builds on the work by
the IOSCO Board Level Task Force on financial market benchmarks.

Scope: Whilst an
initiative on benchmarks is broadly supported for interbank lending benchmarks,
there are mixed opinions about whether other types of benchmarks, such as
commodity, equity and proprietary benchmarks, should be covered by an EU
initiative on benchmarks. The main argument for this position is that for some
of these benchmarks self-regulation is sufficient and that whilst all
benchmarks share some characteristics, there are also many features which
differentiate them and make them more or less susceptible to manipulation. Some
of the differentiating features stated are the nature of the underlying data
(ranging from actual transaction data to subjective estimates), the origin of
underlying data (ranging from prices publicly available on exchanges to
voluntary contributions in over-the-counter (OTC) markets), the replicability
of the indices, the transparency of their methodologies and the degree of
discretion applied in their calculation and the existence of inherent conflicts
of interest in their provision. Furthermore, some benchmark administrators,
such as price reporting agencies (PRAs) state that their commodity price
assessments are not financial but purely journalistic activities and thus they
should not be covered by this initiative.

Role of regulation: There was a
fair degree of consistency in the responses regarding the need to re-establish confidence
in benchmarks which have shown to be susceptible to potential manipulation,
mainly interbank lending benchmarks such as LIBOR and EURIBOR and other
benchmarks sharing similar characteristics. However, there is not a clear
consensus regarding the need for desirability of a regulatory framework for
different categories of benchmarks. Whilst some respondents advocate for
benchmarks becoming a regulated activity, others defend self-regulation by
non-binding principles or industry codes of conduct. A two tier approach to
regulation, with high level non-binding standards for all benchmarks and
binding principles for specific benchmarks for which there is evidence of risks
has also been suggested. Any regulation should be well calibrated to avoid
undesired outcomes.

Methodology: There is
general agreement on the need for robust, fully transparent and understandable
methodologies on benchmark production which allow users to replicate these
benchmarks to the highest degree possible, allowing them to be used to verify
the integrity of benchmarks and better assess whether their methodologies are
fit for their needs. There is also overall consensus on the preference for the
use of thorough methodologies over discretion and the preference for using
underlying actual transaction data or firm bids and offers over subjective
estimates or assessments. However, some contributors point out that for highly
OTC, opaque, volatile or illiquid markets where few transactions take place,
the use of estimates or assessments may be necessary and it may provide a
better representation of the underlying market reality than insufficient or
unrepresentative transaction data. In these cases, some respondents highlight
the advantages of hybrid methodologies using both actual transaction data and
estimates and ex-post verification of underlying data and the appropriate use
of discretion.

Conflicts of
interest/Potential for manipulation: There is broad
consistency among respondents regarding the fact that administrators of and
contributors to benchmarks need to have adequate processes for identifying,
avoiding and, if this is not possible, managing conflict of interest. The
consultation responses link conflict of interest to the inappropriate use of
discretion or the ability and the financial incentive to manipulate the
benchmark value. Some responses mention specific references to inherent
conflicts of interest in the provision of benchmarks in which the contributors
or administrators are also users of indices or interested parties. For example,
for interbank lending rates (e.g. LIBOR and EURIBOR) and strategy/proprietary
indices used and sometimes produced by fund managers who have direct interest
in the performance of these funds. Some of the solutions to conflicts of
interest issues suggested by respondents are reforms to governance, controls
and compliance and the combination of competition, and transparency with
tailored regulatory backstops when appropriate.

Panels and mandatory
reporting:
There is a broad consensus on the fact that panels must be representative and
proportionate to the market they represent. However, some respondents point out
that panels are in general prone to manipulation and information is better
sourced from regulated markets and public/transparent sources whenever
possible. Responses also highlight that the selection of panel, index
contributors, or constituents should be based on clear, objective, and robust
criteria and governed by relevant independent bodies and that panel members
should be sufficiently numerous, diverse and sufficiently active in the
underlying markets. Regarding potential mandatory participation, whilst some
responses support it due to the advantages of large panels, these benefits
could be undermined if panels become unrepresentative due to the inclusion on
inactive or unrepresentative participants. Finally, some responses state that
data submissions should be made only by entities regulated for this purpose and
stress the possible advantages of requirements for transparency in panel reporting
where current levels of transparency are inadequate. Some responses raise other
potential transition issues which involve a potential decrease in market
transparency if voluntary contributors are discouraged to contribute to
benchmarks by new regulatory requirements.

Transparency: Most
responses advocate for the highest level of transparency possible on
governance, processes and methodologies at both administrator and submitter
level, as an effective way for users to monitor and encourage the robustness of
benchmarks. However, it is highlighted in some of the responses that a high
level of transparency on contributions in some particular markets, for example
commodities, may discourage voluntary submissions. Furthermore, some
respondents recommend delayed transparency for some indices in order to avoid
potential credit or market signalling issues. Transparency on what benchmarks
measure and their most relevant characteristics is recommended in most
consultation responses as necessary for allowing users to make the right
assessments on whether benchmarks are fit for purpose.

Governance and
supervision: There is a broad consensus among the consultation responses
regarding the need for high governance and transparency standards for
benchmarks. Most responses request the highest level of transparency possible
on governance, processes and methodologies at both administrator and submitter
level, as an effective way for users to monitor and encourage benchmark
robustness

Accountability: audits
& controls. There is general agreement on the need for more thorough
audits and controls as they are key to ensuring the integrity of benchmarks,
but at contributor and administrator level. Independent external audits of
contributions, calculation and benchmark production procedures have been
highlighted by several responses as one of the main improvements required in
this area.

Use: Many
respondents argue that the choice of which benchmark to use should be left to
the market and it should not be regulated. However, some respondents consider
there is a need to regulate the use of benchmarks which affect retail investors
or consumers and ensure financial controls are referred to robust and reliable
benchmarks which comply with minimum standards in their provision.

Licensing: Many
responses, mainly from users of benchmarks and public authorities, support the
reforms for non-restrictive licensing of benchmarks in the Markets in Financial
Instruments Directive (MIFID) based on reasonable commercial terms on a
non-discriminatory open access basis, whilst other responses, mainly from
benchmark administrators, are against these reforms.

Public versus private
provision:
Although some contributors, mostly public authorities and consumer
organizations, argue that benchmarks share some characteristics of public
goods, others, particularly benchmarks administrators, defend the private
nature of benchmarks and point out the intellectual property rights associated
to them. Most respondents agree that benchmark’s provision should be private as
competition among different administrators is one of the main incentives to
enhance benchmarks’ robustness and integrity and ensure they keep up to the
date with market developments. However, many responses agree in the fact that
private provision of benchmarks should be subjected to the supervision of
public authorities under a public regulatory framework.

Transition issues: Most
responses agree on the need to take into consideration potentially important
transition and legacy issues, especially if any initiative would require
methodologies for the calculation of benchmarks or their definitions to be
radically modified. This could trigger significant legal, economic and
continuity issues. Some responses also express that significant regulatory
changes in this area could face real logistical, legal and other hurdles and
that the potential impact of introducing a regulatory framework for benchmarks
should be carefully assessed. Some respondents believe that the transition to
substitute benchmarks should be authorized, encouraged but not imposed by the
regulator. Finally, it is highlighted that there should be sufficient time for
transition and it should be carefully managed and phased-in.

1.2.
List
of public contributors to the consultation (not including confidential)

Financial authorities –
6

BAFIN

Bank of Latvia

ECB Eurosystem

ESRB (European Systemic
Risk Board)

French Treasury

HM Treasury UK

Index administrators,
calculators and publishers and their associated bodies – 17

Argus

Bloomberg LP

Danish Bankers Association

EURIBOR-EBF

ICI Global

ICIS

Index Industry
Association

IPD (Investment Property
Databank)

Markit

MSCI

Platts

Rate Validation Services

RIMES

S&P Dow Jones
Indices

STOXX

Thompson Reuters

WMBA (Wholesale Market
Brokers Association)

Exchanges and clearers –
8

BATS Chi-X

CME Group

Deutsche Börse Group

FESE

London Stock Exchange

NASDAQ OMX

NYSE Euronext

The Baltic Exchage

Financial institutions
and associated bodies - 30

ABI (Associazione
Bancaria Italiana)

AFG (Assoc. Française de la Gestion
Financière)

AFME (Assoc. for
Finantial Markets in Europe)

AIMA (Alternative
Investment Management Assoc.)

AMUNDI Asset Management

ASSIOM FOREX (Financial
Markets Association -Italy)

ASSOSIM (Italian Assoc.
of Financial Intermediaries)

Barclays

BlackRock

BVI (German Investment
Fund and Asset Mgt. Assoc.)

Caixabank

EFET (European
Federation of Energy Traders)

EBF (European Banking
Federation)

EUSIPA (European
Structured Investment Products Assoc.)

French Banking
Federation

GFMA (Global Financial
Markets Assoc.)

ICAP

ICMA (Intl. Capital
Market Assoc.)

IMA (Investment
Management Assoc.)

ING

INTESA SanPaolo

ISDA (Int. Swaps and
Derivatives Assoc.)

Kames Capital

Pfandbrief

Russell Investments

State Street

UBS AG

Unicredit

Vanguard

VOEB, Bundesverband
Öffentlicher Banken (Fed. Assoc. of Public Banks in Germany)

Non-financial
institutions – 3

Deutsche Lufthansa

EnBW (Energie
Baden-Württemberg AG)

EON

Other – 11

BDEW (DE Federal
Association of Energy & Water)

BEUC (European Consumers
Organization)

CFA Institute

EDHEC Risk Institute

EuroFinuse (European
Federation of Fin Serv Users)

Finance Watch

Financial Services User
Group

Groupe Consultatif
Acutariel Europeen

IATA

Lucidine Conseil

Society of Pension
Consultants

Annex III: EU and internationalwork
streams on benchmark rates
reform
EU work
Streams
European supervisory authorities
work on benchmarks[165]

·
The
EBA and ESMA published three pieces of work on benchmarks simultaneously to the
publication of the consultation paper by IOSCO on 11th of January 2013:

·
a)
Draft Consultation Paper on Principles for Benchmarks-Setting Processes in
Europe. The draft consultation paper sets out a number of draft principles for
the players involved in the benchmark setting process. The aim of this
consultation is to issue principles in Q2 2013. These are likely to be as
voluntary principles addressed to all market participants

·
b)
Euribor-EBF (EEBF) Review: a report and a letter to the EBF with
recommendations related to the administration and management of Euribor,
following an ESMA-EBA investigation.  DG MARKT has not been involved in this
taskforce.

·
c)
EBA recommendations to national authorities on the supervisory oversight of
banks participating in the Euribor panel.

·
In
a joint letter to Commissioner Barnier dated 7th March 2013, 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” and expressed their support for the Commission work on this field and
the formal regulation and supervision of benchmarks.[166]

·
ESMA
and EBA published non-binding Principles for Benchmarks-Setting Processes in
Europe  on 6 June 2013 and the EBA issued non-binding recommendations to
EBF-Euribor following its review of EURIBOR in January 2013  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.

The Wheatley Review of LIBOR[167] and
HMT’s Legislation on Benchmarks[168]

·
Following
the events surrounding Libor Martin Wheatley (chief executive of the Financial
Conduct Authority (FCA) produced a review in September 2012.  The Wheatley
Review set out a ten-point plan for the reform of LIBOR and these
recommendations were incorporated into the Financial Services Bill which came
into effect on the 1 April 2012.  These rules could apply to a wide range of
benchmark; to date only LIBOR is a regulated benchmark but the Government may
include additional benchmarks in the future.  Under this legislation the
submission and administration of LIBOR, as well as key individuals, are now
regulated by the FCA. The FCA has been given the power to make rules in
relation to the submission of LIBOR which have been developed following a
consultation launched in January 2012.  These rules and guidance cover the
systems, controls and codes of practice of entities administering and submitting
to LIBOR. Policies to manage internal conflicts of interest are also required.
As regards input data LIBOR submissions should, so far as possible, be
supported by transaction data.

·
On
9 July 2013 the Hogg Tendering Advisory Committee for LIBOR announced that the
British Bankers’ Association (BBA) had accepted its recommendation that NYSE
Euronext Rate Administration Limited should be the new LIBOR administrator.
NYSE Euronext Rate Administration Limited, a new subsidiary of NYSE Euronext,
will, subject to authorisation from the Financial Conduct Authority (FCA) and
following a period of transition, take over the administration of LIBOR from
BBA LIBOR Ltd. The BBA is currently working with the new administrator to
effect the orderly and timely transfer of the administration of LIBOR, which is
expected to be complete by early 2014.   A new offence of making false or
misleading statements, in relation to LIBOR has also come into effect.

·
The
Wheatley Review 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[169].
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)”[170]

·
It
also stated that: “this Review has been narrowly focused on LIBOR, and the recommendations
are therefore only made in respect of LIBOR. However, the Review is aware of
other work underway in relation to benchmarks generally, including the EU
Commission’s consultation on benchmarks and the Board Level Task Force set up
by IOSCO. In light of this wider work, it is suggested that legislation should
ensure that the regulatory regime can be extended to other benchmarks in the
future, if appropriate”

Danish national authorities review of CIBOR[171]

·
Following
the LIBOR scandal, the Danish government passed legislation to move supervision
of rate-setting to the Danish Financial Supervisory Authority from 1 January
2013.  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 seven banks setting the
CIBOR rate are Danske Bank, Deutsche Bank, Nordea, Jyske Bank, Nykredit,
Sydbank and Spar Nord Bank.  Barclays pulled out of the rate-setting panel for
CIBOR in August 2012.

European Commission investigation of a possible
cartel under LIBOR and EURIBOR and into a potential cartel by contributors to
price assessments for oil and biofuels by Platts

DG Competition of the European Commission

·
In
October 2011, the Commission undertook unannounced inspections at the premises
of a number of companies active in the sector of interest-rate derivative
products linked to the Euro Interbank Offered Rate (EURIBOR) in a number of
Member States, as it had concerns that these companies may have violated EU
antitrust rules. The Commission started investigating these cases as a matter
of top priority before the so-called "LIBOR scandal" triggered by
Barclays on the LIBOR/EURIBOR rate manipulation by a number of banks and their
employees.

·
In
2012-13, the Commission continued to investigate a number of cases related to
the benchmark rates of LIBOR, EURIBOR, TIBOR – the Tokyo rate – and with regard
to a number of banks and brokers. The alleged rate-rigging is a major
competition concern as it has to be ensured that competition in financial
markets takes place on a level-playing field[172].

·
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[173].

EP ECON Committee public hearing on “Tackling the
Culture of Manipulation”[174]

The European Parliament
hold a public hearing on “Tackling the culture of market manipulation - global
action post LIBOR/EURIBOR” (please see summary in annex XVII) on 26/09/
September 2012. This hearing was addressed by representatives from important
public sector and private stakeholders such as: Commissioner Barnier,
Commissioner Almunia, Masamichi Kone (Chairman of IOSCO), Gary Gensler
(Chairman of the US CFTC), Daniel L. Doctoroff (CEO and President of
Bloomberg), Thierry PHILIPPONNAT (Secretary General of Finance Watch), etc.

International work Streams

FSB coordination of international work streams on benchmark reform (IOSCO task
force on benchmark and BIS report)

·
Globally,
FSB is coordinating the international initiatives reviewing the regulatory
frameworks for benchmarks worldwide. At the FSB’s request published Principles
for Financial Benchmarks in July 2013 which were welcomed by the G20.IOSCO also
published principles for oil price reporting agencies in October 2012 to
address risks identified in oil price assessment practices[175].
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.

·
A
report entitled “Towards better reference rate practices: a central bank
perspective” was released on 18th March 2013 by a Working Group established by
the Economic Consultative Committee (ECC) comprised 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. On it 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
sector.

·
Following
from this work, the Official Sector Steering Group (OSSG) 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.

US Commodity Futures Trading Commission settlements
for LIBOR manipulation[176] and participation in IOSCO’s Board Level Task Force
on Financial Benchmarks[177]

·
Following
investigations into LIBOR manipulation the CFTC has settled charges for
manipulation with several financial institutions including Barclays, UBS and
RBS. The CFTC Chairman, Mr. Gary Gensler, is co-chairing the IOSCO Board Level
Task Force on Financial Benchmarks jointly with the FCA Chairman, Mr. Martin
Wheatley.

Japan authorities request for review to bank lobby
setting TIBOR[178]

·
In
October 2012, Ikko Nakatsuka, Japan’s new financial services minister, urged
the Japanese Bankers Association (JBA) to determine whether its process for
setting the benchmark yen lending rate should be reviewed and to identify the
required improvements. Although an internal review by the JBA found “no major
issues” with the benchmark-setting process, Mr Kunibe (Head of the JBA), stated
that the JBA would set up a committee of specialists to consider the future of
the Tokyo interbank offered rate, including analysis of the procedures followed
by the banks which contribute estimates of the cost of funds in the market, and
the JBA’s role in calculating the benchmark.[179]

Review of HIBOR by the Hong Kong Monetary Authority
(HKMA) and announcement on measures to strengthen the HIBOR fixing mechanism[180]

·
After
considering the Treasury Markets Association’s (TMA) report and the Hong Kong
Association of Banks’ (HKAB) submission, the Hong Kong Monetary Authority
(HKMA) announced on 6th February 2013 a package of measures to strengthen the
fixing mechanism for the HKD Interest Settlement Rate (more commonly known as
the Hong Kong Interbank Offered Rate or HIBOR).  The measures are designed to
enhance the transparency and robustness of the HIBOR fixing mechanism.

Korea’s New Lending Rate Benchmark following an
investigation into the manipulation of certificate-of-deposit rates

·
South
Korea chose a new benchmark rate for bank lending following an antitrust agency
investigation into the possible manipulating of certificate-of-deposit rates in
July 2012.The Korean Financial Services Commission plans to use a so-called
short-term Cost of Funds Index in cooperation with lenders as an alternative
for banks to base their short-term lending rates on.

Annex IV: Findings evidencing the
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 such as Barclays, UBS and RBS have been found liable for attempted
manipulation of LIBOR, EURIBOR and TIBOR by the UK and US financial authorities
and agreed to pay fines approaching $ 3 billion in the settlements. According
to various estimates, interest rate benchmark manipulation could cost the banking
industry tens of billions of USD[181]
as evidenced by the fact that contributing banks are leaving the EURIBOR (euro)
setting panel because continued participation exposes them to reputational and
regulatory risk, as well as large fines. (DG Competition of the European
Commission among them) and by the on-going international work streams on
benchmarks rates reform. See Annex III: Int. Work Streams on Benchmark Rates
Reform.

The main reasons for the
attempted manipulation of these rates by contributing banks were: either to
avoid signalling to financial markets concerns about their credit risk or
profiting for potential gains on derivatives trading. The high potential costs
for the banking industry are in proportion to the large potential impact on
investors and consumers of market manipulation. The impact could be very large,
even if the rates were manipulated by just 1 basis point during a short period
of time. The Federal Reserve Bank of New York (FED) already identified the
potential manipulation of LIBOR in 2007[182] and Mr Tim
Geithner, then head of the New York Fed, sent a note to Sir Mervyn King, the
Governor of the Bank of England, warning him about the risk of "deliberate
misreporting" of LIBOR in May 2008 and sharing its proposals for reform
with the British Banking Authorities[183].

The Commission has also
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[184].

More recently, The
Wheatley Review of LIBOR has identified 'weaknesses in governance arrangements
for the compilation process, and within contributing banks themselves'. It also
states that the current LIBOR administration process leaves opportunity for
contributors to attempt to manipulate submissions in line with the incentives
for manipulation that are present and the increasing reliance on judgement.
These findings led to the recommendation that: 'The BBA should transfer responsibility
for LIBOR to a new administrator, who will be responsible for compiling and
distributing the rate, as well as providing credible internal governance and
oversight'.    On 9 July 2013 the Hogg Tendering Advisory Committee for LIBOR
announced that the British Bankers’ Association (BBA) had accepted its
recommendation that NYSE Euronext Rate Administration Limited should be the new
LIBOR administrator. The BBA is currently
working with the new administrator to effect the orderly and timely transfer of
the administration of LIBOR, which is expected to be complete by early 2014. (Please
see annex V: Key recommendations of the Wheatley review of LIBOR).

There exists evidence of
shortcomings in the governance and oversight of the production and use of
different categories of benchmarks. For example, most commodities price
assessments share some characteristics with interest rate benchmarks setting,
such as being based on surveys of a limited number of voluntary contributors
(as well as actual transaction data in some cases) and discretion being applied
in the their assessment. The Commission is currently investigating 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[185].

IOSCO, at the request of
G20, published in October 2012 its final report on 'Principles for Oil
Reporting Agencies', addressing 'preliminary areas of potential concern'
identified on its consultation on this topic , mainly on governance issues such
as: internal quality control procedures; conflict of interest and transparency
policies; formal documentation and retention policies; audit trails; complaints
processes; etc. (See Annex VI: IOSCO’s Principles for Oil Price Reporting
Agencies).

Furthermore, on its
report IOSCO acknowledges that the status quo 'creates the opportunity to
manipulate the commodity market' and warns that the potential for misconduct in
the oil market 'is not mere conjecture'. The report provides examples of
several cases of attempted manipulation of benchmarks in the physical commodity
market. One example concerns Marathon Petroleum, the US-based oil company,
which settled charges of attempting to manipulate the Platts’ assessment of the
West Texas Intermediate crude oil price, paying $1m to the CFTC in 2007.
According to the same report, on the physical gas market, the US-based pipeline
company Energy Transfer Partners, also paid $10m to the CFTC to settle
allegations of attempted manipulation of the physical natural gas market.

The potential for
manipulation of energy price assessments by PRAs on the gas market has also
been highlighted by Total Oil Trading SA, one of the world’s largest oil
trading groups, in its response to IOSCO’s Consultation Paper on the
Functioning and Oversight of Oil Price Reporting Agencies in August 2012. TOTAL
warns of 'inaccurate pricing' in the benchmarks for the oil market that
underpin billions of dollars of trading each day[186].
It states that 'the use of judgement may bias prices away rather than toward
the market'.

Furthermore, the Office
of Fair Trading (OFT) published a report in January 2013 in which it states
that: the OFT is aware of concerns that this system of oil and wholesale
road fuel price reporting involves methodologies and processes that make
manipulation and distortion of reported prices possible. Pump prices could be
influenced by the level of these reported prices, because 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.[187].

With regard to the gas
market, press reports in the UK state that the Financial Conduct Authority
(FCA) and Ofgen are investigating claims by an employee of a PRA that the price
assessment for the day ahead price of the gas wholesale market may has been
manipulated by some of the big power companies[188].
According to these press reports, the concerned PRA's management also reported
to the energy regulator that it had seen evidence of suspect trading on 28
September, a key date as it marks the end of the gas financial year and can
have an important influence on future prices. Press reports have highlighted
that traders contributing price data in the gas market have exploited
weaknesses similar to those of LIBOR, as assessments are based on surveys of
submissions which are not always verifiable from a limited number of voluntary
contributors, among which Chinese walls do not work in practice (the market
being largely opaque and OTC).

Regarding equity and
bond markets benchmarks, they are generally produced in mechanical ways which
are considered to offer low risk of manipulation. However, they share some
characteristics with interest rate and commodities benchmarks which may create
incentives for manipulation, such as being used to reference financial
contracts of enormous value and in some cases existing conflicts of interests
(i.e. proprietary indices being produced by companies managing portfolios whose
returns are referenced to those indices). The opportunity for manipulation may
also exist as even based on transactions, discretion is still exercised at some
stages of their production (i.e. discretion may be used when deciding which
companies’ shares or bonds enter or leave an equity or bond index or applying
float adjustment methodology to equity indices).

Annex V: Key Recommendations of the Wheatley Review

LIBOR reform

·
The
Wheatley Review proposes a comprehensive reform of LIBOR, but not to replace
it, due to the legal uncertainty and risk of litigation associated with
wholesale replacement.

Regulation of LIBOR

·
The
authorities should introduce statutory regulation of administration of, and
submission to, LIBOR, including an Approved Persons regime, to provide the
assurance of credible independent supervision, oversight and enforcement, both
civil and criminal.

Institutional reform

·
The
BBA should transfer responsibility for LIBOR to a new administrator, who will
be responsible for compiling and distributing the rate, as well as providing
credible internal governance and oversight.

·
The
new administrator should fulfil specific obligations as part of its governance
and oversight of the rate, having due regard to transparency and fair and
non-discriminatory access to the benchmark.

The rules governing
LIBOR

·
Submitting
banks should immediately look to comply with the submission guidelines
presented in the Wheatley Review report, making explicit and clear use of
transaction data to corroborate their submissions.

·
The
new administrator should, as a priority, introduce a code of conduct for
submitters that should clearly define:

Ø guidelines
for the explicit use of transaction data to determine submissions;

Ø systems and
controls for submitting firms;

Ø transaction
record keeping responsibilities for submitting banks; and

Ø a requirement
for regular external audit of submitting firms.

Immediate improvements
to LIBOR

·
The
BBA should cease the compilation and publication of LIBOR for those currencies
and tenors for which there is insufficient trade data to corroborate
submissions, immediately engaging in consultation with users and submitters to
plan and implement a phased removal of these rates.

·
The
BBA should publish individual LIBOR submissions after 3 months to reduce the
potential for submitters to attempt manipulation, and to reduce any potential
interpretation of submissions as a signal of creditworthiness.

·
Banks,
including those not currently submitting to LIBOR, should be encouraged to
participate as widely as possible in the LIBOR compilation process, including,
if necessary, through new powers of regulatory compulsion.

·
Market
participants using LIBOR should be encouraged to consider and evaluate their
use of LIBOR, including the a consideration of whether LIBOR is the most
appropriate benchmark for the transactions that they undertake, and whether
standard contracts contain adequate contingency provisions covering the event
of LIBOR not being produced.

International
co-ordination

·
The
UK authorities should work closely with the European and international
community and contribute fully to the debate on the long-term future of LIBOR
and other global benchmarks, establishing and promoting clear principles for
effective global benchmarks.

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

The Board of the
International Organization of Securities Commissions published on 5th October
its final report on Principles for Oil Price Reporting Agencies (PRAs), which
sets out principles intended to enhance the reliability of oil price
assessments that are referenced in derivative contracts subject to regulation
by IOSCO members.

These principles were
prepared in response to the G20 Leaders’ request in November 2011 that “IOSCO,
in collaboration with the IEF, the IEA and OPEC, to prepare recommendations to
improve their functioning and oversight to our Finance Ministers by mid-2012”
and followed by the G20 Leaders’ Los Cabos Declaration.

This report builds upon
issues that were identified in Oil Price Reporting Agencies, the joint report
of the International Energy Forum (IEF), International Energy Agency (IEA),
Organization of Petroleum Exporting Countries (OPEC) and IOSCO, published in
October 2011. It also has been informed by the comments received in response to
IOSCO’s March 2012 Consultation Paper Functioning and Oversight of Oil Price
Reporting Agencies, as well as discussions and comment by the international
organizations at key points.

