12 Financial services: benchmarks
| (35328)
13985/13
+ ADDs 1-2
COM(13) 641
| Draft Regulation on indices used as benchmarks in financial instruments and financial contracts
|
| Legal base | Article 114 TFEU; co-decision; QMV
|
| Department | HM Treasury
|
| Basis of consideration | Minister's letter of 2 April 2014
|
| Previous Committee Reports | HC 83-xxxvi (2013-14), chapter 10 (12 March 2014); HC 83-xxi (2013-14), chapter 5 (20 November 2013); HC 83-xix (2013-14), chapter 4 (30 October 2013)
|
| Discussion in Council | Not known, see paragraph 12.6
|
| Committee's assessment | Legally and politically important
|
| Committee's decision | Not cleared; further information requested
|
Background
12.1 The draft Regulation, known as the benchmark Regulation,
concerns indices used as benchmarks in financial instruments,
financial contracts or to measure the performance of investment
funds. In summary, it seeks to improve governance of the benchmark
process, prevent conflict of interests of benchmark administrators
and contributors, enhance the quality and accuracy of input data
and methodologies used by administrators and ensure adequate protection
for consumers and investors using benchmarks. The
Government is not in favour of the proposed Regulation and does
not think it complies with the principle of subsidiarity. It considers
that if it is to be adopted, it should have a narrower scope in
terms of the number of benchmarks it seeks to regulate.
12.2 The House of Commons agreed to issue a Reasoned
Opinion on this draft Regulation following a debate in European
Committee on 28 November 2013. In our last Report we explained
the basis on which we recommended that Opinion and set out the
Commission's response which we received by letter dated 26 February
2014. We provided our own assessment of that response, but said
in our conclusions that before writing to the Commission we would
like to know the Government's view of the Commission's response.
We also asked for an update on the progress in the negotiations
of the proposal and whether the UK's concerns about the proposal
are shared by other Member States.
12.3 We also raised a related concern of the UK benchmark
industry with the Government concerning other areas of EU regulation
of benchmarks and indices brought to our attention by APX, an
Anglo-Dutch energy exchange. So we asked the Government to deposit,
in due course, the proposed text of the Council Implementing Regulations
on capacity allocation and congestion management (CACM) network
code and governance guidelines.
Minister's letter of 2 April 2014
12.4 The former Financial Secretary to the Treasury
(Sajid Javid) responded to us in a letter dated 2 April. Referring
to the Commission's assertion that the proposed Regulation satisfies
the subsidiarity principle and so both limbs of the subsidiarity
test, the Minister says:
"Regarding the first limb, specifically
whether 'Member State action alone would be insufficient to achieve
the purpose of the proposal', the Government continues to consider
that for the vast majority of benchmarks, action is better taken
at Member State level on the basis that it can be targeted to
the particular issues associated with specific benchmarks in each
jurisdiction. The Commission argues that a national approach could
be sufficient for addressing national benchmarks but argues that
few benchmarks are entirely national in their production and use.
The Government highlights that LIBOR is considered a major international
benchmark and considers that the successful reform of LIBOR provides
an appropriate example of benchmark reform being undertaken effectively
at the national level."
12.5 Turning to the second limb of the subsidiarity
test, the Minister comments:
"The Commission response also argues that
the broad scope of the proposal is in line with the broad scope
of the International Organization of Securities Commissions (IOSCO)
principles. While the scope of the IOSCO principles is very broad,
the Government highlights that due to their nature, specifically
the fact that they are principles and thus allow for more flexibility,
their application to specific benchmarks would allow for proportionality
in application. In contrast the broad scope of the Commission
proposal is particularly difficult because it applies prescriptive
rules to benchmarks in a 'one size fits all' approach, with limited
recognition of different types of benchmarks. This approach does
not reflect the diverse nature of benchmarks, administrators and
the benchmark-setting process.
"The Commission also notes that the IOSCO
principles, on which they argue they have based this proposal,
have been endorsed by the Financial Stability Board and the G20.
The Government would however note that despite endorsement by
the G20, no other jurisdiction in the world is understood to be
taking action for benchmark reform to the same extent as the Commission
intends in this proposal. Other jurisdictions which have chosen
to take legislative action have done so with targeted intervention
to a very limited number of benchmarks — in most cases,
only one benchmark.
"The Commission goes on to state that any
additional costs caused by administration and registration are
unlikely to result in the discontinuation in the provision of
some benchmarks. The Government is clear that it disagrees with
the Commission's analysis and considers that any new and arduous
obligations arising as a result of the proposal will likely cause
additional costs for parties affected. An increase in compliance
costs for administrators and contributors creates a significant
risk that benchmarks may cease to be provided.
"The Commission states that the Impact Assessment
does not base the calculation of the total cost of compliance
on the total number of benchmarks in the EU, as the key requirements
of the proposal apply to administrators and contributors, rather
than to benchmarks themselves. However, the Government would highlight
that some of the requirements of the regulation relate to individual
benchmarks, so whilst the burden is on the administrator, if the
administrator produces a significant number of benchmarks, it
will be required to carry out specific tasks in relation to each
benchmark it produces — for example, administrators are
required to publish a detailed benchmark statement for each benchmark
they produce."
12.6 The Minister then addresses the progress of
the negotiations of the proposal:
"Council negotiations have commenced, however
there has so far been only one working level meeting and negotiations
are expected to continue for some time. There are a range of views
from Member States on the key issue of the scope of the regulation
with some seeking a narrower scope, whilst others prefer the broad
scope of the Commission proposal."
Conclusion
12.7 We thank the Minister for updating us on
progress in the negotiation of the proposed Regulation and note
that it is unlikely to be agreed for some time.
12.8 We are also grateful for the Minister's comments
on the Commission response which will be helpful for amplifying
similar points made in our own assessment of its response (contained
in our last Report) when we write to the Commission.
12.9 We retain the current document under scrutiny
and request that the Government continues to keep us informed
of developments in the negotiations. In particular, we would be
interested to learn, in due course, how and with what success
the Government takes forward those common points in the negotiations
on the proposal.
12.10 Finally, we also note that the Government
has not yet told us whether it intends to deposit the proposed
text of the Council Implementing Regulations on capacity allocation
and congestion management (CACM) network code and governance guidelines.
We would be grateful for an answer as soon as possible.
|
