A technical flaw in the EU’s rules to prevent financial benchmark manipulation could impose a disproportionate burden on commodity price reporting agencies.

What is it?

A trialogue between the European Council, European Parliament and European Commission agreed a compromise text of the proposed regulation of financial benchmarks in December 2015. These measures follow a series of fines handed out to global banks for the manipulation of benchmarks used in financial contracts, for instance the London Interbank Offered Rate (Libor). However, the scope of the regulation goes well beyond interest rate benchmarks.

The key focus for policy-makers was proportionality, with the regulatory burden designed to be concomitant with the risk of manipulation. In addition to a scaled regulatory burden for critical, significant and non-significant benchmarks, there are carve-outs for commodity benchmarks, and for indices compiled from regulated data such as stock exchange transactions.

“My goal was to protect investors and consumers by achieving two things: solid protection and safeguards for important benchmarks, and enhancing market discipline through competition between benchmarks. Proportionality for smaller benchmarks ensures that the cost of regulation does not become so prohibitive that they disappear, which would cause more concentrated markets,” says Cora van Nieuwenhuizen, who is the European parliamentary rapporteur on the regulation.

What happens outside the EU?

Benchmark manipulation is a concern well beyond the EU, but no other jurisdiction has passed or is planning such comprehensive regulation. However, there is an international consensus around a set of principles finalised by the International Organisation of Securities Commissions (Iosco) in July 2013.

The initial European Commission draft called for formal equivalence decisions on non-EU benchmarks, but Ms van Nieuwenhuizen was quick to amend this requirement during the parliamentary discussions. It has been replaced by the idea of recognising non-EU benchmarks provided they comply with the Iosco principles.

“I am very happy we removed the idea of pure legal equivalence, because this has made it possible to permit the use of non-EU benchmarks in Europe. Using compliance with the Iosco principles is a novel concept in EU regulation, and could be a good precedent for the treatment of third countries in other legislation as well,” says Ms van Nieuwenhuizen.

What’s the catch?

Iosco originally recognised the differences between commodity and financial benchmarks by producing two sets of principles. A less stringent set of rules for commodity price reporting agencies (PRAs) were published in October 2012.


Unlike earlier drafts, chapter four of the EU compromise text, which deals with commodity benchmarks, no longer imposes Libor-style requirements, and is instead modelled on the Iosco PRA principles. However, the Luxembourg presidency of the European Council was keen to reach an overarching political deal before completing its rotating term at the end of 2015. This led to the guillotining of discussions, and PRAs are concerned that one particular provision left in may undermine the entire concept of proportionality for commodity benchmarks.

In article 14a, the exemptions granted to commodity benchmarks specifically exclude those “based on submissions by contributors which are in majority supervised entities”. The European Securities and Markets Authority (ESMA) completed technical standards for most of the Markets in Financial Instruments Directive (MiFID II) and market abuse regulation in September 2015. These two new pieces of legislation will result in at least some regulation being imposed on most active participants in commodity markets. As a result, many commodity benchmarks, especially in crucial fields such as energy, hydrocarbons and metals, will be subject to the full force of the benchmarks regulation as well.

“In broad terms, the proposed treatment of commodity benchmarks would have been a good representation of the Iosco PRA principles written into EU law, but the haste to finalise the regulation appears to have left several aspects in confusion, including those relating to the commodity benchmarks,” says Richard Street, head of regulation and compliance at chemicals, energy and fertiliser price reporting agency ICIS.

He says the provisions of the broader benchmarks regulation outside the commodities chapter are not aligned with the international standards that were supported not only by Iosco, but also by energy regulators such as the International Energy Agency and the Organisation of Petroleum-Exporting Countries.

What’s the alternative?

The EU legislative text leaves some flexibility for ESMA in drafting its level two technical standards. But PRAs believe it would be preferable if the new Dutch presidency of the European Council allowed tweaks to the level one compromise. The UK Financial Conduct Authority and several national energy regulators are apparently backing this request.

“Iosco did a fantastic job of creating an international consensus around the PRA principles which have been confirmed as working extremely well. It would be a real shame if we unwittingly undermined the hard work of the past three years,” says Mr Street.


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