The PRA principles detail
a set of recommended practices for PRAs aimed at promoting the quality and
integrity of oil price assessments that will enhance the reliability of oil
derivatives contracts that reference such assessments. This in turn will
enhance the price discovery and risk management function of the oil derivatives
markets and help minimize the susceptibility of contracts to manipulation or
price distortion.

Significant measures
under the principles will expect PRAs to:

• Ensure that their
methodologies provide sufficient information to explain how assessments are
produced, including how changes to a methodology will be communicated to
stakeholders;

• Give priority to
concluded transactions and, if not, to explain the reasons;

• Adopt robust internal
quality control procedures applicable to the submission and evaluation of
market data used in an assessment;

• Adopt robust conflict
of interest policies aimed at reducing the possibility of any undue influence
in the assessment process;

• Institute
documentation and retention policies (i.e., audit trail);

• Institute a formal
complaints process, which includes recourse to an independent third party; and

• Commit to make
available to market authorities audit trails and other related documentation
intended to facilitate determination of the reliability of assessments or to
investigate and prosecute illegal conduct affecting a derivatives market.

Although the PRA
principles were developed in the context of oil derivatives markets, PRAs are
encouraged to implement the principles more generally to assessments that are
referenced by any commodity derivatives contract, without regard to the nature
of the underlying.

The principles recognize
that there is no requirement on any physical market oil participant to submit
transaction data to PRAs. Because data are submitted on a voluntary basis,
IOSCO’s approach has focused on creating incentives for PRAs to institute
processes that IOSCO believes will enhance reliability of assessments that are
indicators of the values in the physical oil underlying a derivatives contract.

IOSCO recommends that
market authorities consider whether to prohibit trading in any commodity
derivatives contract that references a PRA-assessed price unless that
assessment follows the PRA principles.

IOSCO proposed, in
collaboration with the IEA, IEF and OPEC, to evaluate the implementation of the
PRA principles after 18 months. Should IOSCO and the IOs conclude that
implementation has been ineffective, further recommendations could be
developed. The report complements the separate work IOSCO is undertaking on the
broader issue of benchmarks across securities and derivatives and other
financial sectors.

Annex VII: Benchmarks industry and size of financial
markets impacted

Benchmarks industry

It is complex to
estimate the industry market size due to the fact that whilst indices revenue
is relatively small compared to other financial industry revenues (i.e.
financial benchmarks revenues represent only about 7% on average of their administrators
revenues[189])
they reference and impact financial instruments of great value. Furthermore,
some types of benchmarks are provided for free so there are scarce revenues
generated by their production industry revenue and employees are not valid
indicators to estimate their relevance. In addition, there is not index
industry research or public aggregated data available on the size or value of
the index industry and only listed or large benchmark administrators report
this data. According to estimates based on available data, the total
industry revenue for financial benchmarks (including equities, fixed income,
credit and other indices) would be around EUR 1.7bln[190].
Regarding the size of the commodity benchmarks market, the annual aggregated
revenue for the three main commodity Price Reporting Agencies (Platts, Argus
and ICIS, known as PRAs) would be of approximately EUR 538 M[191].
This would bring the combined revenue for these two revenue generating
categories of benchmarks to over EUR 2 billion.

Regarding the number of
jobs generated by the index industry, some indices are relatively low labour
intensive to produce, particularly transaction based ones whose calculation is
normally automated (i.e. the EBF responsible for the administration of EURIBOR
and EONIA only has 5 employees and according to EBF the Reuters 'the fixings
team' responsible for the calculation and publication of EURIBOR and probably
other similar indices such as LIBOR, consist of approximately 5 employees).
However, others, such as price assessment by PRA's are more labour intensive.
For example, the 3 main PRAS (Platts, Argus and ICIS) have a combined staff of
approximately 1600[192]
employees worldwide and most of them work directly in commodity price
assessment which is their main activity. It's not possible to assess the total
number of employees for the industry as most companies do not disclose
information on the number of employees working on their index business line.

The main sources of
revenue for the benchmark industry are licenses and data provision[193]
and their proportion depends on the different types of benchmarks. However,
benchmark administrator's heterogeneity means that whilst some administrators
motivation is revenue generation, many produce them for other reasons, such as:
for commercial and marketing purposes (e.g. Barclays providing bond indices as
an incentive for investors to trade with their desk); as added value to other
principal products (e.g. indexes provided as complements to financial data
Bloomberg of Reuters terminals); to issue financial products referenced to them
or reference investment performance (e.g. proprietary indices used by
investment funds) or to meet an industry demand for free (e.g. EURIBOR is
provided free of charge by EBF).

As a consequence,
revenue or number of employees may not be representative of the total dimension
and importance of the benchmark industry. The impact of this industry on
financial markets (estimated via the value of financial instruments priced by
reference to benchmarks) may provide a better picture of the relevance of this
industry.

Size of financial
markets impacted by benchmarks

The size of the market
for financial instruments and contracts potentially impacted by the benchmark
industry is enormous. This is due to the high value of financial instruments
and retail financial contracts which returns and payments are priced by
reference to benchmarks.

Furthermore, the market
values of financial instruments and retail financial contracts priced by
reference to benchmarks in different categories (interest rate, commodity,
equity, fixed income and other) are diverse and whilst for some instruments
there is hard data available (i.e. exchange traded financial instruments) for
others there are only limited data or estimates available (OTC derivatives).
Finally for non-strictly financial contracts (such as actuarial contracts
referenced by life expectancy benchmarks or weather derivatives) there is not
public aggregated data available.

Due to the limitations
exposed above, the impact of the benchmark industry on financial markets and
retail financial contracts will be estimated for each of the different
categories of benchmarks, always taking into consideration that the final
number will be an indicative figure based on the available data.

Interest rate benchmarks

- According to estimates
from ESMA[194],
the estimated value of financial contracts referenced to interest rate
benchmarks would be approximately USD 915 to 1015 trillion. Of this
total, USD 500 to 600 trillion would be referenced to unsecured interest
rate benchmarks (mostly LIBOR and EURIBOR). The value of financial contracts
referenced by interest rate swaps (IRS) would be UDS 402 trillion
(notional amount), for collateralised interbank lending (REPO) would be USD
13 trillion (for US, JP and EU) and for overnight interbank lending it
would be USD 42 billion.

Commodity benchmarks

These benchmarks can be
distinguished between commodity price indices set by diverse commodity
exchanges (such as CME or LIFFE) and commodity price indices set by PRAs. The
latter refer mainly to the spot price of the commodities in the physical
markets, but often serve as basis to reference financial contracts. In
addition, financial data providers or investment firms (such as S&P or
Thomson Reuters), publish aggregated indices used to track commodity baskets
mainly by Commodity Mutual Funds (CMFs) and other commodity tracking funds
(ETFs or ETPs). Most commodity derivatives contracts, either exchange traded or
OTC, will be referenced by benchmarks in one of categories above mentioned. Thus,
the commodities financial market value impacted by the benchmark industry would
approximately match the total notional value, which for 2010 accounted to USD
3663 billion (EUR 2517 billion approx.[195])

Furthermore, as
mentioned in the main text, commodity price assessments are originally designed
to reference prices in commodities physical markets and contracts. Thus, the
prices of a large percentage of global commodities production directly depend
on these price assessments. As presented in the table below, the total
annual production of commodities amounted to USD 5,080bn in 2009/10.

Table 2b: Physical and Financial Market Size of Major Commodities

2009/10, US$ billion || Physical market(a) || Financial market (exchange traded)

(end period) || Annual production || Annual exports || Annual turnover || Open interest(b)

Oil(c) || 2,395 || 206(e) || 22,843 || 193

Natural gas(d) || 584 || 67 || 2,084 || 29

Coal(e) || 844 || 124 || 24 || 4

Copper(e) || 143(f) || 44(d) || 10,891 || 81

Iron ore || 222 || 117 || na || na

Gold(e) || 104 || na || 6,249 || 76

Corn || 130 || 16 || 1,093 || 20

Wheat || 143 || 28 || 602 || 14

Soybeans || 199 || 68 || 4,775 || 41

Rice || 235 || 16 || 35 || 1

Sugar || 81 || 27 || 4,425 || 27

TOTAL || 5,080 || 713 || 53,021 || 486

(a) RBA estimates based on volumes and indicative world prices ||

(b) Average of open interest outstanding at the end of each month ||

(c) Export and inventory figures for OECD economies || ||

(d) Physical market data are for 2009 calendar year || ||

(e) Physical market data are for 2010 calendar year || ||

(f) This figure is for new production only and does not include scrap metal supply

 Sources: RBA estimates; ABARES; Bloomberg; CFTC; IEA; RBA; USDA ||

Equity, fixed income and
other securities indices:

Most of these indices
are originally created to track investment performance, but they are mirrored
by investment funds for pricing returns on investments, being used as
benchmarks in the secondary markets. There is not enough data available to
estimate the value of financial contracts priced by reference to equity and
fixed income indices, but aggregating the value of net assets for mutual funds
(MTFs) and exchange traded funds (ETFs) tracking equity and fixed income
indices, approximately USD 1879 billion would track equity indices and
USD 399 Billion would track fixed income indices[196].
Thus, the potential value of financial instruments value impacted by these
benchmarks would be of approximately USD 2300 bn.

Credit Indices: These indices
such as credit default swap (CDS) indices and SovX which provide a measure of
sovereign credit risk, are used to reference mainly index linked (CDS)
derivatives. The notional value of outstanding OTC index CDS derivatives in
December 2011 was of approximately USD 10.5 trillion according to BIS data and
most of these instruments would be priced by referenced to credit indices[197].

Other benchmarks:
statistical, actuarial, real estate, sentiment, weather, etc.

Whilst in most cases
these other benchmarks were not designed to serve as reference prices, some are
currently being used for this purpose in diverse commercial or financial
contracts. As these are mostly private contracts or over-the-counter
instruments, no aggregated data exists on their values. In consequence, it is
not possible to calculate the market value of contracts referenced by this
category of benchmarks.

Annex VIII: Magnitude of the problem of benchmarks
manipulation

So far, the main proved
cases of benchmark manipulation for which those responsible have admitted the
misconduct and settled charges relate to interest rate (LIBOR and EURIBOR) and
commodity (oil and gas) price assessments in the US[198].
As these benchmarks are used to price financial instruments and commercial
contracts of great value, their manipulation may have had an important impact
on investors, industry and consumers.

Interest rate benchmarks

In June 2012 Barclays
agreed to USD 453 million in the settlement imposed by US and UK financial
authorities for attempted manipulation of LIBOR and EURIBOR rates. However,
more than a dozen banks are being investigated for LIBOR rate fixing by 13
regulators on three continents, including authorities in the European Union (DG
Competition), Japan, Singapore, and Canada[199]. According to
estimates interest rate benchmark manipulation could cost the banking industry
between 20 billion to 40 billion USD[200].

The high potential costs
for the banking industry are related to the large potential impact on investors
and consumers of market manipulation[201]). This could be
very large, even if the rates were manipulated by just 1 basis point during a
short period of time[202].
It is not possible to accurately estimate the size of the problem of
manipulated interest rate benchmarks at the moment, as there is no evidence yet
of how many banks have been involved in the attempted manipulation, as well as
the time frame of manipulation and value of contracts linked to it. Furthermore,
as rates were allegedly manipulated both upwards and downwards, it is difficult
to identify the overall positive or negative effect on different sides
affected. Besides, as financial contracts referred to LIBOR and EURIBOR rates
have different maturity, settlement and rate re-settlement dates, different
contracts would have been affected by rate manipulation on different dates.
However, by looking at published analysis and estimates of the impact of
Barclays’ attempted manipulation, it is possible to get a better understanding
of the large potential impact of manipulation on investors and consumers.

It appears that the main
motivations behind the attempts to manipulate interest rate benchmarks such as
LIBOR and EURIBOR are either to avoid signalling to markets credit issues of
financial institutions (by contributing unsecured interbank lending rates lower
than the actual ones during financial stress periods) or to profit from trades
on derivatives referenced to these benchmarks (by manipulating the reference
rates prior to settlement). According to the CFTC Barclays settlement on LIBOR[203],
Barclays attempted to manipulate LIBOR and EURIBOR rates for both of these
reasons during a period ranging from 2005 until early 2009. Furthermore, as
stated in the Barclays settlement (art. 81 and 82) Barclays also attempted to
coordinate LIBOR and EURIBOR manipulation with other banks.[204].In
addition, according to Andrew Verstein[205]: “At least 75
percent of the panel banks may unilaterally affect the average by moving the quote
in their preferred direction”.[206]

Regarding the potential
impact of the alleged manipulation LIBOR and EURIBOR on consumers, it is not
possible to fully estimate today the overall impact as, apart from the above
mentioned limitations, there is no aggregated data available on the total value
of loans and mortgages referenced to LIBOR and EURIBOR. Regarding the impact on
UK consumers, one report estimates that 2% UK residential mortgages, about
250,000, taken mainly by buy-to-let borrowers and sub-prime borrowers, would
have been referenced to LIBOR. Investors in residential mortgage backed
securities, a form of bond that pays interest linked to LIBOR, may have
received lower payments if the rates were manipulated, but this depends on the
overall upwards or downward effect of manipulation.[207]

Regarding the impact on
non-British European citizens, according to the ECB response[208] to
the European Commission Consultation on a Possible Framework for the Regulation
of Reference Indices[209],
'almost 60%, on average, of the total loans to the non-financial sector in the
euro area at the end of March 2012 were based on floating rate,(approx. EUR
3tn). While the available statistics do not provide details about which
benchmark rates are used, in terms of reference or maturity EURIBOR is known to
be the most widely used reference rate. Although lower (but also growing over
time), the percentage of loans to households based on floating rates reached
40% in the same period' (approx. EUR 3tn). Variable rate mortgages would represent
an important part of the variable rate loans to households and most of them
would be referred to EURIBOR.[210]

Finally, the impact of
LIBOR manipulation may have been high for US consumers, as there are at least
900,000 outstanding US home loans indexed to LIBOR that were originated from
2005 to 2009, representing about 3% of mortgages originated in the US from 2005
to 2009; these mortgages carry an unpaid principal balance of $275bn, according
to the Office of the Comptroller of the Currency.[211]

The overall effect of
manipulation on retail financial contracts and consumer loans above mentioned
would depend on whether the rate was manipulated upwards or downwards on the
specific payment settlement days for these instruments. However, considering
the large impact this rates have on consumers, they should not be susceptible
to manipulation.

Commodity benchmarks

Total Oil Trading SA
warned IOSCO of 'inaccurate pricing' in the benchmarks for the oil market[212]
in August 2012[213],
and alleged attempts to manipulate gas price assessments reported by one PRA
analyst have been widely covered by the international media in November 2012.
There also settled cases of attempted manipulation of benchmarks in the oil
sector in the US (Marathon Petroleum in 2007) and in the gas sector (Energy
Transfer Partners)[214].
There is no official data on the overall impact of these cases of attempted
manipulation from past and of the on-going investigations. However, considering
that commodity price assessments by PRAs underpin an enormous value of physical
contracts (physical market annual productions of USD 2,395bln for
oil and USD 584bln for gas in 2009/10[215]) and financial
derivative instruments (notional value of approx. USD 3650bln in 2010[216])
the potential impact of commodity benchmarks manipulation could be very large.

Finally, there are
currently no recent reports of cases of equity or fixed income index
manipulation, but some responses to the public consultation on the regulation
of indices point to potential conflicts of interest, particularly in
proprietary indices[217].
Considering the great value of assets linked to equity, fixed income and credit
benchmarks, (mainly ETFs and MTFs assets worth approximately USD 1880bln[218]
for equities and 400bln for bonds) the impact of any potential manipulation
could also be important.

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

An index is a
statistical measure, typically of a price or quantity, calculated from a set of
underlying data. This index may then be used as a reference price or benchmark
for a financial or other contract A wide variety of indices are currently
produced by a number of different types of administrators.

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 traders and energy traders or exchanges. 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 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, contract or transaction. Types of benchmarks A variety of underlying assets or prices may be used to determine benchmarks. [219] These include[220]: -   Interest rate benchmarks: based on bank borrowing rates (such as LIBOR[221]and EURIBOR[222]) or interest rate swaps (IRS) such as Overnight Index Swaps (OIS) or overnight interbank lending (EONIA). - Commodity prices assessments: which use commodity prices as their underlying data (such as Gold COMEX or Brent oil ICE) - Equity, fixed income and other securities indices: they use equities, bonds or other securities as their base (such as FTSE 100 index or NASDAQ OMX) - Credit indices: which provide a measure of sovereign credit risk (such as CDS indices and SovX) - Other indices: includes statistical, actuarial, real estate, sentiment, freight, etc. Benchmark administrators Benchmarks are provided by a wide variety of administrators[223] which include: - Public entities: such as the National Bank of Spain which provides MIBOR - Trade organizations: such as the BBA and EBF which provide LIBOR and EURIBOR - Exchanges: such as LSE which provides FTSE 100 - Price reporting agencies: such as Argus, Platts and ICIS Heren which publish price assessments for oil, gas and many other commodities - Other commercial organizations and independent administrators: such investment firms providing proprietary indices to their clients

Types of Index

A wide variety of
underlying assets or prices may be referenced in an index. These indices differ
not only in the underlying data used, but also in the methods used to collect
the data, the calculation of the index and their ultimate use. These include:

a) Interbank
interest rates: In addition to LIBOR[224], EURIBOR[225],
etc. which are based on banks estimates of unsecured borrowing rates, there are
a whole range of similar indices such as Eurepo[226],
which uses as its base repo rates, Euroswaps, which uses Swap rates and EONIA[227]
which uses actual overnight transaction rates as its base.

b) Commodity
prices assessments: A number of indices that use commodity prices
as their underlying data are long established and include commodities such as
agricultural products (e.g. cocoa LIFFE London), metals (e.g. Gold COMEX) or
oil (e.g. Brent oil ICE). There are also aggregate commodity indices which
represent broadly diversified investment in commodities, such as the CRB which
comprises prices of 19 commodities in different sectors.

c) Equity, fixed
income and other securities indices: There are a number of
well-known indices that use equities as their base such as the FTSE 100 index
or Dow Jones Industrial Average. Others such as NASDAQ OMX fixed income have
bonds as their base. Some of these indices measure not the average but the
variance or another moment of the underlying data; for example the VIX, which
measures the implied volatility of S&P 500 index options.

d) Credit
indices:
There are other financial indices such as CDS indices and SovX which provide a
measure of sovereign credit risk.

e) Other
indices:
This category of benchmarks is highly heterogeneous and non-comprehensive
(statistical, actuarial, real estate, sentiment, weather, freight, etc.) which
are mostly publicly available figures. In many cases they are produced by
public bodies such as statistics institutes based on reliable data and
statistical procedures

Producers of Indices

Indices are produced by
a number of different types of organisations, including:

a) Public
entities,
such as the European Central Bank (ECB), which calculates the EONIA rate, national
statistical authorities that calculate consumer price indices, or multilateral
organisations such as the World Bank and IMF which publish commodity indices or
National Central Banks of euro and non-euro countries calculating benchmark
indices (MIBOR is provided monthly by the Bank of Spain).

b) Trade
organisations such as the British Banking Association (BBA) which
calculates LIBOR, the European Banking Federation (EBF) which calculates
EURIBOR and European repo indices, and the Danish Bankers' Association which
produces the Danish Swap Index and CIBOR.

c) Exchanges such as NYSE
Euronext which produces the Euronext 100 Index and the Next 150 Index among
others, the Chicago Mercantile Exchange (CME), which produces indices such as
the Dow-Jones Industrial Average, the London Stock Exchange (LSE) which
produces the FTSE100 (jointly with the Financial Times) and Deutsche Börse AG
which produces indices such as the Euro Stoxx 50 Index.

d) Price
Reporting Agencies which are responsible for assessing
international commodity prices, such as Platts and Argus Media which calculate
and publish prices for oil, natural gas, coal, energy, metals, and emissions.

e) Other
commercial organisations such as independent financial data providers,
banks, and asset managers also calculate a variety of indices. For example, the
CDS Index published by Markit or GSCI commodity index produced by Standard
& Poors.

Methodologies

A range of different
methodologies are used with respect to the underlying data. The methodology of
a benchmark specifies who contributes the data, how it is collected and how the
index is calculated.[228]
The choice of methodology depends, amongst other things, on what is
practicable, what the index is designed to measure, what it is used for as well
as precedent.

Underlying data

The underlying data may
be actual prices or transaction values, historical data, estimated data, or in
certain other instances, actual and actionable bids or offers or quotes. In
cases where actual figures are used, the data can be considered to be objective
and verifiable. For example EONIA is calculated using actual values for all
overnight unsecured lending transactions in the interbank market.

However, other indices
use less objective or verifiable underlying data, usually because actual transaction
data is not available. LIBOR is calculated on the basis of banks' estimates of
"The rate at which an individual contributor panel bank could borrow
funds, were it to do so by asking for and then accepting interbank offers in
reasonable market size, just prior to 11.00am London time"[229].
This rate is a subjective estimate, but it may be verifiable to the extent that
the bank has engaged in actual transactions that correspond to the definition.
EURIBOR is calculated on the basis of what the panel bank "believes one
prime bank is quoting to another prime bank for interbank term deposits within
the euro zone"[230].
This is again a subjective estimate which is even less verifiable since it
relates to a notional "prime bank". Similarly the Purchasing Managers
Index is a measure of business sentiment and uses purchasing managers'
estimates or opinions[231].

Gathering of data &
contributors

The underlying data may
be collected in a variety of ways. In some cases all the data may be available
because for instance it is mandatory to report all transactions to a particular
entity[232].

Where reporting is not
complete or mandatory, index calculators have broadly two options to gather the
data. They may rely on a panel of contributors to report the data,[233]
or alternatively they can survey the relevant markets – either actively by
contacting participants or passively by relying on participants to report data
to them[234].
In both cases the contributions are voluntary and the results may not be
sufficient to provide an accurate representation of the underlying market.
Finally, for some benchmarks, the role of the contributors is limited because
the underlying data is freely available[235].

Calculation Methodology

A benchmark is
calculated from this underlying data using a formula, typically an average or
an assessment. However this calculation is often more complex, may vary
depending on circumstances and in particular involves the exercise of
discretion. The application of a formula normally involves rules on which data
to include, how they are weighted, and how other information is taken into
account when computing the final figure.

Stock indices are one of
the best known and most straightforward indices. The Dow Jones Industrial
Average is calculated as a simple arithmetic average of the leading industrial
stocks. Even amongst stock indices the calculation methods differ – the Dow
Jones is a price weighted index whereas others are volume weighted. For these
volume weighted indices, further adjustments such as the free float adjustment
in the FTSE 100 are also required.

For other indices, the
methods used to calculate may be more complex and discretionary. The VIX index
is calculated using a complex model[236].
An oil index may be calculated by using a sample of actual reported prices.
However, if the index is produced daily and prices are not available on that
day (either because no trades occurred or none are reported) the index may be
calculated using a proxy[237]
appropriately adjusted. Some indices may normally be based on actual
transaction data, but if this data is not available on a particular day the
index may revert to an estimate based value[238].

Benchmarks may also
incorporate non-quantitative information. For example, an oil benchmark administrator
may have to incorporate an important announcement into the value of a
benchmark, such as an announcement by OPEC. This announcement may have occurred
after any actual transactions took place, but before the benchmark is
published. In some circumstances, if the news is particularly important, this may
mean that actual transactions are ignored and superseded by an estimate in
light of this new information.

An index aims to provide
an objective and consistent representation of the data over time. Typically the
index is therefore calculated entirely using a formula. However in some cases,
a choice is made that the best way to represent the underlying data through a
purely subjective process ("an assessment"), which may use data and
available information, but not in any systematic way or using any formula. This
is in particular the case for a number of commodity benchmarks, for example the
ICIS Heren oil price benchmarks[239].

Annex X:
Cost benefit analysis and administrative burden calculation

In
this annex the Commission services provide a cost-benefit analysis (CBA) of the
preferred options package. The table below presents a summary of the main
preferred options which would have an economic impact on benchmarks’ administrators
and contributors.

Operational Objectives || Preferred Option

1. Ensure effective oversight || Under this option, administrators of and contributors to benchmarks under the scope would become regulated entities under the supervision of NCAs and ESMA for administrators of critical benchmarks(Critical benchmarks)which contributors are based on different Member States

2. Ensure robust internal governance and controls address risk              || Requirement to implement adequate management systems and effective controls for both administrators of and contributors to benchmarks (including adequate management structures, well defined responsibilities, legally binding codes of conduct, internal and external audits, complaints and outsourcing procedures and due diligence of personnel)

3. Limit incentives and opportunities for manipulation || Requirement to manage and disclose conflicts of interest (including Chinese walls and reporting of conflicts of interest)

4. Minimise discretion - ensure benchmarks are based on accurate & sufficient data || Requirement to use underlying transaction data if sufficient and representative. Otherwise verifiable assessments ex-post checked whenever possible. Contributions could be mandated for critical benchmarks

5. Enhance transparency and accountability and  ensure the use of appropriate and robust benchmarks || Providing transparency on the purpose, methodology, calculation processes and underlying data of different benchmarks and of keeping audit and supervisory trails. Assessment of suitability of benchmarks’ use for retail contracts

The costs and
benefits discussed in this section will derive from our best estimates of the
impact of the high level requirements of this initiative on benchmarks. These
estimates will be based on the comparison with the current baseline scenario,
under which benchmark provision is not a regulated activity.

The
estimates presented below provide a very broad forecast of the potential cost
and benefits for administrators and contributors. Although the Commission
consulted widely on potential costs of regulation and supervision, very few
responses to the public consultation provided quantitative information on this
topic. Thus, estimates are based on a series of assumptions and on the
extrapolation of estimates for the regulation of provision and contributions to
LIBOR provided on the FSA consultation paper on the regulation and
supervision of benchmarks[240],
as well as the Commission’s own estimates. However, as most benchmarks provided
in the EU are not critical and already have controls and procedures in place,
the costs of supervision for their administrators and contributors will be much
lower. In consequence, estimates are highly conservative and wide ranges are
provided in some cases, particularly regarding the potential costs of
supervision.

Overview
of the population of firms affected

The
proposed initiative will directly impact administrators of and contributors to
benchmarks. According to estimates on the administrative burden sections, the
approximate number of benchmark administrators under scope in Europe is 500 and
the approximate number of contributors to benchmarks under scope is also 500.
The forecasts of costs and benefits presented below are based on these
estimations.

Estimated
compliance costs for administrators of benchmarks

The
estimated compliance costs for administrators of benchmarks reflect additional
costs resulting from their obligations under the preferred options package and
not their total costs relating to benchmark provision. They derive from the
obligations on the table below:

Obligation || Requirement || One-time costs || Recurring costs (yearly)

1. Provision of benchmarks becoming a regulated activity || Application for registration and compliance with registration conditions || \* Application for authorization (€9.5 M) \* Application for controlled functions (€9.5 M) \*Upgrading governance procedures for compliance (€10M) || Compliance monitoring (€ 5 M)

2. Transparency obligations on calculation and underlying data || Publishing comprehensive information on benchmark calculation and underlying data || || Included under administrative burden (€ 2 M)

3. Disclosure requirements on internal procedures, policies and conflicts of interest || Adjusting disclosure systems, policies and procedures || Included under administrative burden (€ 2 M) || Only one-off costs as it will be maintained and monitored by regular members of staff and compliance officer

4. Systems and controls || Upgrading systems and controls to comply and maintaining them || Record keeping device included in admin. burden (€ 6 M)and upgrading systems and controls  (€ 10 M) || Maintaining systems and controls (€ 5 M)

5. Issuing legally binding codes of conduct to be signed by contributors || Drafting codes of conduct and publishing on website || Included in administrative burden, (€ 1 M) || Only one-off costs as it will be maintained and monitored by regular members of staff and compliance officer

6. Internal and external audits || Cooperation with audits and record keeping || || Internal audit performed by staff. External audit (€ 5 M)

7. Complains procedure || Implementing and supporting the complains procedure || Included in administrative burden, (€ 1 M) || Only one-off costs as it will be maintained and monitored by regular members of staff and compliance officer

Estimated
one-time compliance costs for administrators of benchmarks[241]

Requirement || Avg. cost/applic/ hour/ € || Number of aplic./ hours || Number of administrators in EU || Compliance costs/ million € || Overhead ~ 25%/ million || TOTAL recurring costs/ € million || Per administrator/ €

Application for authorization[242] || 15,000[1] || 1 || 500 || 7.5 || 2 || ~ € 9.5 M || ~ € 19,000

Application for controlled functions || 3,000[243] || 5[244] || 500[245] || 7.5 || 2 || ~ € 9.5 M || ~ € 19,000

Upgrading governance procedures || 32.1 || 500 hrs. || 500 || 8 || 2 || ~ € 10 M || ~ € 20,000

Upgrading systems and controls || 32.1 || 500 hrs. || 500 || 8 || 2 || ~ € 10 M || ~ € 20,000

One-off costs included under administrative burden || || ~ € 10 M || ~ € 20,000

TOTAL || || ~ € 49 M || ~ € 98,000

Source: Eurostat hourly wages, UK FSA data, Commission own calculations

Estimated
recurring compliance costs for administrators of benchmarks

Requirement || Avg. cost/ applic/ hour/ € || Number of aplic./ hours || Number of administrators in EU || Compliance costs/ million € || Overhead ~ 25%/ million || TOTAL recurring costs/ € million || Per administrator/ €

Compliance officer || 32.1 || 250 || 500 || 4 || 1 || ~ € 5 M || ~ € 10,000

Internal and external audits || 32.1 || 250 || 500 || 4 || 1 || ~ € 5 M || ~ € 10,000

Systems and controls maintenance || 32.1 || 250 || 500 || 4 || 1 || ~ € 5 M || ~ € 10,000

Included in administrative burden || || || ~ €  2M || ~ € 4,000

Total || || || ~ € 17 M || ~ € 34,000

Source: Eurostat hourly wages, UK FSA data, Commission own calculations

The
estimated compliance costs for administrators would be composed of one-time
costs in the order of € 49 million for all EU (approx. € 98,000 per administrator)
and recurring costs of about € 17 M for all EU administrators (approx. € 34,000
per administrator yearly). These costs would only apply to benchmark administrators
under the scope. As many of these are financial institutions, which are already
regulated entities, they will have many of the systems, controls, procedures
and personnel in place to comply with the requirements of this initiative.
However, as it is complex to separate business as usual costs from additional
costs deriving from this initiative the estimates assume they do not have them
in place. These are just averaged estimates and the real costs of compliance
for administrators would also vary in relation to the nature and number of
benchmarks provided, as monitoring and ensuring compliance would present
different degrees of complexity and requirements would be proportional to the
risks posed by these benchmarks (critical vs. non-critical, transaction vs.
estimates based, etc.).

Given
the proportionality of the costs for administrators of benchmarks above and
flexibility provided by this initiative in terms of adapting the requirements
to administrators of non-critical benchmarks, it is not likeable that a
significant number of benchmark administrators may discontinue their benchmark
provision. Thus, a reduction in the number of jobs created by this industry is
not estimated as a consequence of this initiative. On the opposite, most recurring
costs of compliance with this initiative derive from the cost of staff to carry
out these tasks. Thus, the cost associated by this initiative will have a
direct impact on the creation of new jobs in the financial industry in Europe.

Compliance
costs for contributors to benchmarks

The
estimated costs of compliance for contributors to benchmarks reflect additional
costs resulting from their obligations under the preferred options package and
not the total costs linked to their contributions. It should also be considered
that contributors under scope will be already regulated entities, and they will
have many of the systems, controls and procedures in place, as well as
personnel available, to comply with the requirements of this initiative. The
broad estimates of compliance costs for administrators presented on the table
below reflect this:

Obligation || Requirement || One-time costs || Recurring costs (yearly)

1. Provision of benchmarks becoming a regulated activity || Application for registration and compliance with registration conditions || \* Application for controlled functions (€ 4 M) \*Upgrading governance procedures for compliance (€ 4 M) || \* Compliance monitoring ( € 1 M)

2. Transparency obligations on calculation and underlying data || Publishing comprehensive information on benchmark calculation and underlying data || Recurring || Included under administrative burden (€ 0.5 M)

3. Disclosure requirements on internal procedures, policies and conflicts of interest || Adjusting disclosure systems, policies and procedures || Included under administrative burden (€ 1 M) || Only one-off costs as it will be maintained and monitored by regular members of staff and compliance officer

4. Systems and controls || Upgrading systems and controls to comply and maintaining them || Upgrading systems and controls (€ 4 M) || Maintaining systems and controls (€ 1 M)

5. Legally binding codes of conduct to be signed by contributors || Drafting codes of conduct and publishing on website || It will be drafted by administrators and they just need to sing it and publish on their website || N.A

6. Internal and external audits || Cooperation with audits and record keeping || Recurring || Internal audits (€ 1 M)

Estimated
one-time compliance costs for contributors to benchmarks

Requirement || Avg. cost/ hour/ € || Number of aplic./ hours || Number of administrators in EU || Compliance costs/ million € || Overhead ~ 25%/ million || TOTAL one-off costs/ € million || Per administrator/ €

Application for controlled functions || 3,000[246] || 2[247] || 500[248] || 3 || 1 || ~ € 4 M || ~ € 8,000

Upgrading governance procedures || 32.1 || 200 hrs. || 500 || 3 || 1 || ~ € 4 M || ~ € 8,000

Upgrading systems and controls || 32.1 || 200 hrs. || 500 || 3 || 1 || ~ € 4 M || ~ € 8,000

One-off costs included under administrative burden || || ~ € 1 M || ~ € 2,000

TOTAL || || ~ € 13 M || ~ € 26,000

Source: Eurostat hourly wages, UK FSA data, Commission own calculations

Estimated
recurring compliance costs for contributors to benchmarks (Euros, rounded to €
million)[249]

Requirement || Avg. cost/ hour/ € || Number of hours yearly || Number of contributors in EU || Compliance costs/ million € || Overhead 25%/ million || TOTAL recurring costs/ € million || Per administrator/ €

Compliance monitoring || 32.1 || 50 hrs. || 500 || 0.8 || 0.2 || 1 M || ~ 2,000

Internal audits || 32.1 || 50 hrs. || 500 || 0.8 || 0.2 || 1 M || ~ 2,000

Systems and controls maintenance || 32.1 || 50 hrs. || 500 || 0.8 || 0.2 || 1 M || ~ 2,000

Included in administrative burden || || 0.5 M || ~ 1,000

Total || || ~ € 3.5 M || ~ 7,000

Source: Eurostat hourly wages, UK FSA data, Commission own calculations

The estimated
compliance costs for contributors to be composed of one-time costs in the order
of € 13 million for all EU (approx. € 26,000 per contributor) and recurring
costs of about € 3.5 M for all EU (approx. € 7,000 per contributor yearly).
These costs would only apply to contributors to benchmarks under scope which
are regulated entities. As these normally are large size institutions, such as
financial institutions, with yearly turnovers in the order of millions and even
billions of Euros[250].These
costs would not represent a large burden for these institutions as many of them
will have most of the systems, controls, procedures and personnel in place to
comply the requirements of this initiative and in consequence their costs will
be much lower. Finally, these are averaged estimated costs, and the real costs
will depend on the number and nature of benchmarks to which different
contributors provide submissions or underlying data[251].

Estimated
costs of supervision

Regarding the costs of
supervision of benchmark administrators, under the preferred option it would be
for national authorities to supervise non-critical and critical benchmarks
under the coordination of ESMA. ESMA would also participate and have a
mediation role in the colleges of supervisors for critical benchmarks which have
a cross-border impact or which contributors are based in different Member
States. This would involve additional costs for national competent authorities
(NCAs) for the supervision of critical
benchmarks administrators and contributors and for ESMA the coordination of the
supervision of critical benchmarks.

As for contributors
which are already regulated entities, such as financial institutions, their
activity of contributing to benchmarks would also be supervised, this would
imply additional costs for NCAs in charge of their supervision.

The estimates provided in the table below are
based rough extrapolation of the supervisory costs estimated for the regulation
of LIBOR by the UK FSA and the Commission own estimates of ESMA cost for
coordination of the supervision of critical benchmarks by NCAs in the colleges
of supervisors. The latter costs for ESMA have been estimated by the Commission
to be an initial operational expense € 0.275 M, mainly
for IT systems and recruitment of staff, and a recurring expense of € 0.324 M
yearly for the employment of 2 members of staff to carry out these duties[252].

Estimated one-off costs of supervision of
benchmark administrators and contributors:

|| Individual costs[253] || Number of EU competent authorities || Total costs

One-time costs for supervision of administrators and contributors[254][255] || ~ € 0.1 to 0.5 M || 56 || ~  € 5.6 to 28 M

Estimated recurring cost of supervision of
benchmark administrators and contributors[256]:

|| Individual costs[257] || Number of CAs || Total costs

Recurring costs for  supervision of administrators  (yearly) || ~ € 0.1 to 0.5 M || 28[258] || ~ € 2.8 to 14 €

Recurring costs for supervision of  contributors  (yearly) || ~ € 0.04 to 0.3 M || 28 || ~ € 1.1 to 8.4 M

Total recurring costs of supervision || ~ € 0.18  to 1.1 M (per Member State) || || ~ € 3.9 to 22.4 M

Source: Eurostat hourly wages, UK FSA data, Commission own calculations

It needs to be considered that regulatory
requirements would vary widely across different jurisdictions and for the
supervision of different types of administrators and contributors. Because of
this reason, a wide range is provided for estimated supervision costs as they
could be up to 80% lower for the supervision of administrators of and
contributors to non-critical benchmarks and also vary widely across different
jurisdictions.

The cost above would be
higher for Member States in which a large number of benchmarks are provided and
used to reference financial contracts. It has been assumed that although some
authorities would need to supervise a relatively large number of benchmark administrators
and contributors, there would be significant economies of scale in their
supervision.

Finally, recurring costs
of supervision of this initiative derive mainly from the cost personnel to
carry out these tasks. Thus, the cost associated by this initiative will have
an impact on creation of new jobs in Europe.[259]

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

Under the preferred
options package, where a financial entity such as a bank intends to enter
into a financial contract with a consumer where the payments are referenced by
a benchmark, it should assess the suitability of the benchmark for this use and
warn the consumer if it is unsuitable. However, as benchmark suitability
assessment would normally be performed as part of the general financial product
suitability assessments
required by the Consumer Credit Directive (CCD)[260]
and the Mortgage Credit Directive (MCD)[261], it is assumed that
systems will already be in place and staff trained to perform these
assessments. Thus, training material, procedures and IT systems would just need
to be updated to comply with this requirement and the benchmark suitability
assessment would require just an additional ¼ of an hour[262] per
'non-intermediated' transaction for suitability assessment. In
consequence, creditors
and credit intermediaries will face limited additional one-off and recurring
costs.
Based on an hourly wage of € 32.1[263], the cost of
assessing suitability for new retail loans would be of approximately € 8 per
loan. It is not possible to accurately estimate which will be the number of
retail financial contracts referenced to benchmarks (variable rates) under the
scope of this initiative in the EU in the future in order to estimate the total
cost of compliance with this requirement.

BENEFITS

The
main benefits derived from this initiative are reducing the risk of
manipulation of benchmarks, enhancing their reliability and contributing to
their appropriate use In consequence, this proposal will contribute to enhanced
market fairness and ensure consumer and investor protection. Such benefits are
difficult to quantify. However, given the global importance of robust and
reliable benchmarks for maintaining market stability and restoring confidence
in financial markets, the benefits would outweigh the costs. The high level
objectives and benefits of this initiative are presented on the table below:

Objectives || Benefits

Reducing the risk of benchmark manipulation || \* Enhanced financial stability and restored confidence in financial markets

Enhancing the  reliability of benchmarks || \* Enhanced fairness, integrity and efficiency of financial markets

Ensuring the appropriate use of robust and reliable benchmarks || \* Enhanced consumer and investor protection

On
top of the high level benefits specified above, other benefits of this
initiative are:

·
the
effective management of conflicts of interest;

·
proactive
supervision of the benchmark provision process which will allow for early
identification of and reaction to potential issues;

·
increased
accountability and oversight of administrators and contributors to benchmarks;
and

·
ensuring
continuity of benchmarks for existing contracts and certainty for new
contracts.

Another
important benefit is reducing the potential detriment to borrowers and
investors caused by benchmark manipulation. Italian consumer groups Adusbef and
Federconsumatori, which filed a complaint in July 2012[264],
estimated that EURIBOR manipulation affected 2.5 million Italian households
with mortgages tied to Euribor, costing them 3 billion euros ($3.7 billion),
based on record 2008 Euribor rates. The number of households affected in Spain
is estimated to be 18 M[265].
Although at the moment it is not possible to quantify the total impact of
benchmark manipulation[266]
on EU consumer and retail investors, these figures provide an idea of the large
impacts of manipulation on investors and retail financial consumers. Thus, the
benefits of avoiding large losses to investors and consumers in the future and
enhancing their protection are undeniable.

Furthermore,
the large amount of fines already paid by the financial industry for the
attempted manipulation of LIBOR, currently in the order of 3 billion Euros, and
the fact that some analysts consider these fines small in comparison to the
potential illicit gains by financial institutions manipulating these benchmarks
in prejudice of their counterparties[267] provide an insight
of the need to enhance market efficiency, integrity and fairness. This
initiative is key in achieving these objectives.

Finally,
although the benefits of ensuring robust and reliable benchmarks and their
appropriate use are difficult to quantify, these will definitively contribute
to the achievement of the general EU financial policy objectives of restoring
confidence in financial markets and financial stability.

ADMINISTRATIVE
BURDEN CALCULATION

In
this section the Commission services provide an estimate of the administrative
burden for benchmark administrators and contributors resulting from the
preferred options package. The administrative requirements under the
preferred option package are proportional to the shortcomings identified and
broadly in line with requirements under the international on-going work streams
on reform of benchmark provision and use.

Administrative
costs for administrators

Based
on the preferred option package above, the main activities which would imply
additional administrative costs, particularly information disclosure costs, for
benchmarks’ administrators under the scope would be:

Requirement || Administrative burden || Quantified cost

1. Provision of benchmarks becoming a regulated activity || Cooperation with public authorities, including maintenance of appropriate records. Submission of reports on demand. || Under compliance costs

2. Transparency obligations on calculation and underlying data || Publishing information on benchmark calculation and underlying data ||  100 hours yearly per benchmark administrator

3. Disclosure requirements on internal procedures, policies and conflicts of interest || Adjusting disclosure systems, policies and procedures || 100 hours

4. Record keeping requirements: recording devices or systems and data archiving system. || One off investment in record keeping device of data archive system || 12,000 Euro per administrator

5. Issuing legally binding codes of conduct to be signed by contributors || Drafting codes of conduct and publishing on website || 50 hours

6. Internal audits and external audits (if required for critical) || Cooperation with audits and record keeping || Under compliance costs

7. Complains procedure || Drafting and publishing guidelines for complains on website || 50 hours

As
the size and complexity of benchmark administrators vary significantly, the
cost of compliance with these requirements would depend on these variables.
Therefore, the cost could vary significantly across administrators. It is
important to take into account that the main administrators have transparency
policies and record keeping systems and procedures already in place as industry
best practice standards. Part of the administrative costs could therefore be
seen as Business as Usual costs. However, as it is not possible to assess the
number companies that have done so, all information obligations imposed by the
Regulation are therefore regarded as new information obligations for benchmark administrators.

The
estimates below represent the average cost across all benchmark administrators
and do not take into account that some firms would only need to adjust existing
policies, procedures and recordkeeping systems and processes to come into
compliance with the requirements of this initiative. However, the calculation
does not include additional recurring costs for transparency obligations for
equity and other indices published on exchanges, as their calculation and
underlying data are generally highly transparent (to the point that they allow
to replicate the indices) and thus would not imply additional costs to enhance
transparency on calculation and underlying data.

For
efficiency reasons the wage per hour per company has been set at one level for
all companies in the European Union as benchmark provision is performed across
all EU countries and often cross-border. It is expected that the employees
executing the work are skilled professional staff that would more or less earn
the same in all European countries. The wage figures used below are taken from
Eurostat data on average hourly wages in the EU published on the EU Database on
Administrative Burden website[268].

Estimated
one time administrative costs for administrators[269]

Obligation || Avg. cost/ applic/ hour/ € || Number of aplic./ hours || Number of administrators in EU || Admin. costs/ million € || Overhead ~ 25%/ million || TOTAL Admin. costs/ € million || Per administrator/ €

Adjusting disclosure systems, policies and procedures || 32.1 || 100 || 500[270] || 1.6 || 0.4 || ~ € 2 M || € 4,000 €

Issuing legally binding codes of conduct || 32.1 || 50 || 500 || 0.8 || 0.2 || ~ € 1 M || € 2,000 €

Complains procedure || 32.1 || 50 || 500 || 0.8 || 0.2 || ~ € 1 M || € 2,000 €

IT systems and record keeping device || One-time costs of avg. 12,000 euro || 500 || 6 || || ~ € 6 M || € 12,000

Total || ||  ~ € 10 M || € 20,000

Estimated
recurring administrative costs for administrators (yearly)[271]

Obligation || Avg. cost/ hour/ € || Est. Number of hours yearly || Number of administrators in EU || Admin. costs/ million € || Overhead ~ 25%/ million || TOTAL Admin. costs/ € million || Per administrator/ €

Transparency on benchmark calculation and underlying data || 32.1 || 100 || 500 || 1.6 || 0.4 || ~2M || ~ € 4,000

Estimated combined one
time and recurring administrative burden for administrators:     approx. € 10 M
one-off costs on the first year (€ 20,000 € avg. per administrator) and € 4,000
recurring costs per administrator yearly (but this would vary according to the
number of benchmarks which they provide) and € 2 M yearly total recurring costs
for all benchmark administrators in the EU. However, as many benchmarks will
already have appropriate transparency in place their costs may be lower.

Estimated
number of benchmark administrators by type of benchmarks in the EU[272]

Type of Administrator || Estimated Number || Types of benchmarks provided

European exchanges || 50 || Equity, commodity, bond, etc.

EU Interest rate benchmark administrators || 30 || Interest rate benchmarks

Financial institutions under scope || 200 || Strategy indices (which are not financial instruments)

Market data and intelligence administrators || 60 || CDS, commodity, fixed-income, IRS, actuarial, volatility

Commodity PRAs || 10 || Commodity price assessments

Others || 150 || All other benchmark administrators

Total || 500 ||

Estimated
administrative costs for contributors

It
is complex to estimate the total overall number of contributors to benchmarks
in the EU due to the following reasons: the current number of contributors to
benchmarks in the EU is constantly changing; there is currently no obligation
to report when a company contributes to a benchmark; and many entities
contribute to a large number of different benchmarks.

Furthermore,
administrative costs for could vary significantly across diverse contributors
depending of the number and type of benchmarks to which they contribute. However,
considering that only contributors which are already regulated entities would
be under the scope of this initiative, it is feasible to provide a broad
estimate of their number. As they already regulated, they will already have in
place transparency policies, record keeping systems and procedures and
personnel to fulfil some of the requirements of this initiative. Thus, part of
the administrative costs could therefore be seen as Business as Usual costs.
The cost estimates below represent the average cost across all contributors to
benchmarks, independently of the number and type of benchmarks to which they
contribute. They are based on the assumption that, as firms are already
regulated; they would only need to adjust existing policies, procedures and recordkeeping
systems and processes to come into compliance with the requirements under the
preferred options package.

Based
on the preferred options package, the main activities which would imply
additional administrative costs for contributors to benchmarks under the scope
would be:

Requirement || Administrative burden || Quantified cost

1. Contribution to benchmarks becoming a regulated activity || Cooperation with inspection by public authorities, including maintenance of appropriate records. Submission of reports on demand. || Under compliance costs

2. Transparency obligations on calculation and underlying data || Publishing comprehensive information on the calculation or assessment and underlying data for all contributions || 50 hours yearly

3. Disclosure requirements on internal procedures, and conflicts of interest and changes || Adjusting disclosure systems, policies and procedures || 25 hours

4. Record keeping requirements: recording devices or systems and data archiving system. || One off investment in record keeping device of data archive system || No significant additional information disclosure costs as already regulated entities must have it

5. Issuing legally binding codes of conduct to be signed by contributors || It will be the benchmark administrator who drafts the legally binding code of conduct and contributors will just need to sign it and publish it on their website. || No significant additional information disclosure costs

6. Internal and external audits || Cooperation with audits and record keeping || Under compliance costs

Estimated
one-time administrative costs for contributors

Obligation || Avg. cost/ hour/ € || Number of hours[273] || Number of contributors in EU || Admin. costs/ million € || Overhead ~ 25%/ million || TOTAL Admin. costs/ € million || Per administrator/ €

Adjusting disclosure systems, policies and procedures || 32.1 || 50 || 500 || 0.8 || 0.2 || ~ € 1 M || ~ € 2,000

Estimated
recurring administrative costs for contributors (yearly)

Obligation || Obligation || Number of hours yearly || Number of contributors in EU || Admin. costs/ million € || Overhead ~ 25%/ million || TOTAL Admin. costs/ € million || Per administrator/ €

Additional transparency obligations for calculation or assessment and underlying data || 32.1 || 25 || 500 || 0.4 || 0.1 || ~€ 0.5 M || ~€ 1,000

Estimated
combined one time and recurring administrative burden for contributors: approx.
€ 1 M one-off costs on the first year for all EU contributors (approx. € 2000
per contributor) and € 1,000 yearly avg. recurring costs per contributor, (but
this would be proportionate to number of benchmarks to which they contribute)
and € 0.5 M yearly total for all contributors in the EU.

Estimated
number of contributors to benchmarks in the EU

Type of contributors (only already regulated contributors are under scope and just apply to benchmarks based on data or estimates contributions versus publicly reported prices or values) || Estimated number of contributors

Regulated financial institutions contributing to interest rate benchmarks || 200

Commodity traders regulated under EU law (REMIT and others) || 100[274]

Other contributors regulated in the EU (for CDS indices, bond indices, etc.) || 200

Total || 500

Estimated administrative
costs of supervision

Regarding the
administrative costs of benchmark supervision under the preferred option
package, they will roughly match the cost of supervision estimated under the
compliance cost section.

ANNEX XI: Impact on fundamental rights

Some
of the preferred policy options for the initiative on benchmarks could affect
fundamental rights embodied in the EU Charter of Fundamental Rights
("CFR"). Limitations on these rights and
freedoms are allowed under Article 52 of the Charter. However, any limitation
on the exercise of these rights and freedoms must be provided for by the law
and respect the essence of these rights and freedoms. Subject to the principle
of proportionality, limitations may be made only if they are necessary and
genuinely meet the objectives of general interest recognised by the Union or
the need to protect the rights and freedoms of others. These limitations and
their proportionality will be discussed here.

Subject
the business of providing benchmarks to regulation

It
has been argued by price reporting agencies (PRAs) in their responses to the
consultation that their activity is a journalistic and therefore that
subjecting price reporting agencies to regulation would restrict the right to
freedom of expression and information and the freedom to conduct business. It
could also be argued that subjecting the provision of benchmarks to regulation
is a restriction of the freedom to conduct business, to the extent that the
costs of complying with regulation might discourage firms from starting, or
continuing to provide, a business of benchmark provision.

First
it is necessary to consider whether there is a public interest objective which
would justify a limitation of this fundamental right. The public interest
objective which justifies this limitation is ensuring market integrity and a high level of protection
of consumers against the use of unreliable benchmarks.

Second,
is such a limitation necessary? The evidence set
out in the problem definition (see sections 4.1.1 and 4.1.2) shows that
benchmarks provided by PRAs are subject to the same vulnerabilities to
manipulation as other types of benchmarks such as interest rate benchmarks
(discretion, conflicts of interest and the lack of governance and controls
provide incentives and opportunities to manipulate the benchmark). Not only is
the provision of benchmarks by PRAs subject to the same risks, but there are
allegations of actual attempts to manipulate benchmarks provided by PRAs. The
analysis in section 9 has shown that regulation of benchmark administrators
would be effective in protecting investors from their
use of non-robust benchmarks and the integrity of markets from the manipulation
of benchmarks. Therefore, subjecting PRAs to regulation meets the test of
necessity in order to meet the public interest objectives of protecting
investors and market integrity and to protect the rights of consumers and their
right not to suffer harm to their right to property in the form of financial
losses caused by the manipulation of benchmarks.

Third,
it is necessary to consider whether the proposed limitation of the fundamental
right is proportionate. First the proposals only apply to the activity
of producing the benchmark number and would not cover the rest of the price
assessment business such as providing commentary and supporting data. The scope
is therefore set as narrowly as possible to meet the objectives. In respect of
the proposals that apply, as explained in section 9.6.3, proportionality has
been considered in relation to this option as it is limited to administrators
and to contributors which are already subject to EU regulation. Contributors
which are not subject to EU regulation would not be brought into regulation by
this initiative, but their compliance with its requirements would be ensured
through the code of conduct with the benchmark administrator. This option is
not likely to deter benchmark administrators from continuing their business and
publishing their benchmarks, but it is expected to render price reporting
accurate and free from manipulation. Therefore, subjecting PRAs to regulation
meets the test of proportionality.

Finally
the essence of the fundamental rights in question is preserved as this
initiative does not restrict anyone from freely expressing their views,
concerning for example oil prices. It does however place restrictions on the
production of oil price indices which directly affect the price of financial
instruments. However the right to continue to produce these assessments remain
- as long as they are produced in a way which is free of conflicts of interest,
based on verifiable data and if discretion is used it can be justified. Also,
the regulation of these activities would not result in impediments to express
true and good-faith assessments.

In
light of the above, the option to subject the business of providing benchmarks
to regulation complies with the CFR as it would be provided for by law (see
section 13.2), it is necessary to meet the public interest objectives of
ensuring market integrity and protecting investors and it is proportionate to
meeting those objectives.

Supervision
of benchmark administrators by authorities with enforcement powers

The
preferred option of making benchmark provision a regulated activity is
complemented by the granting of enforcement powers to competent authorities to
supervise the compliance of benchmark administrators and to sanction
non-compliance. The powers of competent authorities envisaged include access to
premises and to data traffic records in line with the horizontal approach to
powers and sanctions in the Commission’s financial services proposals[275]. This option could be considered to
place limits on the fundamental rights to private and family life and the
protection of personal data.

The
public interest objective which justifies such a limitation is, as for
the above-mentioned option, the objective of ensuring market integrity and
ensuring a high level of protection of consumers against use of unreliable
benchmarks.

To
the extent that this option limits the rights to private life and the
protection of personal data, this is necessary to ensure compliance with
the legislation on benchmarks. Rules on the provision of benchmarks require
supervision and enforcement if they are to be effectively applied, as
self-imposed codes of conduct do not provide the means for their application to
be binding on participants, and lack a body with the powers to ensure their
application. Therefore, subjecting benchmark administrators to supervision by
competent authorities with powers to detect and sanction breaches meets the
test of necessity in order to meet the public interest objectives of protecting
investors and ensuring market integrity.

The
option must also meet the test of proportionality. This option is
proportionate as the access to data by competent authorities is limited to the
purpose of ensuring the enforcement of the requirements on benchmarks or market
abuse investigations by competent authorities. Personal data would therefore
only need to be accessed in cases where the competent authority has a
reasonable suspicion that the requirements of the benchmarks regulation have
been breached. In addition, the Data Protection Directive 95/46/EC applies,
which provides safeguards by requiring that personal data which is processed
must be accurate, adequate and not excessive in relation to the legitimate
purposes for which it is processed. In addition personal data must only be
processed for no longer than necessary. Therefore, providing for supervision of
benchmark administrators by competent authorities with powers to detect and
sanction breaches of the requirements on benchmark administrators meets the
test of proportionality. For the same reasons as explained above, it also
preserve the essence of the fundamental rights in question.

In
light of the above, this option complies with the CFR as it would be provided
for by law. It is necessary to meet the public interest objectives of ensuring
market integrity and protecting investors and it is proportionate to meeting
those objectives.

Require
sufficient underlying data and justification for discretion

This
preferred option entails that where transaction data is not used and discretion
is exercised, contributors and administrators should document and be able to
justify any discretion they exercised. To the extent that it is necessary to
justify discretion where transaction data is not used, records of personal data
may need to be kept, for example for a administrator to record the name, firm
and telephone number of the person to whom its employee spoke on the telephone
in order to obtain an assessment of a price for calculating a benchmark. This
option could be considered to place limits on the fundamental right to the
protection of personal data. The requirement to ensure sufficient underlying
data and justify discretion could also be considered to be a restriction on the
fundamental right to conduct a business, on the grounds that administrators who
are not able to fulfil these requirements would not be able to pursue the
business of benchmark provision.

The
public interest objective which justifies such a limitation is, again, the
objective of ensuring market integrity and ensuring a high level of protection
of consumers against use of inappropriate benchmarks. The option meets the test
of necessity as without it, competent authorities would not be able to have
access to records of benchmark submissions to ensure that the requirements on
justifying discretion where it is used, as well as requirements on conflicts of
interest and governance, have been complied with. It is also necessary as
without it, users of benchmarks could not have confidence that benchmarks would
be provided on a sound basis and could face harm (i.e. financial losses) due to
the potential manipulation of benchmarks. The right to conduct a business must
be balanced against the right of users not to suffer harm to their fundamental
right to property in the form of financial losses due to the manipulation of
benchmarks.

This
option is also proportionate as personal data only needs to be kept when
transaction data is lacking, and is restricted to the data needed to
demonstrate compliance with the requirements for benchmarks on governance,
accuracy and representativeness. The Data Protection Directive 95/46/EC applies
to such data, which requires that personal data which is processed must be
accurate, adequate and not excessive in relation to the legitimate purposes for
which it is processed. In addition personal data must only be processed for no
longer than necessary. The option is also more proportionate than the option to
require mandatory use of transaction data, as it leaves flexibility to
benchmark administrators to continue to provide their benchmarks when
transaction data is lacking by using their discretion, so long as this
discretion is justified. Therefore, this option meets the test of
proportionality and at the same time preserves the essence of the rights to
protection of personal data and to conduct a business.

In
light of the above, this option complies with the CFR as it would be provided
for by law, it is necessary to meet the public interest objectives of ensuring
market integrity and protecting investors and it is proportionate to meeting
those objectives. The proposal is in compliance with the Charter as it would
lead to more effective and harmonised regimes for the production and use of
benchmarks, improving market integrity. To this end the policy options ensure
that the submission of information to contribute to the production of a
benchmark and the production of benchmarks which are an individual assessment
of prevailing market conditions are subject to requirements which do not hamper
these activities. These policy options would contribute to market integrity by
preventing the manipulation of benchmarks within the EU, and ensuring that they
robust and reliable are used.

In
conclusion, regulating the provision of benchmarks as outlined above is
necessary to ensure that those who provide, or submit to, benchmarks which
directly affect financial market prices adhere to sound governance principles,
and to ensure that competent authorities can supervise and enforce the
adherence to these principles. It is necessary also because sanctioning of
offences under market abuse rules and possible restitution only occurs after
the fact, and investors as a result could be subject to distorted prices for an
extended period of time. The preferred policy options would contribute to the public
interest objective of market integrity, and they are necessary to ensure a high
level of consumer protection, as currently investors can suffer losses to their
investments due to distorted benchmark values or the use of inappropriate
benchmarks. They are proportionate as the regulation of these activities is
limited to solely those practices which directly impact financial market
prices.

Annex XII: 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".

In addition, following
the event in relation to LIBOR in Spring 2012, the issue of benchmarks have
become at the focus of international work. The Financial Stability Board (FSB)
and other institutions, such as the International Organization of Securities
Commissions (IOSCO), have in the course of 2012 undertaken work in this field.
In particular, at the meeting of the G20 Finance Ministers and Central Bank
Governors held in Mexico City on 5th November 2012, it was stated that "in
relation to LIBOR, EURIBOR and other financial benchmarks, we welcome actions
taken and on-going reviews to identify measures to address weaknesses and
restore confidence in benchmark and index setting practices and welcome the
coordinator role of the FSB as agreed".

Thus, at Union level, in
addition to the amendments of the proposals for MAR and CSMAD[276] , it is necessary to improve the oversight and
governance frameworks for financial benchmarks. The work started by the
European Securities and Markets Authority (ESMA) and the European Banking
Authority (EBA) illustrate the need to act expeditiously in this field. It is
important to note that this initiative is complementary to existing provisions
in the current EU legal framework (see: Markets in Financial Instruments Directive
(MiFID)[277], Market Abuse Directive
(MAD)[278], Prospectus Directive[279], Regulation on Wholesale Energy Market
Integrity and Transparency (REMIT)[280] and
Undertakings for Collective Investment in Transferable Securities Directive
(UCITS)[281]) and is consistent with
the EU's growth and jobs objectives, in particular to ensure financial markets
better serve the real economy.

Annex XIII: Defining
the scope
Defining the scope by benchmark characteristics

Figure 1 scoping
exercise for benchmarks that should be targeted by intervention

Figure 1 Targeted
benchmarks

Scoping for most relevant problem
drivers: discretion and conflicts of interest

Stakeholder’s views: A variety of
opinions were expressed on this issue. Some thought that all benchmarks should
be included in the proposal as all were subject to the same vulnerabilities.
Others believed that the more subjective benchmarks should be subject to more
onerous requirements.[282]
Others thought that objective indices should be excluded.[283] On
the other hand some administrators believed that subjective indices should not
be included as they constituted journalism.[284]

The key problem driver
is conflicts of interest. Wherever there is discretion which is subject to a
conflict of interest, then there is a risk of manipulation in the absence of
adequate governance and controls (see sections 8 to 10). Therefore indices
which involve discretion, either in their calculations or contributions, should
be subject to some form of mitigating measures. However the discretion
exercised can vary from assessments, which involve almost completely subjective
judgments to well-defined formulas concerning objective transaction data, such
as equity indices, where the discretion may be occasional.

However it was shown
that all indices will involve some discretion and where there is discretion,
manipulation is possible. Therefore the scope of this impact assessment
exercise should include all types of benchmark, regardless of the method of
calculation or the nature of the contributions.

Scoping for impact and vulnerability:
Published indices

Stakeholders’ views: Most agreed
that a benchmark must be a reference for the price financial instrument or
contract or the performance of an investment fund 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 an investment fund should be targeted.

Stakeholder’s views: While a
variety of views were expressed, most recognised the distinction between
published indices and non-published indices in respect of the market failures (explained in section
4.2.1) and the greater risks that published indices pose.[285]
Respondents to the consultation also argued that regulation of purely private
indices would not be necessary [286]or
in some cases not possible[287].
Others recognised the specific market failure whereby the difficulty in
monetising the benchmark may lead to providing the benchmark more frequently
than is necessary (i.e. daily) with adverse consequences for its quality.[288]

Published indices are
more likely to be produced in a way that is insufficiently robust given their
wide use and the inability of administrators to internalise all the benefits of
investments in ensuring their reliability. They are also more likely to be used
inappropriately and, if widely used are likely to inflict greater damage on a
wider population than indices which are not in the public domain. This calls
for attention to be targeted at published benchmarks (and benchmarks which are
otherwise available to the public – for example because they are leaked to the
public even if they are not published). As a result the scope of proposed
options would apply only to published benchmarks.

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 financial instruments 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[289]
and the CME Group[290]
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.

Scoping: targeting critical or important benchmarks

Stakeholder’s views: A variety
of opinions were expressed on this issue; many agreed that any legislative
proposal should apply to all benchmarks, as defined above. Others believed that
a regulation should not apply to less important indices.  However many also
believed that the risk of manipulation were concentrated in particular sectors
(in particular interest rate and commodities benchmarks) and that any
manipulation of benchmarks in these areas would have the greatest effect;
therefore  regulation should be concentrated in these areas.  Others suggest
that this dilemma can be addressed by adopting a differentiated approach with
more onerous regulation of the more vulnerable or high impact benchmarks.

For benchmarks that are
widely used, even minor manipulation may have a significant impact, potentially
affecting financial stability. The scope of the options could, in principle, be
further restricted to the class of benchmarks that might have a material or
significant effect on financial stability, or are more generally deemed
important or vulnerable.

However vulnerability
may vary over time; interest rate benchmarks’ weaknesses increased
significantly when liquidity dried up in interbank markets after the financial
crisis. Similarly, impact can also vary over time; a benchmark can become
widely used in a short period of time. It is therefore appropriate to include
within the scope of the legislation all benchmarks that reference the price of
financial instruments and that are published. The option of defining the scope
for action narrowly by reference to indices which are currently important or
for which there is recent evidence of vulnerabilities has been discarded, as
this would be a reactive approach rather than addressing the risks that any
benchmark may pose in the future.

Sectoral Scoping: However
because different benchmarks sectors have different characteristics and may be
subject to particular vulnerabilities, a proportionate approach dictates that
more focused and detailed provisions should be applied on a sector by sector
basis. For example where in a particular sector indices are produced by
individuals or very small firms, it would be proportionate to tailor the
measures to take account of these characteristics. A sectoral approach in the
initiative would be achieved by further detailing requirements for particular
sectors in a more focused and proportionate manner. Any initiative would adopt
a proportionate approach which should ensure that a disproportionate burden is
not placed on for example small administrators that do not pose large risks.
The sectoral approach would further specify how this can be achieved.

The particular
vulnerabilities of commodity benchmarks have already been identified in the
consultation responses and a number of recent incidents. In addition an
international approach has been agreed in relation to oil benchmarks in the
IOSCO report on Principles for Oil Price Reporting Agencies (PRAs)[291].
It is therefore possible at present to identify an internationally consistent
set of more detailed rules that focus on the specific vulnerabilities of these
types of benchmarks; detailed rules for commodity benchmarks can be therefore included
in any initiative.

Critical
Benchmarks Additional Rules: A critical benchmark is one which if it failed
or was manipulated could have significant adverse impact on the stability of
the financial system and the real economy or lead to significant losses for
investors. The consultation and evidence have highlighted views that such critical
impact should be the focus of stronger safeguards and requirements.  Interest
rate benchmarks are critical benchmarks[292] and a
proportionate approach would suggest that stronger rules should be applied to
these benchmarks.

Applying the principle
of proportionality and the need for an effective framework it is therefore
necessary to define a scope of critical benchmarks which would be subject to
stronger and more detailed requirements. Specific parameters should be
determined to identify which benchmarks are critical, for example, based on the
value of contracts referenced to them and on whether their unreliability could
have serious significant adverse implications in the EU.

Defining the scope by actors
Entities producing benchmarks

Given the scope of
targeted benchmarks, it is then necessary to determine which activities in the
benchmark process (submission, calculation and use), and so which entities,
need to be in the scope in order to ensure that the options are effective,
efficient and proportionate.

The starting point is
that all benchmark administrators are potentially subject to conflicts of
interest, exercise discretion and may not exercise the necessary degree of
control. Therefore it is necessary to regulate their activities. Secondly they
sit at the centre of the benchmark process and so are able to exercise control
over both the contributions and the use, making their regulation highly
effective in terms of achieving this initiatives objectives. Thirdly there are
fewer administrators than users or contributors and so it is efficient to
concentrate the highest degree of regulation on the administrators. As a result
all EU based benchmark administrators involved in the production of the above
defined ‘target benchmarks’ should be in the scope of the options examined
here.

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 Regulation.

Entities contributing to benchmarks

Stakeholders’ views: there was an
even split between those who thought that administrators or contributors or
both should be within scope, with views depending on whether they were a administrator,
contributor or user. Some however endorsed a proportionate approach which would
involve only targeting entities already subject to EU regulation.[293]

Benchmark contributors
are subject to conflicts of interest, may exercise discretion and so may be the
source of the manipulation of benchmarks. Requirements for contributors are
therefore necessary. The amended proposals for a regulation and a directive to
prohibit and criminalise manipulation of benchmarks [294]
are targeted at prohibiting the manipulation of benchmarks by contributors and
impose serious penalties, including criminal sanctions for any breach; as such
they address the leading vulnerability that contributors pose to the benchmark
process.

This initiative is
intended to address the framework under which contributions are made. However,
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

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 (see section 10).

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

Suppose
Bob, as a hobby, sets up a wine index in Bordeaux; this index, published in the
online local newspaper, is only intended to be an indicator of local wine
prices for visiting tourist wine connoisseurs.  The underlying data for this
index is obtained by phoning a fixed panel of contributor vineyards and asking
them the price of their best wine. Bob then calculates the index as an average
of these prices (giving more weight to the largest vineyards).  The index
therefore involves discretion – for the contributors in choosing which their
best wine is and for the administrator, Bob, in choosing who should be on the
panel and how to weigh them.  This discretion means that potentially both Bob
and the contributing vineyards have the opportunity to manipulate the index. 
But why would they want to?

However
Chinese commercial visitors coming to Bordeaux to export wine back home start
using the index to set the price in commercial export agreements with the
vineyards.  The local banks then issue financial derivatives that reference the
index to allow the vineyards to hedge these export agreements; the index is now
a benchmark.  And now there is a conflict of interest because the contributor
vineyards have an interest in the value of the benchmark because it prices the
wine derivatives they buy from the local banks. Thus while the contributor
discretion creates the opportunity, this conflict creates an incentive to
manipulate the benchmark.

Aware
of this Bob starts charging the local banks 10 euros to use his benchmark which
pays for his son Bill to go round occasionally and check whether vineyards are
giving the price for their best wine.  Given that he is aware that only 10,000
euros of contracts reference his benchmark this seems a reasonable level of
governance and controls.  However, banks in London, New York and Beijing, are
in fact selling these derivatives not just to the local vineyards but also to
users such as Californian vineyards for export hedging, and to other investors
keen to invest in fine wine. These banks can do this because the benchmark is
published.  In time these derivatives total billions meaning that manipulating
the benchmark can reap millions for traders – but also cause losses to
Californian vineyards and other investor. As a result the governance and controls
Bob has implemented are now clearly not commensurate with the risks the
benchmark poses and the massive incentives to manipulate the rate.

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

(About
irregular practices of creditors establishing themselves reference indices for
the borrowing rates for consumers (anonimised)).

By emails dated
22/11/2012, 26/11/2012 and 10/12/2012, Mr. X, a Bulgarian national, has asked
the Commission services to answer the following questions:

"Please give
your statement whether the usage of "methodology developed by the creditor
itself" including components which are not transparent and can be changed
any time based only on the internal will of the creditor is in compliance with
the EU directives. Shall the creditor transfer the risks of the services to the
consumer? Is this in compliance with consumer protection EU directives /
"EU Consumer Credit Directive 2008/48/EC". In case of discrepancies:
what are the next steps and who is going to trigger them?"

Mr. X has provided the
Commission services with the following documents in Bulgarian (original) and
English (unofficial translation):

(1) Letter of the
Ombudsman of the Republic of Bulgaria of 04/12/2012 in reply to Mr. X's
complaint of 13/11/2012

By complaint of
13/11/2012 Mr. X has requested the Ombudsman of the Republic of Bulgaria to ask
the Constitutional Court of the Republic of Bulgaria to declare
unconstitutional the definition of "reference rate" under Additional
Provision § 1(6) of Bulgaria’s Consumer Credit Act with regard to the words
"or an index, which is calculated based on methodology developed by the
creditor itself".

By letter of 04/12/2012
the Ombudsman of the Republic of Bulgaria replied to Mr. X that the contested
definition does not contradict Article 19(2) of the Constitution of the
Republic of Bulgaria.

However, the Ombudsman
acknowledged that:

"Having in
mind other complaints from citizens and identified problems together with the
lack of adequate control upon the way of the methodology definition for index
calculation in the last year I’ve send recommendations to the head of the
Bulgarian National Bank to take corresponding actions, including change of the
regulation in order to protect the consumers better. In the yearly report of
the Ombudsman activities for 2011 towards the Bulgarian parliament I emphasized
again the problem and I recommended initiating changes in the corresponding
legislation. Unfortunately up till now and although the expressed willingness
of the Financial Minister in the beginning of the current year to submit
legislation changes connected with the referral interest rate, such changes are
not submitted".

(2) Annual
Report on the Activities of the Ombudsman of the Republic of Bulgaria for the
year 2011

Please take note of
pages 142-143 of this Report:

"Law on Credit
Institutions, Law on Consumer Credit, and the unilateral change of the interest
rate by the credit institutions

I would like to draw
your attention to another problem with the legal framework and the operations
of the banks. From the citizen complaints and signals which I’ve received I
found out that consumer rights are not sufficiently protected by the
regulations. The Law on Credit Institutions (LCI) contains provisions on
information which must be provided by the banks to the clients with the
granting of a credit. Some of this information is associated with the changes
in the interest rate till full repayment of the loan. The text of Art. 58,
paragraph. 1, item 2 of the LCI is missing criterion of "objectivity"
in the interest rate change. This edition of the provision allows banks to
determine the conditions under which they can change the interest rate on loans
without to follow any established criteria. It is enough only to inform the
borrower of the changed conditions for the loan.

Under the Consumer
Credit Act, banks can also change interest rate unilaterally without criteria
for conditions that change.

By defined in § 1, item
6 of the Supplementary Provisions of the law "reference interest rate is
the interest rate that the creditor used as a base for calculating the interest
rate on the loan. It is a market index or an index which is calculated from a
methodology developed by the creditor itself. Reference rate is made public by
providing it in electronic format and the information it is kept available to
interested persons in writing at the premises of the creditor".

This definition enables
the bank to unilaterally change the interest rate choosing the option for
reference rate that is an index calculated by creditor’s methodology, which is
not subject to control and there are no legislatively defined performance
requirements.

Given these findings, I
made a recommendation to the Governor of the Bulgarian National Bank and the
Finance Minister to take necessary action in order to protect the rights of
citizens as consumers.

Result: Despite the
initial refusal actions to be taken by the government and the National
Bulgarian Bank, I’m pleased to see that in the beginning of 2012 the Minister
of Finance expressed its intention to introduce proposed regulatory changes
related to interest rate calculation on credits. In this regard, I appeal to
you and the members of the parliament as right holders of legislative
initiative, with a recommendation to initiate changes in those laws to ensure
that the lender has the right for changing of the interest rate only on for
valid reason and objective criteria, thus protect the rights of citizens as
consumers".

(3) Interview with Ms.
Violina Marinova, CEO of DSK Bank, published at http://banks.dir.bg/2012/04/03/news10877484.html

In this interview Ms.
Violina Marinova, CEO of DSK Bank, has pointed out, inter alia, that:

"What was
offered (from the Finance Minister ) is a benchmark interest rate linked to
EURIBOR, LIBOR or SOFIBOR and this will NOT lead to a decrease of the interest
rates, because these indices are quite manipulated and cost of credit could not
be exactly determined".

Conclusion:

In the light of the
above it could be concluded that:

(1) Please note that CCD
neither defines the term „reference rate“, nor regulates the periods,
conditions and procedures for changing the reference rate.

Therefore, in our view,
Bulgaria is free to introduce national legislation concerning the application
of the reference rate, such as the provisions contained in Article 33a and
Additional Provision § 1(6) of Bulgaria’s Consumer Credit Act (CCA).

Thus we are unable to
find discrepancies between CCD and CCA with regard to the notion of "reference
rate".

(2) However, it
should be pointed out the existence of numerous complaints lodged by individual
citizens and NGOs with regard to the regulation and implementation of the
reference rate in Bulgaria.

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

(About irregular
practices of creditors establishing themselves reference indices for the
borrowing rates for consumers (anonimised))

The Polish complainant
raised in May 2012 concerns as to WIBOR (used generally as a reference rate for
variable rate on consumer credits in Poland):

- It is issued from the
offers from the banks (the participants certify that they will conclude
transactions between them according to the rates that are not lower); the
complainant raises concerns about insufficient regulation of the process of
definition of WIBOR and potential collusion

- They complainant
points out that the rates on interbank loans are not necessarily the cost of
credit for the bank, especially if it earns big amounts of money.

The complaint was not
very professionally formulated, but according to DG SANCO’s information:

- There are very few
actual interbank transactions for 3 or 6 months, while WIBOR3M or WIBOR6M is
the most often used to reference borrowing rates for consumer credits (so
probably WIBOR3M and WIBOR 6M is not based on actual transactions); the liquid
interbank market is overnight

- According to the data
regularly published by the National Bank of Poland, the principal source of
financing in Polish banks are deposits (annual Reports on Stability of the
Financial Sector).

As it was not CCD issue,
DG SANCO had to reply to the complainant that it is not regulated at EU level.

ANNEX XVII: Summary record (by the Commission services) of ECON public hearing on "Tackling the culture
of market manipulation - Global action post Libor/Euribor" , 24th
September 2012, 15:00 – 17:30

3.
Public hearing on "Tackling the culture of market manipulation - Global
action post Libor/Euribor
ECON/7/10626
Rapporteur: Arlene McCarthy (S&D/UK)

Session 1: Tackling the culture of
manipulation

The rapporteur, Arlene McCARTHY (S&D/UK)
stressed in her introductory remarks the crucial importance of learning the
lessons from LIBOR's manipulation and addressing unsupervised benchmarks as
there is a very large volume of financial and commercial contracts referenced
to them. She expressed her concern about unregulated interest rate benchmarks
as they are used not only used by institutional investors but by SMEs and
consumers as well. She pointed out that the consultation launched by the
European Parliament into benchmarks regulation has received 165 responses to
date which underlines the interest on this topic. She also welcomed the amended
proposals from the Commission to extend the scope of the Market Abuse
Regulation and criminal sanctions for market abuse Directive to cover
benchmarks and ensure both criminal and administrative sanctions for abuse.

The following speakers addressed the hearing:

·
Gary
GENSLER, Chairman of the US Commodity Futures Trading Commission (CFTC) (by
video link).

·
Michel
BARNIER, Commissioner for Internal Market and Services

·
Andrew
FARRELL, Partner, Head of Commercial Litigation, JMW Solicitors LLP

·
Joaquín
ALMUNIA, Commissioner for Competition

·
Masamichi
KONO, Chairman of the International Organisation of Securities Commission
(IOSCO) Board

·
Daniel
L. DOCTOROFF, CEO and President of Bloomberg

·
Thierry
PHILIPPONNAT, Secretary General of Finance Watch

·
Joanna
COUND, Head of Government affairs, Blackrock

The hearing was opened by Mr GENSLER, CFTC
Chairman, who focused on four main points:

· The reasons
why LIBOR manipulation happened: benchmarks were not based on observable
underlying transactions and there was a lack of supervision and control
mechanisms to avoid conflicts of interest.

· How extensive
is the problem: large scale as shown by the Barclays case, EURIBOR was
consistently twice as high as LIBOR, which was remarkably stable: on 85% of
days banks did not change their submissions at all; short-term interest rate
volatility not reflected in LIBOR rate and interest rate benchmarks not
reflecting credit worthiness of their contributors.

· Healing
process: Need for benchmarks to be based on actual transactions, as well as
legislation enhancing supervisory authorities’ powers to supervise benchmarks
and reinforced governance to prevent and address conflicts of interest.

· Can LIBOR be
mended or should it be replaced? The market should decide, but if it is replaced
a long transition period as well as coordination at international level would
be needed to ensure a smooth move to healthy transaction-based benchmarks.

Mr BARNIER, Commissioner for Internal Market and
Services, focused his intervention on three main points:

· Lack of
confidence of investors and citizens in benchmarks and markets: some can be
considered as public goods and the lack of integrity and transparency affects
us all, as well as confidence in financial markets.

· Need for a
strong global response to benchmarks manipulation: no room for complacency;
need a policy on manipulation with criminal and administrative sanctions as
well a change of culture by reinforced governance and transparency.

· Consultation
on benchmarks regulation: Self-regulation is not a valid option; the Commission
has launched a public consultation on regulatory options to reinforce the
integrity, transparency, governance and use of benchmarks.

Mr Andrew FARRELL, acting on behalf of SMEs
affected by the LIBOR manipulation in the UK, remarked that for many SMEs affected
by LIBOR manipulation it is not cost-effective to individually seek
compensation for being mis-sold complex hedging products. There is a need for
behavioural change, not just structural change, and this could be best achieved
by making the management of financial institutions management for mis-selling
of financial products.

Following these interventions Ms
McCARTHY(S&D/UK) opened up a round of questions by asking Mr GENSLER what
would be an alternative to contributing banks if banks are dissuaded to
contributing towards benchmarks by criminal transactions. Mr GENSLER replied
that the best alternative would be transaction-based benchmarks with
independent bodies collecting and calculating data. In addition, he insisted on
the need for transparent processes and proper supervision and control of
contributing banks, as well as sanctions in order to avoid collusion.

Mr LAMBERTS (EFA/BE) questioned Mr GENSLER on
the optimal regulatory level for benchmarks and who is best positioned to
determine what benchmarks are and who should be the most appropriate regulatory
and enforcement institutions. Mr GENSLER replied that this depends on the scope
and use of different benchmarks.

Mr FEIO (EPP/PO) on behalf of Ms PIETIKÄINEN (EPP/FI)
asked Mr GENSLER how he sees the reform of benchmarks and what could be the
alternatives to LIBOR and EURIBOR.
Mr GENSLER replied that the solution should be benchmarks based on real
transactions. This would diminish the chances of misconduct as less discretion
would be required.

Mr KLINZ (ALDE/DE) expressed his concern for the
confidence crisis caused by financial institutions still not showing respect
for customers and supervisors, and wanted to quantify the damage caused by
benchmarks manipulation. He shared this belief that this is a cultural
question, thus rules and regulation will not be enough and inquired about what
can be done to ensure cultural change in financial sector. Mr BARNIER replied
that he does not believe in self-regulation of financial markets or in a sudden
change of culture and in consequence there is a need for regulation as well as
external and internal supervision.

Ms FERREIRA (S&D, PT) asked how
this happened, why it took so long to react and how it could be prevented in
future. Mr BARNIER replied that this happened because of lack of supervision on
conflicts of interests. The Commission response was quick by adopting proposals
for amendments to MAR and MAD in order to include administrative and criminal
sanctions for benchmarks manipulation.  The Commission is working to ensure
that required internal and external supervision is implemented in benchmarks
production and contributions to avoid conflicts of interest and further
regulatory actions will be considered depending on the on-going public
consultation results.

Mr SCHMIDT (ALDE/SE) also referred to the need for change in financial
institutions management attitudes and inquired into why there were no earlier
reactions to benchmarks manipulation as it started in 2008. Mr GENSLER answered
that the CFTC started looking at this with the FSA in 2008 but it was a huge
job with time required to put all facts and evidence together.

Ms McCARTHY (S&D/UK) closed the questions
round by asking Mr FARRELL what SMEs need from regulators to restore their
confidence in financial institutions. Mr FARRELL replied that SME’s need
protection and enforcement of regulations as well as personal accountability of
financial institutions' management.

Session
2: Establishing
integrity and trust post Libor/Euribor

Mr Joaquín ALMUNIA, Commissioner for
Competition, expressed his belief that the financial sector grew too large and
too complex before the crisis, serving its own interests before its clients'
interests. He made two main points:

·
Banks
are essential factors of growth; competition policy supports the good
functioning of markets and enforcement needs to be stepped up to ensure market
access and fair play. Perverse incentives leading to conflicts of interest and
lack of transparency in benchmarks production and contributions need to be, and
are being, addressed by regulatory reforms on which the Commission is
consulting.

·
The
Financial and economic evolution of last 3 decades led to the financial crisis
and the responsibilities are shared by banks, politicians, regulators and business
leaders.

Mr Masamichi KONO, Chairman of the IOSCO Board,
stressed that there is a need for global regulation and coordination on
benchmarks regulation and supervision in order to enhance their integrity and
restore market confidence. Improvement should be market driven but only
globally coordinated approaches to benchmarks regulation will work. IOSCO's
task force on benchmarks intends to publish a consultation report by the end of
2012 and to develop global recommendations by March 2013.

Mr Daniel L. DOCTOROFF, CEO and President of
Bloomberg, argued for transparency, accuracy, objectivity and actual
transaction data as well as technical expertise, investment from market players
and a market based response. Bloomberg has offered to develop, pro bono,
an alternative to LIBOR based on the principles of transparency, accuracy and
real transactions. He believes that LIBOR must be preserved at least in the
short-term but there is a need for markets to move to reference rates which
reflect economic reality and generate confidence.

Mr Thierry PHILIPPONNAT, Secretary General
of Finance Watch, affirmed that the current benchmarks system has in-built
conflicts of interest and there is a need for enhanced regulation to restore
confidence, as self-regulation is not a valid option. He called for harmonised
definitions and procedures, benchmarks based on effective rates, and for banks
and their management to be held responsible for manipulation.

Ms Joanna COUND, Head of Government affairs at
Blackrock, expressed concern about the large impacts that sudden and extreme
regulatory changes could have on pension and investment funds. According to
her, sudden change can lead to more problems than the initial manipulation due
to transition and legacy issues. She called for evolution and not revolution in
relation to LIBOR, due to liquidity considerations.

Ms SWINBURNE (ECR/UK) requesting advice for MEPs
negotiating MIFID regarding the use of benchmarks, and questioned whether an
open access public utility should be devised for benchmarks provision. Mr
PHILIPPONNAT argued that benchmarks should be provided by private entities but
controlled by public institutions.

Mr KLINZ (ALDE/DE) asked Mr ALMUNIA whether the
Commission considered holding individuals responsible, not just companies, for
benchmarks manipulation. Mr ALMUNIA replied that competition law can only
impose fines on companies which have colluded and never to individuals. Mr
KLINZ also asked Mr DOCTOROFF how quickly its alternative to LIBOR could ready,
why it offered this for free and how it has been received by other regulatory
intuitions. Mr DOCTOROFF replied that Bloomberg considered that no commercial
entity should benefit from the provision of an alternative to LIBOR. It would
take about 15 months to introduce and regulators were "intrigued".

Mr LAMBERTS (Greens-EFA/BE) shared his
understanding that a move from LIBOR will bring disruption but the status quo
was not an option. He wondered whether a multiplicity of indices would be
better than one critical index such as LIBOR. He asked Mr ALMUNIA about the
likely methodology to measure possible fines for LIBOR manipulation. Mr ALMUNIA
explained that the levels of any fines for a cartel would be calculated based
on the level of sales affected by the cartel and the duration of the
infringement.

Mr SANCHEZ PRESEDO (S&D/ES) remarked on the
corporate responsibility dimension and insisted on the need for a coordinated
approach on benchmark regulation as well as manipulation investigations. Mr
ALMUNIA replied that the Commission is coordinating with other jurisdictions
and in particular with the US.

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”, organised by ESMA/EBA on 13th February 2013,
14:30 – 17:30

Introduction: The hearing
was chaired by Verena Ross (VR, Executive Director of ESMA) and Piers Haben
(PH, Director of Oversight at EBA) who framed it in the context of the three
work streams on benchmarks by ESMA and EBA:

-
ESMA-EBA
consultation on Principles for Benchmark Setting Processes in the EU

-
Review
of EURIBOR’s administration and management and recommendations to EEBF

-
Formal
EBA Recommendations to national authorities on the supervisory oversight of
banks participating in the Euribor panel

They emphasized that the
intention of the principles for benchmark-setting processes by ESMA is to set
an interim regime, which will serve as a glide path to the foreseen European
framework on benchmark setting, and which does not prejudge the Commission
initiative. They also highlighted the non-binding legal effect of the
principles and pointed out that the intention of the hearing was to obtain an
overview of the stakeholders’ views on the consultation paper (CP). As a
result, the hearing was structured in line with the different sections of the
CP and stakeholders were asked to provide their views on the following topics:

Scope (CP, page 4)

Price reporting agencies
(PRAs, including Argus Media and ICIS) inquired whether the
definition of benchmark in the CP was intentionally aligned with the definition
in MAR and MAD and VR confirmed this.

The UK Investment
Management Association and Markit expressed their views that the terms
index and benchmark should be differentiated and that the definition of
benchmarks was very broad and vague and it should differentiate transaction
based from panel based benchmarks as they present different issues and
characteristics.

Markit also
suggested that it could be useful to differentiate between benchmark sponsor
(responsible for an index) and administrator agent (responsible for the
maintenance of the index but not necessarily the calculator). It also suggested
that regulatory distinctions should be made for different types of benchmarks
within the scope.

PRAs (Argus Media and
ICIS)
agreed on this and added that one size fits all approach would not be feasible
as price assessments provided by PRAs present different issues compared to
‘financial’ benchmarks. They also emphasized that as they are specialist media
organisations and their assessments are part of their financial publications
they may not be aware of use of their assessments to reference financial
contracts in many occasions.

VR replied that
the definition of benchmark was intentionally broad as the principles are
intended to be high level and apply to the broad benchmark industry and thus it
has been avoided to make the CP specific to certain benchmarks and markets.

The Association of
German Public Sector Banks presented its view that a differentiation
should be made between existing benchmarks and new benchmarks and that existing
benchmarks should be subject to less stringent requirements than new ones. In
their view new benchmarks should be created to address shortcomings identified
in existing ones.

VR replied that
due to concerns about the continuity of financial instruments and contracts
referenced to benchmarks, shortcomings and potential risks in both current and
future benchmarks should be addressed and existing benchmarks should be
reinforced.

The Association of
German Pfandbrief Banks suggested that the CP should differentiate
between critical and other benchmarks in order not to impose excessive or
disproportionate obligations on small benchmark administrators. VR responded by
asking how they would define criticalally important benchmarks and welcomed
their suggestions in writing.

Other stakeholders also
mentioned that the consultation did not make reference to benchmarks used for
private purposes which are not published or published just to a limited
audience. VR replied that as per the definition on the CP, only published
benchmarks would be under the scope of the principles.

Principles of good
conduct for benchmark setting (CP, page 7)

A. General framework for
benchmarks setting

A.1 Methodology: some
stakeholders remarked that underlying data should be sufficiently liquid and
questioned the continuity of currently used benchmarks depending on quotes.
However, others sustained that the aim of benchmarks is not to reflect the
liquidity of the underlying but to have liquidity themselves. Others
highlighted that liquidity is normally not consistent throughout the
investments and methodologies need to be adapted to available data on the
underlying markets and there needs to be transparency about the liquid the
underlying market is. VR responded that for benchmarks with liquid underlying
markets, panels would not be necessary, but as not all benchmarks can be
transaction based, assessments based on a good level of liquidity of underlying
data, transparency and checks are necessary.

A.2. Governance
structure:
PRAs expressed their concern about the requirement for an independent structure
“the process of setting a benchmark needs to be governed by a clear and
independent process”. VR explained that sufficient independence is key to
ensuring proper governance and decision making processes and avoiding conflicts
of interest.

A.4. Transparency: some
stakeholders, mainly stock exchanges such as LSE, NYSE-Euronext and Deutsche Börse,
highlighted the need to calibrate transparency on methodology and underlying
data for different types of benchmarks and indices, for example by permitting
partial or delayed transparency. In their view, this is needed in order to
protect the IPRs of benchmark administrators and not to discourage contributors
from participating on the benchmark setting process.  Deutsche Börse also made
reference to the requirements for transparency and open access under Art. 30
MIFIR, and defended that transparency should be calibrated according to users
and that excessive transparency could lead to competitive disadvantages for administrators
and reduce innovation in index provision.

VR responded
that the principles on ESMA’s CP are not linked to requirements under MIFID/MIFIR
and emphasised that the principles cannot be sector specific and a common
approach needs to be reached.

B. Principles for firms
involved in benchmark data submissions (where relevant) (CP, page 9)

Several stakeholders (including
Ernst & Young, Markit, Argus, ICIS  and  the Association of German Public
Sector Banks) expressed their concern about the fact that they rely on
voluntary contributions from submitters based outside the EU which could be
discouraged by these requirements, as they seem fit to large financial
institutions rather than for small commodity traders. They also raised concerns
about the requirement for adequate internal control mechanisms and audits of
submissions and procedures under B.8. They inquired about the required periodicity
of these controls and audits and explained that verifiable controls are not
always possible for existing benchmarks.

C. Principles for
benchmark administrators (CP, page 10)

C.3.Limitation of the
use of discretion: Markit objected to this requirement to limit
discretion as in its opinion in some markets judgment is more relevant than
transactions and Thomson Reuters supported the need to flexibility on the
choice of methodologies by administrators and users of benchmarks.

C.5. Fiduciary
obligation on benchmark administrators: several stakeholders
defended the need to differentiate between index administrators and administrators
of financial products to investors and to provide a safe harbour for administrators
of generic indices whose primary aim is not referencing financial products.

C.6. A benchmark
administrator should fully disclose the methodology: according to administrators
of strategy indices (also known as smart beta indices), making their
methodologies completely public would hurt the interest of investors in this
type of research and reduce innovation and competitiveness in the provision of
these indices.

C.9. Benchmark
administrators should ensure that principles applying to contributing firms in
order to prevent any misconduct are implemented: several stakeholders
highlighted that this could be costly and difficult for them as their
submissions are voluntary and in many cases from non-EU firms. They pointed out
the absence of a mechanism for bringing in submitting. Finally, stock exchanges
which rely on hundreds of live data feeds from exchanges around the world,
versus contributions from submitters, shared their view that this requirement
should apply exclusively to administrators of benchmarks based on panels or
surveys.

D. Principles for benchmark
calculation agents and publishers (CP, page 12-13)

There were not many
comments regarding the requirements for benchmark calculation agents, apart
from VR confirming that the responsibility for the reliability of benchmark
would rest with the administrator even if its calculation was outsourced.

The application of these
requirements to public institutions acting as calculators of certain benchmarks
(such as the ECB for EONIA or the Danish Central Bank for CIBOR) was questioned
and PHs responded that as these public institutions are already heavily
supervised in principle these requirements would not apply to them.

F.   Principles for
users of benchmarks (CP, page13)

F.2. A benchmark user
should ensure that the relevant benchmark administrator  and benchmark
calculation agent comply  with the principles: some stakeholders,
mainly users of strategy indices, stated that users are not able to ensure the
robustness of the indices they use and that these requirements could be seen as
an attempt to outsource the compliance function to the users of benchmarks. The
Investment Management association highlighted the fact that in many occasions
investment managers need to use the benchmarks which their clients choose even
if they think they are not appropriate and thus they would not be able to
comply with this requirement.

VR responded
that this is rather a “due diligence” requirement for users as they are
required to check that they are using appropriate and robust benchmarks to
reference financial products and that this should be possible as this is a
requirement for administrators to provide sufficient information for users to
make informed decisions.

F.3. Requirement for
contingency plans: users of strategy indices expressed their
opinion that contingency plans may not be applicable to users of strategy
indices as their clients choose the indices used on many occasions.

General comments

PRAs (Argus and
ICIS) stated that shortcomings in price assessments provided by PRAs have
already been addressed by IOSCO’s principles for oil PRAs. As the principles
for benchmarks on the CP by ESMA are in some cases not consistent with the
principles from IOSCO, this could hinder the implementation of the latter,
which will be reviewed by IOSCO in 18 months. PRAs and other stakeholders
stressed the need for coordination on the principles with IOSCO as capital
markets and the use and provision of benchmarks are global.

VR replied that
ESMA/EBA are participating on the IOSCO task force and aiming to align their
principles with ISOCO to the highest degree possible. However, she stressed
that whilst the EU needs to be consistent with IOSCO, it also needs to ensure
its own needs and interests are addressed.

The International
Capital Market Association (ICMA) pointed out the fact that these
principles of benchmark setting look just at the pricing of the financial
transaction versus the whole financial transaction. They inquired whether these
principles are aimed at addressing market abuse (already addressed under
MAR/MAD) or investor protection (already addressed under MIFID/MIFIR). They
emphasized the need to put this initiative in the context of the regulation of
the overall financial transactions.

VR responded
that with these principles ESMA is aiming to ensure investor protection through
efficient and orderly markets as well as financial stability.

Stakeholders (including
stock exchanges and the Association of German Public Sector Banks) asked for
clarification on how national competent authorities (NCAs) plan to apply the
principles. They expressed their concern that although the principles are
non-binding and intended to serve as a glide path for an EU framework on
benchmarks, they could be used by NCAs a basis for national regulation of
benchmarks.

VR replied that
the principles from ESMA/EBA are not intended to serve as a basis for national
regulation and that as an EU wide framework for benchmarks is under way they do
not intend to encourage intermediate regulation at national level which could
lead to a fragmented approach.

VR closed the hearing by thanking
the stakeholders and informing that ESMA/EBA plan to publish a feedback
statement together with the final principles by the end of April. When inquired
about the date of applicability of these principles she responded that this is
still to be decided.

Annex XIX: Bibliography

·
Amended proposal for a Regulation on insider
dealing and market manipulation, COM(2012) 2011/0295 (COD): http://ec.europa.eu/internal\_market/securities/abuse/index\_en.htm

·
Amended proposal for a Directive on criminal
sanctions for insider dealing and market manipulation, COM(2012) 2011/0297
(COD): http://ec.europa.eu/internal\_market/securities/abuse/index\_en.htm

·
Charter of Fundamental Rights of the EU, OJ C
326, 26.10.2012, p. 391-407: http://infoportal.fra.europa.eu/InfoPortal/infobaseShowContent.do?btnCat\_302&btnCountryBread\_169

·
CFTC Order in the matter of Barclays PLC, 27th
June 2012: http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfbarclaysorder062712.pdf

·
Commission consumer credit Directive 2011/90/EU
of 14 November 2011 amending Part II of Annex I to Directive 2008/48/EC: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32011L0090:EN:NOT

·
Consolidated versions of the Treaty on European
Union and the Treaty on the Functioning of the European Union, OJ C 326,
26.10.2012: http://eur-lex.europa.eu/JOHtml.do?uri=OJ:C:2010:083:SOM:EN:HTML

·
ESMA and EBA Principles for Benchmarks-Setting
Processes in the EU: http://www.eba.europa.eu/documents/10180/217545/2013-658+ESMA-EBA+Principles+on+Benchmarks+Final+Report.pdf

·
ESMA-EBA Consultation Paper on Principles for
Benchmarks-Setting Processes in the EU, January 201, and responses: http://www.esma.europa.eu/content/Principles-Benchmarks-Setting-Processes-EU

·
ESMA-EBA review of Euribor’s administration and
management and clear recommendations to the Euribor-European Banking Federation
(EEBF), January 2013: http://www.esma.europa.eu/content/Letter-EBF-Euribor

·
Formal EBA Recommendations to national
authorities on the supervisory oversight of banks participating in the Euribor
panel, January 2013: http://www.esma.europa.eu/content/EBA-Recommendations-supervisory-oversight-activities-related-banks’-participation-Euribor-pa

·
FSA consultation paper on the regulation and
supervision of benchmarks, CP 12/36, December 2012: http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

·
FSA Final Notice to Barclays, 27th
June 2012: http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf

·
Global Financial Markets Association Principles
for financial benchmarks: http://www.gfma.org/correspondence/item.aspx?id=350

·
Hong Kong Monetary Authority’s (HKMA) package of
measures to strengthen the transparency and robustness of the mechanism for the
fixing of HKD Interest Settlement Rate (more commonly known as the Hong Kong
Interbank Offered Rate or HIBOR), January 2013: http://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2013/20130206e4a1.pdf

·
IOSCO final report on Principles for Financial
Benchmarks: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf

·
IOSCO consultation report on the Functioning and
Oversight of Oil Price Reporting Agencies, CR04/12, March 2012: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD375.pdf

·
IOSCO consultation report on Financial
Benchmarks, CR01/13, January 2013 and responses: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD399.pdf

·
IOSCO final report on principles for Oil Price
Reporting Agencies, FR06/12, October 2012:
http://www.csrc.gov.cn/pub/csrc\_en/affairs/AffairsIOSCO/201210/P020121010499030150053.pdf

·
Market in Financial Instruments Directive, OJ L
145, 30.4.2004: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:2004L0039:20070921:EN:PDF

·
Presentations at the European Parliament Public
Hearing on Tackling the culture of market manipulation - Global action post
Libor/Euribor, 24th September 2012: http://www.europarl.europa.eu/committees/en/econ/events.html

·
Proposal for a Directive of the European
Parliament and of the Council on credit agreements relating to residential
property (Mortgage Credit Directive)/ COM/2011/0142 final: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52011PC0142:EN:NOT

·
Public statements by the Commissioner Barnier
and the ECB on concerns about banks leaving panels for interbank interest rate
benchmarks, 8th February 2013:
http://ec.europa.eu/commission\_2010-2014/barnier/headlines/speeches/2013/02/20130208\_en.htm
http://www.ecb.int/press/pr/date/2013/html/pr130208.en.html

·
Responses to the European Commission Consultation
on a Possible Framework for the Regulation of
the Production and Use of Indices serving as Benchmarks in Financial and other
Contracts, November 2012: http://ec.europa.eu/internal\_market/consultations/2012/benchmarks/index\_en.htm

·
Regulation on energy market integrity and
transparency (EU) No 1227/2011 (REMIT): http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:326:0001:01:EN:HTML

·
Regulation on European statistics (EC) No
223/2009: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:087:0164:0173:En:PDF

·
Strategy for the effective implementation of the
Charter of Fundamental Rights by the European Union, COM(2010) 573 final: http://ec.europa.eu/justice/news/intro/doc/com\_2010\_573\_en.pdf

·
Towards better reference rate practices: a
central bank perspective, by the EEC Working Group group: http://www.bis.org/press/p130318a.htm

·
Treaty of Lisbon, OJ C 306, 17.12.2007, OJ C
326, 26.10.2012: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12007L/TXT:EN:NOT

·
Undertakings for Collective Investment in
Transferable Securities Directive (2009/65/EC): http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:302:0032:0096:en:PDF

·
Wheatley review of LIBOR, final report,
September 2012: http://cdn.hm-treasury.gov.uk/wheatley\_review\_libor\_finalreport\_280912.pdf

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

This
annex provides some examples of the main types of
indices and price assessments frequently used as benchmarks and their main
characteristics. The list below aims to provide an overview of the wide range
and variety of benchmarks wide range and variety of indices and price
assessments used as benchmarks. However, it cannot be considered as an exhaustive
or comprehensive list and the IA analysis for the initiative on benchmarks has
not been based exclusively on the benchmarks listed in this annex but on all
types of benchmarks under the scope of the initiative according to section 7 of
this IA.

1.1.
Interest rate indices.

These are benchmarks for which the underlying assets are
either actual interest rates or interest rates estimates. They range from
Interbank Offered rates to REPOs or money market rates. They are mostly
calculated surveys of contributing banks by trade associations or private
companies (LIBOR, EURIBOR, etc.), but in some occasions by public bodies
(WIBOR). Money market rates such as EONIA and SONIA are generally calculated by
Central Banks based on actual transaction data.

1.1.1. Interbank Offered Rates (IBOR):
average interbank rates at which prime banks lend or borrow unsecured short
term deposits.

IBOR –  EU

Index || Definition || Currency || Maturities || Panel || Calculation || #Participants || Administrator || Domicile

BUBOR || Average interbank rate at which prime banks offer unsecured term deposits with up to 1yr maturity || HUD || 15: O/N – 1yr || Yes || Arithmetic average of rates after removing highest and lowest 4 quotes. || 15 banks selected by Hungarian Central Bank || Hungarian Forex Associa-tion || Hungary

CIBOR || Average interbank rate at which prime banks lend unsecured with up to 1yr maturity || DKK || 14: 1wk – 1yr || Yes || NA || 9 banks || Danish Bankers Association || Denmark

EURIBOR || Average interbank rate at which prime banks offer unsecured term deposits with up to 1yr maturity || EUR, USD || 15: O/N – 1yr || Yes || Arithmetic average after removing highest and lowest 15% || 43 banks || European Bankers Federa-tion (EBF) || Euro Area

LIBOR || Average interbank rate at which prime banks borrow unsecured with up to 1yr maturity || AUD, CAD, CHF, DKK, EUR, GBP, JPY, NZD, SEK, USD || 15: O/N – 1yr || Yes || Arithmetic average after removing highest and lowest 25% || 6 to 18 banks (minimum 5) || British Bankers Association (BBA), Thomson Reuters || UK

PRIBOR || Average interbank rate at which prime banks offer unsecured term deposits with up to 1yr maturity || CZK || 9: O/N – 1yr || Yes || Arithmetic average of rates after removing 1 to 2 highest and lowest quotes. || Minimum 4 banks || Czech National Bank || Czech Rep.

RIGIBOR || Average interbank rate at which prime banks borrow unsecured with up to 1yr maturity || LVL || 6: O/N – 1yr || YES || Arithmetic average of rates after removing the highest and the lowest quotes. || 7 banks || National Bank of Latvia || Latvia

SOFIBOR || Average interbank rate at which prime banks borrow unsecured with up to 1yr maturity || BGN || 14: O/N – 1yr || YES || Arithmetic average after removing highest and lowest 20% || Minimum 8 banks || National authorities (e.g. BNB) || Bulgaria

STIBOR || Average interbank rate at which prime banks borrow unsecured with up to 1yr maturity || SEK || 8: T/N – 1yr || Yes || Arithmetic average of rates. If the lowest and/or highest bid differs with 25 basis points or more from the second lowest and second highest bid it will be excluded from the calculation. || Banks in Genium-Inet system || Nasdaq OMX || Sweden

VILIBOR || Average interbank rate at which prime banks borrow unsecured with up  1yr maturity. || LTL || 7: O/N – 1yr || Yes || Arithmetic average of rates after removing the highest and the lowest quotes. || Minimum 5 banks || NA || Lithuania

WIBOR || Average interbank rate at which prime banks borrow unsecured with up to 1yr matur. || PZL || 9: O/N – 1yr || Yes || Arithmetic average of rates based on transactions data. No trimming of data. || 14 banks selected by volume in Polish cash and derivative instruments || National Bank of Poland || Poland

IBOR – NON EU

Index || Definition || Currency || Maturities || Panel || Calculation || #Participants || Administrator || Domicile

AIDIBOR || NA || AED || NA || NA || NA || NA || NA || UAS

BAIBOR || NA || ARS || NA || NA || NA || NA || NA || Argentina

BBSW || NA || AUD || NA || NA || NA || NA || NA || Australia

BKBM || NA || NZD || NA || NA || NA || NA || NA || New Zealand

BKIBOR || NA || THB || NA || NA || NA || NA || NA || Thailand

BRAZIBOR || NA || BRL || NA || NA || NA || NA || NA || Brazil

CDOR || NA || CAD || NA || YES || NA || NA || NA || Canada

CHILIBOR || NA || CLP || NA || NA || NA || NA || NA || Chile

COLIBOR || NA || COP || NA || NA || NA || NA || NA || Columbia

EIBOR || NA || AED || NA || NA || NA || NA || NA || UAE

HIBOR || Average interbank rate at which prime banks borrow unsecured with up to 1yr maturity || HKD || 8: O/N – 1yr || YES || The Hong Kong Interbank Offer Rate (HIBOR) is determined by the supply of and demand for funds between market players, and therefore is one of the most important indicators of the price of short-term funds in Hong Kong. || NA || NA || China

IIBOR || NA || NA || NA || NA || NA || NA || NA || NA

ICAP NYFR (equivalent of USD-LIBOR) || Average interbank rate at which prime banks borrow unsecured with up to 1yr maturity || USD || 2: 1m and 3m || YES || Arithmetic average after removing highest and lowest 25% || 24 to 40 banks (minimum 16) || ICAP || UK

JIBAR || NA || ZAR || NA || NA || NA || NA || NA || South Africa

JIBOR || NA || IDR || NA || NA || NA || NA || NA || Indonesia

KIBOR || NA || PKR || NA || NA || NA || NA || NA || Pakistan

KLIBOR || NA || MYR || NA || NA || NA || NA || NA || Malaysia

KORIBOR || NA || KRW || NA || NA || NA || NA || NA || South Korea

MEXIBOR || NA || MXN || NA || NA || NA || NA || NA || Mexico

MIBOR || Average interbank rate at which prime banks borrow unsecured with up to 1yr maturity || IRP || 3: 2wk – 3m || YES || Transaction volume weighted average of rates || 33 banks/ primary dealers || Fixed Income and Money Market Dealers Association (FIMMDA), National Stock Exchange (NSE) || India

MOSIBOR || NA || RUB || NA || NA || NA || NA || NA || Russia

NIBOR || Average interbank rate at which prime banks lend unsecured with up to 1yr maturity || NOK || 10: 1w – 1yr || YES || Arithmetic average of rates || 6 banks || Finance Norway (FNO) || Norway

NIBOR (Nigeria) || NA || NGN || NA || NA || NA || NA || NA || Nigeria

PHIBIOR || NA || PHP || NA || NA || NA || NA || NA || Philippines

REIBOR || NA || ISK || NA || NA || NA || NA || NA || Iceland

SABOR || NA || ZAR || NA || NA || NA || NA || NA || South Africa

SHIBOR || NA || CNY || NA || NA || NA || NA || NA || China

SIBOR || Average interbank rate at which prime banks borrow unsecured with up to 1yr maturity || SGD || 6: 1m – 1yr || YES || Arithmetic average after removing highest and lowest 25% || 17 banks || Association of Banks in Singapore (ABS) || Singapore

TAIPOR || NA || TWD || NA || NA || NA || NA || NA || Taiwan

TELBOR || NA || ILS || NA || NA || NA || NA || NA || Israel

TIBOR || Average interbank rate at which prime banks borrow unsecured with up to 1yr maturity || JPY, EUR || 13: O/N – 1yr || YES || JBA discards quotes from the 2 highest and 2 lowest financial institutions and averages the remaining rates || 15 to 16 banks || Japanese Bankers Associ-ation (JBA) || Tokyo

TRLIBOR || NA || TRY || NA || NA || NA || NA || NA || Turkey

VINOBOR || NA || VND || NA || NA || NA || NA || NA || Vietnam

ZIBOR (CHF-LIBOR) || Average interbank rate at which prime banks borrow unsecured with up to 1yr maturity || CHF || 15: O/N – 1yr || YES || Arithmetic average after removing highest and lowest 25% || 6 to 18 banks (minimum 5) || British Bankers Association (BBA) || Switzerland

1.1.2. Repurchase agreements (REPO):
average interest rates at which prime banks lend against collaterals.

Index || Definition || Currency || Maturities || Panel || Calculation || #Participants || Administrator || Domicile

EUREPO || Average interbank rate at which prime banks lend against collateral with maturity up to 1yr || EUR || 10: O/N – 1yr || YES || Arithmetic average after removing highest and lowest 15% || 34 banks (minimum 12, 3 countries) || European Bankers Federa-tion (EBF) || Euro area

Swiss Repo Rate || Average interbank rate at which prime banks lend against collateral with maturity up to 1yr || CHF || 12: O/N to 1yr || NO || Volume weighted average of O/N reported transactions || Eurex SIX repo market || Eurex SIX, Swiss National Bank (SNB) || Switzerland

Tokyo Repo Rate || Average interbank rate at which prime banks lend against collateral with maturity up to 1yr || JPY || 8: O/N – 1yr || YES || Arithmetic average after removing highest and lowest 15% || 22 banks || Bank of Japan (BoJ) || Japan

UK REPO || Average interbank rate at which prime banks lend against collateral with maturity up to 1yr || GBP || 10: O/N – 1yr || YES || Arithmetic average after removing highest and lowest 25% || 12 banks || British Bankers Association (BBA) || UK

US REPO || Average overnight inter-bank rate at which prime banks lend against collateral || USD || 1: O/N || NO || Volume weighted average of O/N reported transactions || NA || ICAP (GovPX) || USA

1.1.3. Money market rates: overnight
interest rates at which financial institutions and high quality corporates
perform short-term transaction in the money market.

Index || Definition || Curr || Maturities || Panel || Calculation || #Participants || Administrator || Domicile

Overnight money market rates

EONIA || Overnight rate at which banks effectively perform unsecured lending transactions || EUR || O/N || NO || Volume weighted average of O/N transactions reported to ECB’s TARGET system. || 43 banks (TARGET reporting data) || European Central Bank (ECB), EBF || Euro area

Federal funds rate || Overnight rate at which depository institutions lend balances at the Federal Reserve to other depository institutions || USD || O/N || NO || Volume weighted average rate of O/N repo transactions || NA || Federal Reserve System (FED) || USA

SARON || Overnight rate at which banks effectively perform (collateralised!) repo lending transactions || CHF || O/N || NO || Volume weighted average rate of O/N repo transactions || NA || Swiss National Bank (SNB) || Switzerland

SONIA || Overnight rate at which banks effectively perform unsecured lending transactions || GBP || O/N || NO || Weighted average of unsecured O/N cash transactions || NA || Bank of England (BoE) || UK

TONAR || Overnight rate at which banks effectively perform unsecured lending transactions || JPY || O/N || NO || Weighted average of unsecured O/N cash transactions || NA || Bank of Japan (BoJ) || Japan

Other money market rates

ABCP || Interest rate at which high-quality corporates borrow against collateral with maturity of up to 9m || USD || Up to 270 days (average 30 days) || NO || Rates calculated on regression techniques using DTCC transaction data || DTCC || Federal Reserve System (FED) || USA

CP || Interest rate at which high-quality corporates borrow unsecured with maturity of up to 9m || USD || Up to 270 days (average 30 days) || NO || Rates calculated on regression techniques using DTCC transaction data || DTCC || Federal Reserve System (FED) || USA

1.1.4. Interest rate swaps:
fixed for floating interest rate swaps.

Index || Definition || Curr || Maturities || Panel || Calculation || #Participants || Administrator || Domicile

Danish Swap || Fixed for floating interest rate swap with maturities of more than 1yr || DKK || 9: 2yr – 10yr || YES || NA || 9 banks || Danish Bankers Association || Denmark

FTSE MTIRS || Fixed for floating interest rate swap with maturities of more than 1yr || EUR, GBP, USD, JPY || 10: 1yr – 10yr || NO || The source for IRS Semi Bond Swap rates is the rates displayed on Thomson Reuters, where there are quotes available for both offer and bid, for 2 - 15 years in steps of 1 year, then for 20, 25 and 30 years || NA || FTSE || UK

ISDAFIX || Fixed for floating interest rate swap with maturities of more than 1yr || CHF, EUR, GBP, HKD, JPY, USD || 10: 1yr – 10yr || YES || Arithmetic average of rates after removing 2 to 4 highest and lowest quotes. || 8 to 16 banks (minimum 6 to 12) || ICAP/ISDA || UK

OIS || (Free of counterparty risk) Fixed for floating interest rate swap with maturities up to 2yrs and the floating lag being tied to an overnight rate (e.g. EONIA) || AUD, CAD, CHF, DKK, EUR, GBP, HKD, JPY, NZD, SEK, USD || Usually 1wk to 2yr || NA || NA || NA || Bloomberg, ICAP, Thomson Reuters, other data providers || Various

1.1.5. Credit default swaps (CDS): index of structured credit
products.

Index || Definition || Curr || Maturities || Panel || Calculation || #Participants || Administrator || Domicile

CDX || Index of synthetic/ structured credit products || USD, EUR || Up to 10yr || YES || Markit receives contributed CDS data from official books and records of market. This data then undergoes a rigorous cleaning process by testing for stale, flat curves, outliers and inconsistent data. In case of failing the requirements the data is discarded. || 14 investment banks || Markit (former JP Morgan company) || USA

Iboxx || Index of CDS of investible (bond) underlyings. || EUR, GBP, JPY, USD a.o. || Up to 30yr || YES || Markit receives contributed CDS data from official books and records of market. This data then undergoes a rigorous cleaning process by testing for stale, flat curves, outliers and inconsistent data. In case of failing the requirements the data is discarded. || Investment banks || Markit (former Iboxx company) || USA

Itraxx || Index of synthetic/ structured credit products || Various || Up to 10yr || YES || Markit receives contributed CDS data from official books and records of market. This data then undergoes a rigorous cleaning process by testing for stale, flat curves, outliers and inconsistent data. In case of failing the requirements the data is discarded. || 10 to 12 investment banks || Markit (former Morgan Stanley company) || USA

1.1.6. Secondary markets sovereign yields: redemption yield of on-the run
sovereign bonds.

Index || Definition || Curr || Maturities || Panel || Calculation || #Participants || Administrator || Domicile

Sovereign yields || Redemption yield of on-the run sovereign bonds with maturity of more than 1y || Various || Up to 30yr || NO || NA || NA || National central banks (NCB), National treasury departments || Various

Treasury bills || Redemption yield of on-the run treasury bills with maturity of up to 1y || Various || Up to 30yr || NO || NA || NA || FED || USA

1.2 Commodities price indices.

These are weighted
averages of selected commodity prices, which may be based on spot or futures
prices. Price information used for the construction of popular commodity
indices (such as CRB, DJ-AIGCI, GSCI, RICI, SPCI, etc.) is usually based on
observable futures transactions performed through central counterparties, i.e.
mercantile or derivatives exchanges.

The main commodity index
(such as IMF, World Bank, Dow-Jones, S&P, Thompson Reuters, Platts, Argus,
etc.) publishes transparent rules governing the index construction.
Manipulation of such indices is thus relatively difficult. However, price
reporting agencies (PRAs) such as Argus, ICIS and Platts publish highly
specialised price indices based on quotes from panel participants, for which
methodologies and underlying data are not always transparent as prices are
formed by surveys of voluntary price contributors. In consequence IOSCO is
currently investigating the functioning and oversight of Oil PRAs.

The main commodities
sectors represented in indices are: Energy, Metals, Grains & Seeds, Softs,
Livestock and others. In this section we will differentiate between aggregate,
agricultural, energy and metal based indices:

Commodity price indices (CPIs)

Index || Administrator || Definition

Aggregate || ||

(TR/J CRB) || Thomson Reuters/Jefferies (prior by the Commodities Research Bureau) || The (TR/J CRB) index is designed to provide a timely and accurate representation of a long-only, broadly diversified investment in commodities. It is a tradable index and it currently comprises 19 commodities as quoted on the NYMEX, CBOT, LME, CME and COMEX exchanges. These are sorted into 4 groups, each with different weightings. These groups are: petroleum based products, liquid assets, highly liquid assets and diverse commodities. The index comprises 19 commodities: Aluminium, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat[295].

Thomson Reuters Equal Weight Continuous Commodity Index || Thomson Reuters || The Thomson Reuters Equal Weight Continuous Commodity Index is recognized as a major barometer of commodity prices. The index comprises 17 commodity futures: Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Live Cattle, Live Hogs, Natural Gas, Orange juice, Platinum, Silver, Soybeans, Sugar No. 11, and Wheat. It is sometimes referred to as the ‘Old CRB’. The 17 components of the CCI are continuously rebalanced to maintain the equal weight of 5.88%. Since CCI components are equally weighted, they therefore distribute evenly into the 4 major sectors: Energy 17.65%, Metals 23.53%, Softs 29.41% and Agriculture 29.41%. While other commodity indices may overweight in certain sectors (e.g. Energy), the CCI provides exposure to all four commodity subgroups.

DJ-AIGCI || Dow Jones-UBS || The Dow Jones-UBS Commodity Index (DJ-UBSCI) is a broadly diversified rolling commodities index composed of futures contracts on 19 physical commodities traded on U.S. exchanges. It is a tradable index and it is designed to minimize concentration in any one commodity or sector. For relative weights, DJ-AIGCI relies primarily upon liquidity, and to a smaller extent upon production .No one commodity can compose less than 2% or more than 15% of the index, and no sector can represent more than 33% of the index. Annual rebalancing and reweighting ensure that diversity and liquidity is maintained over time. The index serves as a liquid and diversified benchmark for the commodities' asset class. The DJ-UBSCI℠ is calculated on an excess return basis. Also available is the Dow Jones-UBS Commodity Index Total Return℠ (DJ-UBSCITR℠), a total return index based on the DJ-UBSCI℠. The DJ-UBSCI℠ reflects the return of underlying commodity futures price movements only, while the DJ-UBSCITR℠ reflects the return on fully collateralized positions in the underlying commodity futures[296].

S&P GSCI || Standard & Poors (prior Goldman Sachs) || The S&P GSCI serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time; formerly Goldman Sachs Commodity Index (sold to S&P in 2007) It is a tradable index and available to market participants at the CME. Individual components qualify for inclusion in the S&P GSCI® on the basis of liquidity and are weighted by their respective world production quantities. Currently, the S&P GSCI contains 24 commodities from all commodity sectors: six energy products, five industrial metals, eight agricultural products, three livestock products and two precious metals. The S&P GSCI is world-production weighted; the quantity of each commodity in the index is determined by the average quantity of production in the last five years of available data. It reviews changes to the component list and weights generally once a year. Since the weights are recalculated based on world production changes can be quite drastic at times. There is also the Goldman Roll, which represents monthly sale and purchase of commodities for SP-GSCI (rollover for its futures)[297]. The S&P-GSCI Excess Return  also exists.

S&P SPCI || Standard & Poors || The Standard & Poor's Commodity Index (SPCI) is a commodity price index that measures the price changes in a cross section of agricultural and industrial commodities with actively traded U.S. futures contracts, stretching across five sectors - Energy, Metals, Grains, Livestock, and Fibers & Softs. Only commodities that are consumed for industrial use are included in the index. Weights in the index are determined by the dollar value of Commercial Open Interest (COI) for each component commodity, and rebalanced annually each February.

RICI || Uhlmann Price Securities || The Rogers International Commodity Index (RICI) is a broad index of commodity futures designed by Jim Rogers in 1996/1997. The index tracks commodity futures contracts. It represents the value of a basket of commodities consumed in the global economy, ranging from agricultural to energy and metals products. The value of this basket is tracked via futures contracts on 38 different exchange-traded physical commodities, quoted in four different currencies, listed on twelve exchanges in five countries. The index’s weights attempt to balance consumption patterns worldwide (in developed and developing economies) and specific contract liquidity. The list of commodities is subject to change by the RICI Committee. The index is divided into three sub-indices, - RICI Agriculture, RICI Energy and RICI Metals. The sub-indices' contribution to main index from the beginning are Agriculture - 34.90%, Energy - 44.00%, Metals - 21.10% according to the RICI Handbook[298].

Deutsche Bank Liquid Commodity Index (DBLCI) || Deutsche Bank || The DBLCI, launched By Deutsche Bank in February 2003, comprises six commodities, the least number of commodities relative to other indices These were chosen by a committee. Like the RICI, the DBLCI weights are fixed. However, detailed information on the index, such as weighting calculation, is not disclosed. The DBLCI has been back-calculated to July 1988.

Merrill Lynch Commodity index eXtra (MLCX) || Merrill Lynch || The Merrill Lynch Commodity index eXtra (MLCX), launched in June 2006, comprises 18 commodity futures contracts, selected by liquidity. These commodities are then weighted using global production weights. Caps and floors of 60% and 3%, respectively, are applied to the main six sub-indices in order to control for risk. Going forward, the index weights are updated annually. The history of the index starts in June 1990, on which spot, excess and total return indices were published.

CMCI || UBS/ BLOOMBERG || The UBS Bloomberg CMCI (Constant Maturity Commodity Index). This global index offers exposure to a basket of 26 different commodity futures contracts of varying maturities for each individual commodity.

NASDAQ Commodity Index || NASDAQ || The NASDAQ Commodity Index Family is designed to measure the performance of a single commodity or a group of commodities through the use of futures contracts. The Indexes aim to include the largest and most liquid commodity futures. The Index Family includes Benchmark, Tradable, Sector and Single Commodity indexes as well as 5 different roll versions. They are the NASDAQ Commodity Benchmark Index (NQCI) which includes 33 commodities, the NASDAQ Commodity Tradable Index (NQCIT) which includes 19, the NASDAQ Commodity Sector Indexes which include five main sectors and five additional sub and diversified sectors and the NASDAQ Commodity Single Indexes which are derived from the commodities included in the Benchmark Index. Single Commodity indexes are available for all commodities included in the Benchmark index.

Multi-sector || ||

WORLD BANK COMMODITY PRICE INDICES || World Bank || The World Bank monitors major commodity markets. Monthly price Indices for over 70 series are published on the third U.S. business day of each month. Series are available from 1960 for commodity monthly prices for energy, non-energy, food, raw materials, fertilizers, metals, and minerals (1990 = base year). The data is collected from various sources as noted in the Commodity Price Data (pink sheets). They are classified into Energy and Non- Energy[299].

IMF COMMODITY PRICE INDICES || IMF || The IMF develops and maintains Indices of Primary Commodity Prices, (in USD and SDRs terms, this includes industrial metals, food, beverages and agricultural raw materials, and energy) and Indices of Market Prices for NonFuel and Fuel Commodities (in USD and SDRs terms). Weights are updated every 5 years and these indices differ from the ones published by the World Bank that their basket is not only representative of developing countries, but of global commodities trade[300].

CBOE/ CME COMMODITY VOLATILY INDICES || CBOE/ CME || The CBOE & CME launched in 2008 a family of volatility indices for commodities, after the introduction VIX OIL, a volatility index for oil prices. These indices include: OIV (CBOE/NYMEX Crude Oil (WTI) Volatility Index), GIV (CBOE/COMEX Gold Volatility Index), SIV (CBOE/CBOT Soybean Volatility Index), CIV (CBOE/CBOT Corn Volatility Index) and WIV (CBOE/CBOT Wheat Volatility Index)[301].

Main Agricultural & Energy CPIs || ||

CBOT COMMODITY PRICE INDICES || CBOT || The Chicago Board of Trade (CBOT), established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members. It merged with CME in 2007. It publishes indices and prices for agricultural commodities such as corn, soybeans, soybean oil and wheat among others. Some examples are:  Soybean meal – CBTO, Soybean - CBTO and Soy Oil CBTO.

CME COMMODITY PRICE INDICES || CME || The Chicago Mercantile Exchange (CME) is a commodity derivative exchange. It merged with CBOT in 2007. After merges in 2008, the CME, CBOT, NYMEX and COMEX are now markets owned by the CME Group. It publishes indices on agricultural products (CME Index) such as cattle (Live Cattle – CME), lean hogs (Lean-Hog – CME) and cereals (Wheat – CME, Corn-CME), etc. It also produces indices on energy products such as: Natural Gas NYMEX, Crude Oil WTI – NYMEX, Heating oil NYMEX, Gasoline NYMEX, Ethanol (NYMEX), Electricity (NYMEX), Refined Products (NYMEX), Coal (NYMEX) and Others (Uranium, NYMEX).

NYBOT COMMODITY PRICE INDICES || NYBOT || The New York Board of Trade is a futures exchange located in New York. The NYBOT is comprised of several formerly independent, niche exchanges including the New York Cotton Exchange (NYCE); the Coffee, Sugar, and Cocoa Exchange (CSCE); the New York Futures Exchange (NYFE); and the Financial Instruments Exchange (FINEX).. Thus, NYBOT provides commodity prices and indices for agricultural such as cotton, coffee, sugar and cocoa (Cotton – ICE, COFFE C – ICE, Sugar 11 – ICE & Cocoa – ICE), as well as for other commodities such as oil (Brent Oil ICE).

LIFFE COMMODITY PRICE INDICES || LIFFE EURONEXT || NYSE Liffe is the global derivatives business of NYSE Euronext. It comprises the derivatives (futures and options on futures) business of Euronext originally traded on individual venues in Amsterdam, Brussels, London, Lisbon and Paris markets. It provides derivatives indexes and prices for agricultural commodities such as wheat, sugar, cocoa and coffee among others. Some examples of indices are: Wheat - LIFFE London, Sugar LIFFE London, Cocoa LIFFE London, Coffee LIFFE London and Wheat - LIFFE Paris.

ICE CPIs || ICE || Intercontinental Exchange, Inc., known as ICE, is an American financial company that operates Internet-based marketplaces which trade futures and over-the-counter (OTC) energy and commodity contracts as well as derivative financial products. While the company's original focus was energy products (crude and refined oil, natural gas, power, and emissions), recent acquisitions have expanded its activity into the "soft" commodities (sugar, cotton and coffee). It provides indices such as Gasoil-ICE, &NBP –ICE.

Benchmark prices and indices for petroleum products || Price Reporting Agencies (PRAs) (Platts, Argus, ICIS) Private Entities || Major energy/oil brokers and producers submit voluntary quotes to the PRAs. Price Reporting Agencies collect trade and quote data that are submitted voluntarily for a broad set of oil grades to derive benchmark prices which are referenced in spot trading and oil derivatives. The derivation of price assessments is not through a algorithm but involves discretionary determinations as to the “quality” of a given price. Verification of all reported trades (process non-transparent). According to IOSCO, the number of reported deals per benchmark may be lower than five. In illiquid markets price assessments are based on bids and offers through the entire day and might take into account “other market information.”.

NIMEX Indices || NYMEX || Indices for Oil and Gas Products: Light Sweet Oil, Gasoline, Heating oil, Natural Gas, Brent Crude. They are trade based indices calculated as the volume weighted average price of trades occurring Globex between 2.28 and 2.30pm EST. Some examples are: Natural Gas – NYMEX, Crude Oil WTI – NYMEX, Heating oil NYMEX and Gasoline NYMEX.

EEX Indices || EEX || EEX (European Energy Exchange Phelix baseload futures)  operates market platforms for trading in electric energy, natural gas, CO2 emission allowances and coal and derivatives of these products. Contracts are settled financially on the basis of indices such as: Phelix Baseload – EEE, European Gas Index – EGIX , API#2 (ARA), API#4 (RB), etc.

Lean Hog Index, Feeder Cattle Index || US Department of Agriculture || The CME Lean Hog Index is a two-day trade based weighted average of average net prices provided by USDA.

Precious metals CPIs || ||

London Gold Fixing || London Gold Fixing Ltd- Private Entity || The gold fixing sets a price for settling gold contracts in the London market twice daily. Participant orders for clients and prop trading must net to within 50 bars of 0 to fix the price. The posted bids are then executable. Calculated based on Submission for 5 member banks

COMEX Indices || COMEX || Now part of CME, COMEX is the primary market for trading metals such as gold, silver, copper and aluminium. It provides indices such as GOLD – COMEX, SILVER-COMEX, COPPER-COMEX, etc.

1.3 Equity Indices

Common
stock price indices (e.g. Eurostoxx, FTSE, MSCI, NYSE) are based on
time-varying panels of company shares. However, any price information considers
exclusively observable transactions performed through central counterparties,
i.e. stock exchanges and their trading venues. The major index administrators
further publish transparent rules governing the index construction. Index
manipulations are therefore very difficult to implement. Because of this
reason, IOSCO High Level Task Force on Benchmarks does not consider the reform
of these type of benchmarks a priority: "Exclude benchmarks that
are produced by algorithmic procedures applied to transparent prices that
result from transactions on regulated exchanges (e.g., S&P index
products). Rationale: A number of benchmarks would otherwise be
captured such as traditional equity indices (S&P 500, FTSE), which IOSCO
members may not consider to be of immediate priority"

These indices are categorised mainly by region
and sectoral coverage. We provide an overview of the main families of Equity
indices below, which are subdivided into a very large number of sub-indices:

Global Indices Equity || Region

|| world

SPGLOB Index || S&P GLOBAL 1200 INDEX

OOI Index || S&P GLOBAL 100 INDEX

SPADR Index || S&P ADR INDEX

|| Americas

SPR Index || S&P 1500 Composite Index

SPX Index || S&P 500 INDEX

SPTSX60 Index || S&P/TSX 60 INDEX

SPLAC Index || S&P LATIN AMERICA 40

|| Europe

SPEU Index || S&P EURO INDEX

SPEP Index || S&P EURO PLUS INDEX

SPEURO Index || S&P EUROPE 350 INDEX

SPUK Index || S&P UNITED KINGDOM INDEX

|| Asia

SPA50 Index || S&P ASIA 50 INDEX

SPTPX Index || S&P/TOPIX 150 INDEX TSE

HKSPLC25 Index || S&P/HKEx LargeCap Index

HKSPGEM Index || S&P/HKEx GEM Index

AS31 Index || S&P/ASX 50 INDEX

Global Indices Equity || Region

|| world

SPGLOB Index || S&P GLOBAL 1200 INDEX

OOI Index || S&P GLOBAL 100 INDEX

SPADR Index || S&P ADR INDEX

|| Americas

SPR Index || S&P 1500 Composite Index

SPX Index || S&P 500 INDEX

SPTSX60 Index || S&P/TSX 60 INDEX

SPLAC Index || S&P LATIN AMERICA 40

|| Europe

SPEU Index || S&P EURO INDEX

SPEP Index || S&P EURO PLUS INDEX

SPEURO Index || S&P EUROPE 350 INDEX

SPUK Index || S&P UNITED KINGDOM INDEX

|| Asia

SPA50 Index || S&P ASIA 50 INDEX

SPTPX Index || S&P/TOPIX 150 INDEX TSE

HKSPLC25 Index || S&P/HKEx LargeCap Index

HKSPGEM Index || S&P/HKEx GEM Index

AS31 Index || S&P/ASX 50 INDEX

Global Indices Equity || Region

|| world

SPGLOB Index || S&P GLOBAL 1200 INDEX

OOI Index || S&P GLOBAL 100 INDEX

SPADR Index || S&P ADR INDEX

|| Americas

SPR Index || S&P 1500 Composite Index

SPX Index || S&P 500 INDEX

SPTSX60 Index || S&P/TSX 60 INDEX

SPLAC Index || S&P LATIN AMERICA 40

|| Europe

SPEU Index || S&P EURO INDEX

SPEP Index || S&P EURO PLUS INDEX

SPEURO Index || S&P EUROPE 350 INDEX

SPUK Index || S&P UNITED KINGDOM INDEX

|| Asia

SPA50 Index || S&P ASIA 50 INDEX

SPTPX Index || S&P/TOPIX 150 INDEX TSE

HKSPLC25 Index || S&P/HKEx LargeCap Index

HKSPGEM Index || S&P/HKEx GEM Index

AS31 Index || S&P/ASX 50 INDEX

Global Indices Equity || Region

|| world

SPGLOB Index || S&P GLOBAL 1200 INDEX

OOI Index || S&P GLOBAL 100 INDEX

SPADR Index || S&P ADR INDEX

|| Americas

SPR Index || S&P 1500 Composite Index

SPX Index || S&P 500 INDEX

SPTSX60 Index || S&P/TSX 60 INDEX

SPLAC Index || S&P LATIN AMERICA 40

|| Europe

SPEU Index || S&P EURO INDEX

SPEP Index || S&P EURO PLUS INDEX

SPEURO Index || S&P EUROPE 350 INDEX

SPUK Index || S&P UNITED KINGDOM INDEX

|| Asia

SPA50 Index || S&P ASIA 50 INDEX

SPTPX Index || S&P/TOPIX 150 INDEX TSE

HKSPLC25 Index || S&P/HKEx LargeCap Index

HKSPGEM Index || S&P/HKEx GEM Index

AS31 Index || S&P/ASX 50 INDEX

1.4 Fixed Income Instruments Indices

These indices are
provided by various Private bodies such as FTSE, S&P, Markit, Goldman
Sachs, UBS, etc.  The indices follow some formulaic approaches for calculation
but the sponsor retains large smoothing algorithms which are not always
transparent. Furthermore, the index sponsor usually has discretion on the rules
governing the rebalancing of the indices. Regarding the underlying data, there
are some varying practices. Some are derived from prices on Regulated Markets,
whist many rely on submissions of quotes on bonds/CDS which are not always
executable.  These indices are categorised mainly by region and sectoral
coverage. We provide an overview of the main families of fixed-income indices
below, which are subdivided into a very large number of sub-indices:

|| || Fixed Income (FI) Index-family ||

|| || Bank of England Yield  Curves ||

|| || Barclays Capital Indexes ||

|| || Barclays Capital TWBC ||

|| || Bond Exch. of South Africa ||

|| ||    Citigroup Global Fixed Inc ||

|| || Citigroup Domestic FI ||

|| || Citigroup Emerging Markets ||

|| || Credit Suisse ||

|| || Crisil Mutual Fund Indexes ||

|| || Deutsche Borse REX/Eurex ||

|| || DJ Citigroup Sukuk Index ||

|| || DJ CS Inflation Breakeven ||

|| || DJ LATixx Index ||

|| || DMO GILT Prices ||

|| || DnB NOR Fixed Income ||

|| || EuroMTS Indexes ||

|| || FTSE Corporate Bonds ||

|| || FTSE Gov. Bonds ||

|| || FTSE GILT Gov. Bonds ||

|| || HSBC Fixed Income Indexes ||

|| || IHS Global Insight FI ||

|| || J.P. Morgan Indices || Indices included:

|| || J.P.Morgan Aggregate Euro ||

|| || J.P.Morgan Asia Credit Index ||

|| || J.P.Morgan Corporate EMBI ||

|| || J.P.Morgan Daily Analytics ||

|| || J.P.Morgan Euro EMBI ||

|| || J.P.Morgan ELSI ||

|| || J.P.Morgan GABI ||

|| || J.P.Morgan Gov. Bonds ||

|| || J.P.Morgan Gov. Bonds-EM ||

|| || J.P.Morgan U.S. Tips Index ||

|| || Korean Fixed Income Index ||

|| || Markit Indices || Indices included:

|| || || Markit iBoXX Indices

|| || || Markit iBoXX ABF

|| || || Markit iBoXX Asia Indexes

|| || || Markit iBoXX Benchmarks

|| || || Markit iBoXX EUR ABS

|| || || Markit iBoXX USD

|| || || Markit CDX Indices

|| || || Markit iTraXX Indices

|| || Merrill Lynch Fixed Income || Indices included:

|| || || EMU Broad Market Index

|| || || Global Broad Market Index

|| || || Global Broad Market Plus Index

|| || || Global Large Cap Index

|| || || Pan-Europe Large Cap Index

|| || || US Broad Market Index

|| || Merrill Lynch Yield Curves ||

|| || NASDAQ OMX Fixed Income ||

|| || NOMURA BPI ||

|| || NZX Fixed Income Indexes ||

|| || Oslo Bond Indexes ||

|| || PC-Bond (DEX) ||

|| || S&P AMT-Free Municipals ||

|| || S&P ASX Australian Fixed ||

|| || S&P Ratings Xpress ||

|| || Svenska Handelsbanken ||

|| || Swiss Exchange (SWX) ||

|| || Thai Bond Market ||

|| || The Yield Book® Analytics ||

|| || Thomson ReutersDatascope ||

|| ||    Thomson Reuters Mrtg.Bds ||

|| || UBS Australia ||

1.5 Other indices

There is a great number
and variety of indices, such as statistical, real estates, freight, actuarial,
volatility, weather, sentiment, etc. which are mostly public available figures
that whilst in most cases where not designed to serve as reference prices for
financial contracts are currently being used for this purpose in diverse
commercial contracts or financial products. In many cases they are produced by
public bodies such as statistics institutes based on reliable data and
statistical procedures, so the incentives and opportunities of manipulation are
narrow. Furthermore, it   would prove difficult to regulate the production and
use of these indices as it would be challenging to limit the scope, restrict
their use, etc.

Consumer price indices || Statistics Offices || Usually any price information needed for the construction of consumer price indices (CPI) is publicly observable. Also, the items considered in the basket of products are well-defined by national statistical bureaus. However, their weights are determined based on surveys among consumers and are therefore prone to misreporting. This is a well-known CPI panel problem mitigated through statistical tools by statistical offices and central banks. It is not directly related to manipulation issues.

Manufactures Unit Value Index (MUV) || World Bank || The Manufactures Unit Value Index (MUV) index is a measure of the price of developing country imports of manufactures in U.S. dollar terms. The MUV is a composite index of prices for manufactured exports from the fifteen major developed and emerging economies to low- and middle-income economies, valued in U.S. dollars.

Freight and Shipping || The Baltic Exchange- || Shipping Brokers submit voluntary quotes to the Baltic Exchange. The Baltic exchange averages all submissions

Real Estate || Private entities (S&Ps, FTSE, Moody's, IPD, etc.) || The most relevant index families for tracking residential real estate prices in the US are the S&P/Case-Shiller Home Price Indices and Radar Logic's RPX,. Other important real estate index families in Europe used to reference financial and derivative contracts are the FTSE UK Commercial Property Index Series, the FTSE EPRA/NAREIT Global Real Estate Index Series, Moodys/REAL Commercial Property Price Index (CPPI) and  Investment Property Databank ("IPD") index series.

Actuarial || Private entities (S&P, FTSE) || Some of the most wide used actuarial index families are the FTSE All World Index Series (previously FT/S&P – Actuaries World Indices) andthe the Baring Emerging Markets data series which has been integrated into the FTSE.

Sentiment || Public Bodies, MARKIT, || Some important ones are the  consumer confidence indices (CCI) and purchasing manager indices  (PMI), business confidence indices, etc.

Weather Indices || Public & privte bodies, Meteo Inst. (EarthSat, NCDC) || Some weather indices are used to reference commodities weather derivatives or weather insurance contracts. CME weather futures and options prices are  based on monthly or seasonal index values determined by Earth Satellite (EarthSat) Corp which works with temperature data provided by the National Climate Data Center (NCDC).

Volatility Indices || Private (CBOE, Reuters, etc.) || Such as the CBOE Dow Jones Volatility Index (VXD), Thomson Reuters Realized Volatility Index, VIX, Petersen and IVX volatility Indices.

[1]See FSA Final Notice to Barclays dated 27 June 2012 http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf
and the CFTC Order in the matter of Barclays PLC et al http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfbarclaysorder062712.pdf;
in relation to TIBOR see CJL http://www.fsa.go.jp/en/news/2011/20111216-1.html
; CGMJ, http://www.fsa.go.jp/en/news/2011/20111216-2.html; 
http://www.ft.com/cms/s/0/7089ffda-534a-11e1-aafd-00144feabdc0.html#axzz1lv2IXnos
, February 9, 2012

[2] Amended proposal for a Regulation on insider dealing and market
manipulation, COM(2012) 2011/0295 (COD): http://ec.europa.eu/internal\_market/securities/abuse/index\_en.htm

[3] Amended proposal for a Directive on criminal sanctions for insider
dealing and market manipulation, COM(2012) 2011/0297 (COD): http://ec.europa.eu/internal\_market/securities/abuse/index\_en.htm

[4] Wheatley review: http://www.hm-treasury.gov.uk/d/condoc\_wheatley\_review.pdf and regulation of LIBOR: http://www.legislation.gov.uk/ukdsi/2013/9780111533826/pdfs/ukdsi\_9780111533826\_en.pdf

[5] Please see info on CIBOR on:
http://www.nationalbanken.dk/DNUK/Rates.nsf/side/reference\_Rates!OpenDocument

[6] Please see the document on: http://www.eba.europa.eu/-/esma-and-the-eba-publish-final-principles-on-benchmarks

[7] Please see the document on: http://www.esma.europa.eu/system/files/eba\_bs\_2013\_005.pdf

[8] EC press release on the investigations: http://europa.eu/rapid/press-release\_MEMO-13-435\_en.htm

[9] Please see the document on: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf

[10] Please see the report on: http://www.iosco.org/news/pdf/IOSCONEWS227.pdf

[11] Please see the announcement on: http://www.financialstabilityboard.org/press/pr\_130625.pdf

[12] Consultation responses can be found on: http://ec.europa.eu/internal\_market/consultations/2012/benchmarks/index\_en.htm

[13] Roadmap can be found on: http://ec.europa.eu/governance/impact/planned\_ia/docs/2013\_markt\_011\_regulation\_of\_benchmarks\_and\_indices\_en.pdf,
and agenda planning on:
http://ec.europa.eu/governance/impact/planned\_ia/roadmaps\_2013\_en.htm

[14] including by "false or misleading or inaccurate report
concerning crop or market information or conditions that affect or tend to
affect the price of any commodity in interstate commerce, knowing, or acting in
reckless disregard of the fact that such report is false, misleading or
inaccurate."

[15] "Mistakenly transmitting, in good faith, false or misleading
or inaccurate information to a price reporting service.” Dodd Frank Act,
Section 753:
http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf

[16] Core Principle 3, Title 7, Chapter 1, USC § 7b–3:
http://www.gpo.gov/fdsys/pkg/USCODE-2010-title7/html/USCODE-2010-title7-chap1-sec7b-3.htm

[17] MIFID
Article 40(1): http://ec.europa.eu/internal\_market/securities/isd/mifid\_en.htm

[18] MIFID Implementing Regulation Article 37(1)b:
http://ec.europa.eu/internal\_market/securities/isd/mifid2\_en.htm

[19]It states that where the value of any
financial instrument is calculated by reference to a benchmark, a person with
proprietary rights to the benchmark shall ensure that central
counterparties (CCPs) and trading venues are permitted, for the purposes of trading and
clearing, non-discriminatory access to it.

[20]Directive 2003/71/EC and Regulation (EC) No 809/2004, Annex XII,
item 4.2.2

[21]Undertakings for Collective Investment in Transferable Securities
Directive (2009/65/EC), Article 53

[22]REMIT regulation: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:326:0001:01:EN:HTML

[23] Commission estimates on annex VIII based on data from ECB and ESRB
responses to Commission’s consultation

[24] ESRB response to the public consultation, Page 3,
paragraph 1,

[25] Ibid, GFMA’s response to the public
consultation

[26] Ibid, BEUC’s response to the public consultation

[27] The terms “submitter” and “contributor”
are used interchangeably in this IA

[28] EC press release on the investigations:
http://europa.eu/rapid/press-release\_MEMO-13-435\_en.htm

[29] IOSCO ‘s report on principles for oil
PRAs, note 51. See also http://www.csrc.gov.cn/pub/csrc\_en/affairs/AffairsIOSCO/201210/P020121010499030150053.pdf)

[30] Please see the response from EDHEC risk institute to the Commission
public consultation on benchmarks:
http://ec.europa.eu/internal\_market/consultations/2012/benchmarks/index\_en.htm

[31] http://www.ft.com/intl/cms/s/0/b96b6cbc-b7d9-11e2-9f1a-00144feabdc0.html#axzz2TXNjdRwg

[32] http://ec.europa.eu/commission\_2010-2014/barnier/headlines/speeches/2013/02/20130208\_en.htm
http://www.ecb.int/press/pr/date/2013/html/pr130208.en.html

[33] A
report of Mr Kono's intervention at the EP public hearing on benchmarks can be
found on: http://www.europarl.europa.eu/document/activities/cont/201209/20120925ATT52231/20120925ATT52231EN.pdf

[34] The Wheatley Review of LIBOR final report has identified governance
shortcomings related to: the lack of surveillance and scrutiny of submissions;
internal controls and procedures transparency for submitters and administrators;
lack of audits and audit trail keeping for submitting firms and
non-discriminatory access to the rate, which have led to recommendations to
address these issues. Please see annex Annex V: Key Recommendations of the Wheatley Review for further
information.

[35] Quote by professor Rosa M. Abrantes-Metz, Why and How Should the
LIBOR be reformed (2012)

[36] ESRB 2.2 page 4: In practice the use of most benchmarks does
not entail a fee. In this case, it is likely that the administrator of the
non-excluded benchmark does not fully internalise the social benefits of a credible benchmark without
error or manipulation. This could provide justification for legal or regulatory
intervention, to align the incentives of contributors, administrators and users
of benchmarks with the interests of society. This should be complemented with
supervision by public authorities.

[37] Please see annex IV with more detail explanation of the findings
evidencing weak governance of benchmarks

[38] please see press
report on: http://www.bloomberg.com/news/2012-07-19/interest-rates-from-sweden-to-south-korea-under-fresh-scrutiny.html

[39] Please see annex V: Key Recommendations of the Wheatley Review: http://cdn.hmtreasury.gov.uk/wheatley\_review\_Libor\_finalreport\_280912.pdf

[40] See annex VI: IOSCO’s Principles
for Oil Price Reporting Agencies:
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD375.pdf

[41] Footnote 55: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD391.pdf

[42] EC press release on the investigations:
http://europa.eu/rapid/press-release\_MEMO-13-435\_en.htm

[43] From 1st April 2013 UK’s the previous UK Financial Services
Authority (FSA) split between two new bodies, ‘The
Prudential Regulation Authority’ (PRA) and the ‘Financial Conduct Authority’
(FCA).The PRA, will be a subsidiary of the Bank of England, and will supervise
deposit takers, insurers and a small number of significant investment firms. The FCA will be charged with ensuring
conduct and markets regulation is tougher, bolder and more engaged with
consumers.

[44] http://www.guardian.co.uk/business/2012/nov/12/Libor-like-manipulation-gas-markets

[45] http://www.oft.gov.uk/OFTwork/markets-work/othermarketswork/road-fuel-CFI/

[46] http://online.wsj.com/article/SB10001424127887324077704578358381575462340.html

[47]Please see evidence on UK FSA notice to Barclays: http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf

[48] Please see section on the current legislative framework for
benchmarks

[49]For example, the Wheatley review has recommended that submission to
and administration of LIBOR should become regulated activities, including an
Approved Persons Regime: "The authorities should introduce statutory
regulation of administration of, and submission to, LIBOR, including an
Approved Persons regime, to provide the assurance of credible independent
supervision, oversight and enforcement, both civil and criminal" Wheatley
Review final report: http://cdn.hmtreasury.gov.uk/wheatley\_review\_Libor\_finalreport\_280912.pdf

[50] Please see BAFINS’s response to
consultation the public consultation on the initiative on benchmarks: http://ec.europa.eu/internal\_market/consultations/2012/benchmarks/index\_en.htm

[51] Please see annex VII on the size of benchmark industry size and market impacted

[52] http://www.ipsnews.net/2012/03/euribor-under-scrutiny-by-peoples-campaign-in-spain/

[53] http://www.bloomberg.com/news/2012-07-31/barclays-documents-seized-in-italy-in-euribor-fraud-probe-1-.html

[54] Please see press repor: http://www.ft.com/intl/cms/s/0/be34832e-04f9-11e3-9e71-00144feab7de.html?siteedition=intl#axzz2cmfG8UHE

[55]   Please see Annex XIX Bibliography

[56] Please see press report; http://www.ipsnews.net/2012/03/euribor-under-scrutiny-by-peoples-campaign-in-spain/

[57] http://www.esma.europa.eu/system/files/esa-2013-007.pdf,
7 March 2013, ESA/2013/007

[58] Please see press report : http://www.ipsnews.net/2012/03/euribor-under-scrutiny-by-peoples-campaign-in-spain/

[59]http://ec.europa.eu/internal\_market/consultations/2012/benchmarks/registered-organisations/finance-watch\_en.pdf

[60] Please see ISDA’s response to the
Commission public consultation on the initiative on benchmarks

[61] Please see press repor: http://www.ft.com/intl/cms/s/0/be34832e-04f9-11e3-9e71-00144feab7de.html?siteedition=intl#axzz2cmfG8UHE

[62] http://www.businessweek.com/news/2012-07-20/italy-opens-euribor-criminal-probe-after-consumers-complaint

[63] http://www.bloomberg.com/news/2013-03-19/freddie-mac-sues-multiple-banks-over-libor-manipulation.html

[64] HMT’s legislation currently specifies only
LIBOR as a regulated  benchmark, but other benchmarks could be specified
as regulated in the future:
http://www.legislation.gov.uk/ukdsi/2013/9780111533826/pdfs/ukdsi\_9780111533826\_en.pdf

[65] The Wheatley review also stated that: “this Review has been
narrowly focused on LIBOR, and the recommendations are therefore only made in
respect of LIBOR. However, the Review is aware of other work underway in
relation to benchmarks generally, including the EU Commission’s consultation on
benchmarks and the Board Level Task Force set up by IOSCO. In light of this
wider work, it is suggested that legislation should ensure that the regulatory
regime can be extended to other benchmarks in the future, if appropriate”:
http://cdn.hm-treasury.gov.uk/wheatley\_review\_libor\_finalreport\_280912.pdf

[66] Please See annex V on the findings and recommendations of the Wheatley review of LIBOR; see full report
here:  http://cdn.hm-treasury.gov.uk/wheatley\_review\_libor\_finalreport\_280912.pdf

[67] Please see the document on: http://www.eba.europa.eu/-/esma-and-the-eba-publish-final-principles-on-benchmarks

[68] Please see the document on: http://www.esma.europa.eu/system/files/eba\_bs\_2013\_005.pdf

[69] http://www.esma.europa.eu/system/files/esa-2013-007.pdf

[70] Please see the final report on: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf

[71] Please see annex
VI: IOSCO’s Principles for Oil
Price Reporting Agencies: http://www.iosco.org/news/pdf/IOSCONEWS253.pdf

[72] EC press release on the investigations:
http://europa.eu/rapid/press-release\_MEMO-13-435\_en.htm

[73]Regulation
(EU) No 1227/2011 of 25 October 2011 on wholesale energy market integrity and
transparency: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:326:0001:0001:EN:PDF

[74] http://www.bis.org/press/p130318a.htm

[75] http://www.financialstabilityboard.org/press/pr\_130625.pdf

[76] Please see annex III on international work
streams on benchmark reform

[77] “The indices above [based on objective data] should be out of
scope as they are very different from price assessments that use surveys,
panels, and voluntary contributions are one segment.” MSCI

[78] “While it may be correct that criminal and antitrust sanctions
can never hinder certain individuals and companies from infringing the
respective provisions, it would nevertheless not be proportionate to extend the
envisaged regulation to administrators of objective indices. This group of
undertakings did not participate in the LIBOR scandal nor is there any
incentive to engage in manipulations in the future.” Deustsche Bourse

[79] “Interest rate indices can be considered “public goods”
whenever their usage is widespread and, as a consequence, inaccurate
submissions and manipulations can sharply affect the stability of financial
markets and can also impact households and companies” Assiom Forex- The
Financial Markets Association of Italy

[80] "Many indices are created by index administrators to meet
a specific client’s needs. Such bespoke indices are not wide-spread adopted
benchmarks and in such cases ensuring that they are fit for purpose should lie
between the administrator and customers.” BATS-ChiX

[81] “calculation agent which produces “white label” custom indices
on behalf of certain clients. In these cases, the intellectual property in the
indices are owned by the client and S&P Dow Jones Indices serves solely as
an independent third-party calculation agent,” Dow Jones

[82]Eurex weather derivatives (listed in Frankfurt)  http://www.eurexchange.com/exchange-en/products/wed/

[83] The CME Group weather derivatives (listed in
several EU cities): http://www.cmegroup.com/trading/weather/files/pm264-fact-card-european-weather.pdf

[84] IOSCO, Principles for Oil Price
Reporting Agencies, October 5th 2012, http://www.iosco.org/library/pubdocs/pdf/IOSCOPD391.pdf

[85] “The production of benchmarks should not be a separate
regulated activity. To the extent that production or contribution is already by
or from a regulated entity then it may be possible to expand the role of the
regulator to ensure that this aspect of the business is appropriately
supervised with the objective of assuring impartiality and accuracy” Baltic
Exchange

[86] http://ec.europa.eu/internal\_market/securities/abuse/index\_en.htm

[87] EBF-Euribor response to the public
consultation on benchmarks

[88] Blackrock response to the public
consultation on benchmarks

[89] French Banking Federation response to the
public consultation on benchmarks

[90] CFA Institute response to the  public
consultation on benchmarks

[91] Stoxx response to the public consultation
on benchmarks

[92] BEUC response to the Commission public
consultation on benchmarks

[93] The $1.5 billion fines imposed on UBS and $ 453 million imposed on
Barclays by financial regulators, provide an example of how costly it can be
for benchmarks’ contributors not to ensure the reliability of their benchmarks
and reflect the large impact which benchmarks’ manipulation can have on the
efficiency of and confidence in financial markets and in the real economy: http://www.bloomberg.com/news/2012-09-19/Libor-like-manipulation-possible-in-other-benchmarks-iosco-says.html

[94] The GFMA, which
represents the most important financial institutions globally (including
important benchmarks’ administrators, contributors and users) has issued
non-binding Principles for Financial Benchmarks GFMA Principles for financial
benchmarks: http://www.gfma.org/correspondence/item.aspx?id=350

[95] Finance Watch response to public
consultation on benchmarks

[96] Fundamental Right to Conduct a Business: http://infoportal.fra.europa.eu/InfoPortal/infobaseShowContent.do?btnCat\_302&btnCountryBread\_169

[97] VOEB, Bundesverband Öffentlicher Banken
response to the public consultation on benchmarks

[98] CFA response to the public consultation on
benchmarks

[99] Deutsche Lufthansa’s response to the
public consultation on benchmarks

[100] EON response to the public consultation on
benchmarks

[101] Unicredit response to the  public
consultation on benchmarks

[102]“ Mandatory reporting provides the advantage of ensuring
consistency in the number of contributors on a given day. It also removes the
ability to manipulate the index by purposefully choosing not to contribute data
on a particular day. Disadvantages include the decision as to which
organisations are compelled to report, which entity regulates the panel, bears
the costs, and owns and sets the framework for submissions. “RIMES

[103] “There would be considerable advantages to mandatory reporting of
price data on concluded trades in highly liquid, standardised and commoditised
markets provided of course that a large proportion of transactions throughout
the 24 hour period were captured. This would therefore require a global
initiative. In opaque, truly global markets such as shipping, where the
commodity being traded is far from standardised, mandatory reporting seems
impossible to implement. If such a proposal were implemented within a limited
arena such as the EU it would encourage migration of business away from the
jurisdiction. In shipping there is no industry-wide consensus in favour of
greater transparency and since there is no widespread discontent with the
benchmarks available, little incentive for change.” Baltic Exchange

[104] “Mandatory reporting requirements could prove useful, as they
increase the share of the market that is represented by the benchmark. However,
a threshold (e.g. market share) should be considered to avoid excessive burdens
on minor submitters who do not significantly contribute to the
representativeness of the benchmark.” Bafin

[105] “Mandatory participation could result in large panels. The benefit
which one would expect from a large panel could, however, be undermined by
mandatory participation if this means that the panel becomes unrepresentative
or if it creates uncertainty in the construction of the panel. Who, under a
mandatory system, would have responsibility for defining the criteria to select
the banks that must contribute? Who would monitor and maintain the criteria and
hence the banks selected? Any benchmark should reflect ‘volume weighting’ to
some degree – an arithmetic mean established from a very broad panel with a
large number of marginal participants could result in fixes which were not
representative of the economically significant activity.” Blackrock

[106] “For mandatory reporting of data, requiring all trade data to be
available to authorities or benchmark administrators must be carefully balanced
with the costs it will create. In particular, creating trade repositories or
trade reporting will require large monitoring resources from competent
authorities, as well as large set up costs. It must also be noted that
verification of submissions will still be required to ensure all data is
submitted, and that it correctly reflect arms lengths transactions. It is not
obvious that similar benchmark integrity could not be achieved through a strong
governance and control framework” HMT

[107] Please see annex III on international initiatives on benchmark reform

[108] Please see the Problem definition and the  Scope section regarding the impossibility for administrators and
contributors of published benchmarks to internalise all the benefits of
investments in enhancing benchmarks’ reliability.

[109] Please see HMT response to consultation: http://ec.europa.eu/internal\_market/consultations/2012/benchmarks/index\_en.htm

[110] Under this option European benchmark administrators and
contributors would be either under the scope of eiher non-binding principles
issued by supervisory authorities (such as the ones to be issued by IOSCO and
ESMA/EBA) or under regulation issued by NCA (as is the case for LIBOR in UK and
CIBOR in Denchmark).

[111] Argus response to the public consultation
on benchmarks

[112] Caixabank response to public consultation
on benchmarks

[113] Caixabank response to the public
consultation on benchmarks

[114] According to national supervisory authorities such as BAFIN, there
is a need for credible governance structures. Adequate controls must be in
place; adequate processes for identifying, avoiding and, if this is not
possible, managing conflicts of interest and an appropriate degree of formal
oversight and regulation

[115] MIFID OJ L 145, 30.4.2004, p. 1. Please see bibliography

[116] See e.g. Barclays, Index Industry Association, BBVA response,
Danish Bankers Association

[117] See e.g. Association Française de la Gestion financière (AFG)

[118] BATS Chi-X Benchmarks must be fully transparent in relation to
their constituents and weightings and be governed by fully transparent, robust
and non-subjective rules in order that users of the indices can predict changes
as playing a crucial role in the integrity of benchmarks by helping to ensure
that any published benchmark is well understood

[119] Platts response to the public consultation
on benchmarks

[120] UBS AG The level of transparency should increase in line “with the
amount of judgement exercised

[121] Blackrock: “Are
the rules governing index calculation sufficiently transparent? Are the index
calculations clear and replicable?”

[122] EnBW We believe that there is a need for enhanced transparency

[123] Bafin Most important factors would be: A robust, fully transparent
and understandable methodology for calculation

[124] Her Majesty’s Treasure: “a fundamentally important and more easily
achievable area of focus should be empowering the users of benchmarks to make
more efficient choices and apply pressure to administrators, through increasing
transparency, particularly around the methodology used to compile benchmarks,
including how judgements and other intangible inputs are used.

[125] ICIS
“Anonymity is a necessary evil
in some markets, where participants believe that transparency poses a
commercial risk. ICIS experience of energy markets shows, however, that market
participants generally benefit from a reduction in, or indeed abolition of anonymity.”

[126] Please see the ESRB response to the public consultation

[127] The Mortgage Credit Directive under
negotiation may also include provisions on the use of benchmarks.

[128] See Finance watch response to the public
consultation on benchmarks

[129] BATS Chi-X “If
it is a widely acceptable benchmark, especially in circumstances where other administrators
are providing similar coverage, there appears little need to restrict its use.
More esoteric benchmarks, however, may have components that are less understood
by end users. For them, a more restricted use  seems conceivable”

[130]FSUG “Similarly, retail investors may stick
with a seriously underperforming investment fund due to the inappropriate use
of a particular index or benchmark in communications between the fund manager
and investor”.

[131] DBA “If the very large wholesale markets trust the benchmarks this
is an indicator of the general trustworthiness of the benchmarks”.

[132] See Baltic exchange response to the public
consultation on benchmarks

[133] BEUCs  response to the Commission public
consultation on benchmarks

[134] Please see ESRB response to the public consultation on benchmarks

[135] CFA institute response to  the public
consultation on benchmarks

[136] EON’s response to public consultation

[137] European Banking Federation’s response to consultation

[138] Please see cost section X “Cost benefit analysis” of this IA.

[139] FSUG response to public consultation

[140] European Consumers organization response
to public consultation

[141] Please see the
public statements by the
Commissioner Barnier and the ECB on concerns about banks leaving panels for interbank interest rate
benchmarks:
http://ec.europa.eu/commission\_2010-2014/barnier/headlines/speeches/2013/02/20130208\_en.htm
http://www.ecb.int/press/pr/date/2013/html/pr130208.en.html

[142] CME response to public consultation

[143] CFA Institute’s response to public consultation

[144] According IMF data on financial institutions turnover: http://www.imf.org/External/Pubs/FT/GFSR/2010/02/pdf/text.pdf

[145] The one-off and recurring costs of compliance for benchmark administrators
and contributors are much lower than those estimated by the FSA for the administrators
of/contributors to LIBOR. However, most benchmark administrators and
contributors will just need to comply with the general requirements of the
initiative and not with the requirements for critical benchmarks, which will
ensure proportionality.

[146] Based on the extrapolation of supervision costs estimated for
LIBOR FSA consultation paper on the regulation and
supervision of benchmarks[146]: http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

[147] Estimated one-off costs relate to setting up systems and controls
for the supervision of benchmarks by NCAs (totally a
maximum of 56 entities including NCAs for the
supervision of benchmark administrators and NCAs for the supervision of
contributors which are subject to financial regulation
and supervison in all MS. Costs per CA are estimated
to vary from €100,000 to €500,000 depending on the nature, risk and number of
benchmarks to be supervised by the CAs in different jurisdictions. These are
based on a maximum estimate of € 0.5 M for the supervision of administrators of critical benchmarks.

[148] Assuming that supervision will take place for each benchmark providing
firm or contributing firm, independently of the number of benchmarks it
provides or contributes to, we will consider the costs of supervision to be for
number of administrators and no for number of benchmarks.

[149] The cost contributors’ supervision of have been estimated as a
maximum of half of those for the supervision of contributors to LIBOR under the
current FSA paper on “The regulation and supervision of benchmarks”,
(March 2013) as the requirements of the Commission initiative are less
stringent than those of the regulation adopted by UK authorities, for example
by not regulating not already regulated contributors.

[150] Based on the extrapolation of supervision costs estimated for
LIBOR FSA consultation paper on the regulation and
supervision of benchmarks[150]: http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

[152]For example, it has been estimated by the FSA that the compliance
with the obligations under FSA review of LIBOR would be carried out by a team
of 5 people. http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

[153] http://ec.europa.eu/internal\_market/finservices-retail/credit/consumer/index\_en.htm

[154] http://ec.europa.eu/internal\_market/finservices-retail/credit/mortgage/index\_en.htm

[155] More detailed information of these costs
can be found in annex X. Cost-benefit analysis

[156] http://www.bloomberg.com/news/2012-07-31/barclays-documents-seized-in-italy-in-euribor-fraud-probe-1-.html

[157]
http://www.ipsnews.net/2012/03/euribor-under-scrutiny-by-peoples-campaign-in-spain/

[158] The overall impact of LIBOR and EURIBOR manipulation has not been
determined yet as investigations are still on-going.

[159] According to later news on fines for LIBOR manipulation on Reuters
article: http://uk.reuters.com/article/2013/01/29/uk-rbs-Libor-settlement-idUKBRE90S07I20130129

[160] According IMF data on financial institutions turnover: http://www.imf.org/External/Pubs/FT/GFSR/2010/02/pdf/text.pdf

[161] The one-off and recurring costs of compliance for benchmark administrators
and contributors are much lower than those estimated by the FSA for the administrators
of/contributors to LIBOR. However, most benchmark administrators and
contributors will just need to comply with the general requirements of the
initiative and not with the requirements for critical benchmarks, which will
ensure proportionality.

[162] IOSCO, Principles for
Oil Price Reporting Agencies, October 5th 2012, http://www.iosco.org/library/pubdocs/pdf/IOSCOPD391.pdf

[163]http://www.risk.net/energy-risk/news/2258379/lack-of-regulatory-clarity-hampering-pra-code-of-conduct

[164] Based on COM (2010) 573, Strategy for the effective implementation of
the Charter of Fundamental Rights by the European Union, particularly the check
list: http://ec.europa.eu/justice/news/intro/doc/com\_2010\_573\_en.pdf

[165] http://www.esma.europa.eu/system/files/2012-675.pdf

[166] http://www.esma.europa.eu/system/files/esa-2013-007.pdf,
7 March 2013, ESA/2013/007

[167] http://cdn.hm-treasury.gov.uk/wheatley\_review\_libor\_finalreport\_280912.pdf

[168] http://cdn.hm-treasury.gov.uk/wheatley\_review\_Libor\_finalreport\_280912.pdf

[169] http://cdn.hm-treasury.gov.uk/wheatley\_review\_libor\_finalreport\_280912.pdf

[170] Please See annex V on the findings and recommendations of the Wheatley review of LIBOR; see full report
here:  http://cdn.hm-treasury.gov.uk/wheatley\_review\_libor\_finalreport\_280912.pdf

[171] http://www.bloomberg.com/news/2012-09-27/danish-banks-to-offer-cita-loans-after-review-finds-cibor-flawed.html

[172] http://europa.eu/rapid/press-release\_MEMO-11-711\_en.htm?locale=en

[173] http://europa.eu/rapid/press-release\_MEMO-13-435\_en.htm

[174] http://ec.europa.eu/avservices/ebs/schedule.cfm?page=1&date=09/24/2012&institution=Parliament

[175] http://www.iosco.org/news/pdf/IOSCONEWS253.pdf

[176]http://www.bbc.co.uk/news/business-18671255

[177] http://www.cftc.gov/PressRoom/PressReleases/pr6518-13

[178] http://www.bloomberg.com/news/2012-10-05/japan-urges-bank-lobby-to-review-tibor-amid-u-k-rate-reform.html

[179] http://www.ft.com/intl/cms/s/0/5fa72ede-99f0-11e2-9732-00144feabdc0.html

[180] http://www.hkma.gov.hk/eng/key-information/press-releases/2013/20130206-4.shtml

[181] Please see estimates in Economist’s
report: http://www.economist.com/node/21558281

[182] FED’s response to
a Congressional Request for Information on Barclays - LIBOR Matter can be found
on: http://www.newyorkfed.org/newsevents/news/markets/2012/Barclays\_LIBOR\_Matter.html

[183]Mr Geithner's email s to Sir Mervyn King with recommendations to
enhance LIBOR governance can be found on:http://www.newyorkfed.org/newsevents/news/markets/2012/Libor/June\_1\_2008\_LIBOR\_recommendations.pdf

[184] http://europa.eu/rapid/press-release\_MEMO-13-435\_en.htm

[185] EC press release on the investigations:
http://europa.eu/rapid/press-release\_MEMO-13-435\_en.htm

[186]Please see TOTAL Oil Trading response to IOSCO’s Consultation on Oil
Price Reporting: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD391.pdf

[187] Please see report published by the OFT: http://www.oft.gov.uk/OFTwork/markets-work/othermarketswork/road-fuel-CFI/

[188] Please see press reports from 13/11/12 on the Guardian and
Bloomberg websites: http://www.bloomberg.com/news/2012-11-13/uk-regulators-probing-price-fixing-in-natural-gas-market.html
http://www.guardian.co.uk/business/2012/nov/12/Libor-like-manipulation-gas-markets

[189] Source Bloomberg and EC calculations. Please see note number 2 for
more information

[190] Source Bloomberg: EC estimates of the size of financial indices
industry based on reported revenues for this business line by index producers
on their latest annual financial reports, including: NYSE, NASDAQ, LSE(FTSE),
the CME Group, the ICE, (Dow-Jones Indices), S&P, MSCI, Markit, Reuters and
Bloomberg.

[191] Source: Bloomberg and latest annual financial reports published by
the companies on their websites.

[192] Latest annual financial reports published by the companies on
their websites.

[193] Mainly historical or real time data on index values, constituent's
data and 'corporate actions' tracking

[194] ESMA consultation paper on Draft Consultation Paper Principles for
Benchmarks-Setting Processes in Europe (to be published in January)

[195] Source: Table 2. Non Paper 18.05.2011- Document Prepared by the
Commodities Task Force on the Relationship between Price Formation in the
Commodity and Commodity Derivatives Markets.

[196] Source: Table 3. Frontier Economics, Blackrock and ICI data: http://www.ici.org/pdf/2012\_factbook.pdf,

[197] Source: BIS table 19. Amounts outstanding of OTC derivatives by
risk category and instrument.
December 2011: http://www.bis.org/statistics/otcder/dt1920a.pdf

[198] There also settled cases of benchmarks attempted manipulation in
the oil sector in the US (Marathon Petroleum in 2007) and in the gas sector
(Energy Transfer Partners).

[199] http://www.ft.com/intl/cms/s/0/aa28764c-1f85-11e2-b273-00144feabdc0.html#axzz2CAwIoFNF

[200] http://www.reuters.com/article/2012/07/20/us-banking-Libor-settlment-idUSBRE86J00H20120720

[201] As specified in section 2 of this IA, LIBOR and EURIBOR reference
returns and payments for enormous volumes of derivative contracts, commercial
and personal consumer loans, home mortgages and other transactions (up to USD
800 trillion financial instruments are priced by reference to LIBOR and up to
USD 570 trillion to EURIBOR

[202] For example, if one or more banks would have managed to move the
3-month Libor fix by 1 basis point (a basis point is 0.01 percentage point) on
a specific date with derivative contracts worth EUR 10 trillion referenced to
it, the total impact on the value of these contracts would be: EUR
10,000,000,000,000 x 0.0001 x 0.25 duration = EUR 250,000,000.

[203] http://www.cftc.gov/PressRoom/PressReleases/pr6289-12:
The CFTC Order finds that Barclays attempted to manipulate and made false
reports concerning two global benchmark interest rates, LIBOR and EURIBOR, on
numerous occasions and sometimes on a daily basis over a four-year period,
commencing as early as 2005’:. The CFTC Barclays Order “also finds that
throughout the global financial crisis in late August 2007 through early 2009,
as a result of instructions from Barclays’ senior management, the Bank
routinely made artificially low LIBOR submissions to protect Barclays’
reputation from negative market and media perceptions concerning Barclays’
financial condition. Dishonest U.S. Dollar LIBOR submissions occurred on a
regular basis during the global financial crisis from August 2007 through early
2009, and, at limited times, for Yen and Sterling LIBOR during the same period”

[204] http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf:
Barclays’ Derivatives Traders attempted to influence the EURIBOR (and to a much
lesser extent, US dollar LIBOR) submissions of other banks by making requests
to external traders. One of the Derivatives Traders also embarked on
co-ordinated strategies to align Barclays’ positions with traders at other
banks and to influence the EURIBOR rates published by the EBF”. On the other
side, “Derivatives Traders also made internal requests for EURIBOR and US
Dollar LIBOR submissions based on the trading positions of traders at other
banks who had asked them to pass requests on to Barclays’ Submitters”

[205] Yale Law School Center for the Study of Corporate Law, see
Verstein’s benchmarks academic review in: http://papers.ssrn.com/sol3/papers.cfm?abstract\_id=2025124

[206] http://www.bloomberg.com/news/2012-07-16/Libor-flaws-allowed-banks-to-rig-rates-without-conspiracy.html

[207]
http://www.ft.com/intl/cms/s/0/3cf4e5c4-c143-11e1-8eca-00144feabdc0.html#axzz2EBnrGFJY

[208] http://www.ecb.europa.eu/pub/pubbydate/2012/html/index.en.html?skey=public

[209] http://ec.europa.eu/internal\_market/consultations/2012/benchmarks\_en.htm

[210] According to the Housing Finance in the Euro Area report by the
ECB, (March 2009, table 2, chart 7), 43% of new mortgage loans in the Euro area
in 2007 were referenced to variable interest rates. The report states that in
the eleven Euro area countries where variable rates dominate (all except
Belgium, Germany, France and the Netherlands), 'predominantly the EURIBOR with
the corresponding maturity is used for adjusting the interest rates': http://www.ecb.int/pub/pdf/scpops/ecbocp101.pdf

[211] http://www.ft.com/intl/cms/s/0/1b2d25aa-cb66-11e1-911e-00144feabdc0.html#axzz2DGR6PM16

[212]However, according to the FT, IOSCO backed away from its initial
tough proposals for regulation of the benchmarks in the physical energy market
due to concerns that in case it would have carried on with its regulatory
ideas, they would have resulted in 'some market participants to decrease or
even to cease their submission of data' to PRAs, making energy price
assessments more opaque than they currently are: http://www.ft.com/intl/cms/s/0/3c859a3c-1163-11e2-a637-00144feabdc0.html#axzz2BqGPqAgd

[213] http://www.iosco.org/library/pubdocs/pdf/IOSCOPD391.pdf

[214] Please see section 4.1. “Lack of Governance and Supervision".

[215]
Source: http://www.rba.gov.au/publications/bulletin/2011/jun/7.html

[216] Please see section “Size of benchmarks market. Potential impact on
financial markets”

[217] ESRB response to public consultation, on the regulation of indices
page 3, paragraph 1: "The imperative of reform should also apply more
generally to other indices used as references or benchmarks in financial
contracts or financial instruments: those which are compiled from submissions
such as some CDS and repo indices; those which are computed from actual
transactions such as commodity price indices and asset price indices; and
proprietary benchmarks, particularly those which are tailored to define payoffs
from structured retail products, and which might entail conflicts of
interest". http://ec.europa.eu/internal\_market/consultations/docs/2012/benchmarks/consultation-document\_en.pdf

[218] Please see table 3 of section “Size of benchmarks market.
Potential impact on financial markets”

[219] Please see annex IX for more details on benchmark types, administrators and
calculation methodology

[220] Please see annex XX for an overview of the wide range and
variety of indices and price assessments used as
benchmarks.

[221] LIBOR
(London InterBank Offered Rate) is defined as “The rate at which an individual
contributor panel bank could borrow funds, were it to do so by asking for and
then accepting interbank offers in reasonable market size, just prior to
11.00am London time". It is administered by the British Bankers Association
and calculated by Thompson Reuters: http://www.bbaLibor.com/bbaLibor-explained/definitions

[222]
EURIBOR (European Interbank Offered Rate), is the rate at which Euro interbank
term deposits are offered by one prime bank to another prime bank within the
EMU zone, and is published at 11:00 a.m. (CET) for spot value (T+2).It is
administered by the European Banking Federation (EBF) and calculated by
Thompson Reuters: http://www.Euribor-ebf.eu/Euribor-org/about-Euribor.html

[223] Please see Annex VII for more detail on benchmarks industry size and markets impacted

[224] LIBOR (London InterBank Offered Rate) is
defined as “The rate at which an individual contributor panel bank could borrow
funds, were it to do so by asking for and then accepting interbank offers in
reasonable market size, just prior to 11.00am London time". It is
administered by the British Bankers Association and calculated by Thompson
Reuters: http://www.bbaLibor.com/bbaLibor-explained/definitions

[225] EURIBOR (European Interbank Offered Rate),
is the rate at which Euro interbank term deposits are offered by one prime bank
to another prime bank within the EMU zone, and is published at 11:00 a.m. (CET)
for spot value (T+2).It is administered by the European Banking Federation
(EBF) and calculated by Thompson Reuters:
http://www.Euribor-ebf.eu/Euribor-org/about-Euribor.html

[226] EUREPO is the rate at which, at 11.00 a.m.
Brussels time, one bank offers, in the euro-zone and worldwide, funds in euro
to another bank if in exchange the former receives from the latter the best
collateral within the most actively traded European repo market. http://www.Euribor-ebf.eu/eurepo-org/about-eurepo.html

[227] EONIA® (Euro OverNight Index Average) is the effective overnight
reference rate for the euro. It is computed as a weighted average of all
overnight unsecured lending transactions undertaken in the interbank market,
initiated within the euro area by the contributing banks; http://www.Euribor-ebf.eu/Euribor-eonia-org/about-eonia.html

[228] LIBOR calculation methodology can be seen under
BBA-LIBOR Calculation section in http://www.bbaLibor.com/bbaLibor-explained/the-basics: "Every bbaLibor rate produced by
Thomson Reuters is calculated using a trimmed arithmetic mean. Once Thomson
Reuters receive each submission they rank them in descending order and then
exclude the highest and lowest 25% of submissions - this is the trimming
process. The remaining contributions are then arithmetically averaged to create
a bbaLibor quote. This is repeated for every currency and maturity, producing
150 rates every business day"

[229] BBA LIBOR definition:
http://www.bbaLibor.com/bbaLibor-explained/definitions

[230] EBF EURIBOR definition: http://www.Euribor-ebf.eu/Euribor-org/about-Euribor.html

[231] Source ECB glossary:
http://www.ecb.europa.eu/home/glossary/html/act2e.en.html

[232] For example, all overnight secured lending by the relevant panel
banks is cleared by the ECB and as a result it has available all the necessary
data to calculate the EONIA index of the overnight interbank lending rate

[233] For example the ISDAFIX benchmark for average mid-market swap
rates is calculated based on contributed data from a panel of 6 to 18 banks

[234] This is the approach typically adopted by commodity price
assessments administrators

[235] For example stock indices may gather the closing prices from
publically reported data.

[236] http://www.cboe.com/micro/vix/vixwhite.pdf

[237] For example the transaction price for a comparable grade of oil.

[238] See Mibor

[239] See pg 3 Report by IEA, IEF, OPEC and IOSCO to G20 Finance
Ministers, October 2011

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD364.pdf

[240] FSA consultation paper on the
regulation and supervision of benchmarks[240],
annex I:http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

[241] The 25% overhead costs cover any potential costs related to
compliance with this initiative which may not have been included in the
Commission estimates, such as training of staff, office space and
administrative expenses, IT and other equipment allocated to this task, etc.

[242] Based on application for authorisation costs estimated for LIBOR FSA consultation paper on the regulation and supervision of benchmarks:
http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

[243] Based on controlled function application costs estimated for LIBOR
FSA consultation paper on the regulation and
supervision of benchmarks[243]: http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

[244] This is based on the assumption that each administrator would need
to apply for controlled functions for: director, CEO, compliance officer and
two analysts.

[245] This is an approximate number based on the list of administrators
envisaged to be under the scope of a potential initiative which includes EU:
stock Exchanges (approx. 50); interest rate benchmark administrators (approx.
30), PRAs (approx. 10), market data and intelligence administrators (approx.
60) and; financial institutions (approx. 200) and others (approx.150).

[246] Based on controlled function application costs estimated for LIBOR
FSA consultation paper on the regulation and supervision
of benchmarks[246]: http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

[247] This is based on the assumption that each administrator would need
to apply for controlled functions for: director, CEO, compliance officer and
two analysts.

[248] This is an approximate number based on the estimated number of
already regulated contributors to benchmarks in the EU provided on the
administrative burden calculation section.

[249] The number of hour’s estimates for compliance with different
requirements of this initiative has been based on the number of hours estimated
for compliance with similar request on previous impact assessments by the
Commission for initiatives including similar requirements.

[250] According IMF data on financial institutions turnover: http://www.imf.org/External/Pubs/FT/GFSR/2010/02/pdf/text.pdf

[251] The one-off and recurring costs of compliance for benchmark administrators
and contributors are much lower than those estimated by the FSA for the administrators
of/contributors to LIBOR. However, most benchmark administrators and
contributors will just need to comply with the general requirements of the
initiative and not with the requirements for critical benchmarks, which will
ensure proportionality.

[252] Please see legislative financial statement
accompanying the Commission proposal for a Regulation on indices used as
benchmarks in financial instruments and financial contracts.

[253] Based on the extrapolation of supervision costs estimated for
LIBOR FSA consultation paper on the regulation and
supervision of benchmarks[253]: http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

[254] Assuming that supervision will take place for each benchmark
providing firm or contributing firm, independently of the number of benchmarks
it provides or contributes to, we will consider the costs of supervision to be
for number of administrators and no for number of benchmarks.

[255] Estimated one-off costs relate to setting up systems and controls
for the supervision of benchmarks by a maximum of 56
entities including NCAs for the supervision of
benchmark administrators and NCAs for the supervision of contributors in the
financial sector in all MS. Costs per CA are estimated to vary from €100,000 to
€500,000 depending on the nature, risk and number of benchmarks to be
supervised by the CAs in different jurisdictions. These are based on a maximum
estimate of € 0.5 M for the supervision
of administrators of critical benchmarks.

[256] The cost contributors’ supervision of have been estimated as a
maximum of half of those for the supervision of contributors to LIBOR under the
current FSA paper on “The regulation and supervision of benchmarks”,
(March 2013) as the requirements of the Commission initiative are less
stringent than those of the regulation adopted by UK authorities, for example
by not regulating not already regulated contributors.

[257] Based on the extrapolation of supervision costs estimated for
LIBOR FSA consultation paper on the regulation and
supervision of benchmarks[257]: http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

[259]For example, it has been estimated by the FSA that the compliance
with the obligations under FSA review of LIBOR would be carried out by a team
of 5 people. http://www.fsa.gov.uk/static/pubs/cp/cp12-36.pdf

[260] http://ec.europa.eu/internal\_market/finservices-retail/credit/consumer/index\_en.htm

[261] http://ec.europa.eu/internal\_market/finservices-retail/credit/mortgage/index\_en.htm

[262] Extrapolated from estimates for similar
requirements under the Consumer Credit Directive (CCD), see note 251

[263]  http://adminburden.sg.cec.eu.int/calculator.aspx

[264] http://www.bloomberg.com/news/2012-07-31/barclays-documents-seized-in-italy-in-euribor-fraud-probe-1-.html

[265]
http://www.ipsnews.net/2012/03/euribor-under-scrutiny-by-peoples-campaign-in-spain/

[266] The overall impact of LIBOR and EURIBOR manipulation has not been
determined yet as investigations are still on-going.

[267] According to later news on fines for LIBOR manipulation on Reuters
article: http://uk.reuters.com/article/2013/01/29/uk-rbs-Libor-settlement-idUKBRE90S07I20130129

[268] http://adminburden.sg.cec.eu.int/calculator.aspx

[269] These costs are estimated by administrator and not by number of
benchmarks provided. Thus, although codes of conduct will need to be issued for
all benchmarks, as administrators will normally have a model code of conduct
approved by the Board which they adapt to different benchmarks, it will be
assumed that the additional information disclosure obligation will be mainly
related to drafting and publishing the original code of conduct.

[270] This is an approximate number based on the list of administrators
envisaged to be under the scope of a potential initiative which includes EU:
stock Exchanges (approx. 50); interest rate benchmark administrators (approx.
30), PRAs (approx. 10), market data and intelligence administrators (approx.
60) and; financial institutions (approx. 200) and others (approx.150).

[271] As the procedures for providing transparency of benchmark
calculation and underlying data would be automated for most benchmarks,
including the majority of benchmarks published on exchanges which are based on
already public data, it has been estimated that each administrator would
allocate 100 hours yearly to ensuring that information on benchmark calculation
and underlying data is provided adequately.

[273] As the procedures for providing transparency of benchmark
calculation and assessment and underlying data would be automated for most
benchmarks, including the majority of benchmarks published on exchanges which
are based on already public data, it has been estimated that each contributor
would allocate 25 hours yearly to ensuring that this information is provided
adequately.

[274] European regulated energy trading companies member of EFET are
over 100: http://www.efet.org/

[276] Ibid footnotes 2 and 3 on MAR & MAD: http://ec.europa.eu/internal\_market/securities/abuse/index\_en.htm

[277] MIFID: http://ec.europa.eu/internal\_market/securities/isd/mifid\_en.htm

[278] MAD: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004L0072:EN:NOT

[279] Prospectus Directive: http://ec.europa.eu/internal\_market/securities/prospectus/index\_en.htm

[280] REMIT: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:326:0001:0001:EN:PDF

[281] UCITS Directive: http://ec.europa.eu/internal\_market/investment/ucits-directive/index\_en.htm

[282] “The indices above [based on objective data] should be out of
scope as they are very different from price assessments that use surveys,
panels, and voluntary contributions are one segment.” MSCI

[283] “While it may be correct that criminal and antitrust sanctions
can never hinder certain individuals and companies from infringing the
respective provisions, it would nevertheless not be proportionate to extend the
envisaged regulation to administrators of objective indices. This group of
undertakings did not participate in the LIBOR scandal nor is there any
incentive to engage in manipulations in the future.” Deustsche Bourse

[284] “Any mandatory regulation should not cover price reporting by
PRAs as they consider their activities to be journalistic.” ICIS

[285] “Interest rate indices can be considered “public goods”
whenever their usage is widespread and, as a consequence, inaccurate
submissions and manipulations can sharply affect the stability of financial
markets and can also impact households and companies” Assiom Forex- The
Financial Markets Association of Italy

[286] "Many indices are created by index administrators to meet
a specific client’s needs. Such bespoke indices are not wide-spread adopted
benchmarks and in such cases ensuring that they are fit for purpose should lie
between the administrator and customers.” BATS-ChiX

[287] “calculation agent which produces “white label” custom indices
on behalf of certain clients. In these cases, the intellectual property in the
indices are owned by the client and S&P Dow Jones Indices serves solely as
an independent third-party calculation agent,” Dow Jones

[288] “Most administrators of benchmarks would like to restrict their
use so that they can monetise their intellectual property more effectively.
However, since most of the data is at best daily and often less frequent that
that, it leaks quickly into the public domain. It is much easier to monetise
real-time index calculations because continuous supply is needed” Baltic
Exchange

[289]Eurex weather derivatives (listed in Frankfurt)  http://www.eurexchange.com/exchange-en/products/wed/

[290] The CME Group weather derivatives (listed in
several EU cities): http://www.cmegroup.com/trading/weather/files/pm264-fact-card-european-weather.pdf

[291] IOSCO, Principles for Oil
Price Reporting Agencies, October 5th 2012, http://www.iosco.org/library/pubdocs/pdf/IOSCOPD391.pdf

[292] See e.g. ECB response

[293] “The production of benchmarks should not be a separate
regulated activity. To the extent that production or contribution is already by
or from a regulated entity then it may be possible to expand the role of the
regulator to ensure that this aspect of the business is appropriately
supervised with the objective of assuring impartiality and accuracy” Baltic
Exchange

[294] http://ec.europa.eu/internal\_market/securities/abuse/index\_en.htm

[295]http://www.jefferies.com/cositemgr.pl/html/ProductsServices/SalesTrading/Commodities/ReutersJefferiesCRB/index.shtml

[296]http://www.djindexes.com/commodity/

[297] http://www.standardandpoors.com/indices/sp-gsci/en/us/?indexId=spgscirg--usd----sp------

[298] http://beelandinterests.com/PDF/RICI%20Hndbk\_Final\_01.24.12.pdf

[299]http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21574907~menuPK:7859231~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html

[300] http://www.imf.org/external/np/res/commod/index.aspx

[301] http://www.cmegroup.com/trading/options-volatility-indexes.html

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