10 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
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| Legal base
| Article 114 TFEU; co-decision; QMV
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| Department
| HM Treasury
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| Basis of consideration
| Letter from the Commission of 26 February 2014
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| Previous Committee Reports
| HC 83-xxi (2013-14) chapter 5, (20 November 2013) HC 83-xix (2013-14), chapter 4, (30 October 2013)
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| Discussion in Council
| Not known
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| Committee's assessment
| Legally and politically important
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| Committee's decision
| Not cleared; further information requested
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Background
10.1 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.
10.2 The House of Commons issued a Reasoned
Opinion on this Draft Regulation following a debate in European
Committee on 28 November 2013. It was the only national parliament
to do so. We recommended the Reasoned Opinion because we considered,
partly on the basis of strong evidence from the UK financial services
sector, that the supposed benefits of EU level action (second
limb of the subsidiarity principle) — the enhancement of
the single market, the promotion of cross-border transactions
and the protection of consumers — were outweighed by potential
disadvantages. These included:
· harmful consequences of the
broad application of a detailed, harmonised solution to the wide
range of benchmarks (particularly as the rules are not fully aligned
with International Organisation of Securities Commissions (IOSCO)
principles);
· burdens imposed on administrators,
contributors, regulators and others, which could result in the
discontinuance of some existing benchmarks and impede the creation
of others;
· the risk to the independence
of national statistics authorities; and
· lack of provision for use
of non-EU benchmarks within the EU.
The Commission's response
10.3 In his letter of 26 February 2014,
Maroš Šefèoviè, the Vice-President of
the Commission (Inter-institutional Relations and Administration)
says that the Commission remains of the view that the proposal
is justified. However, he says that the Reasoned Opinion of the
House of Commons will be considered as part of the ongoing political
dialogue. The full text of the Commission's response is annexed
to this Report.
10.4 The Commission reiterates its
justification of the proposal on the first limb of the subsidiarity
test (that Member State action alone is insufficient to achieve
the purpose of the proposal) which was set out in its original
impact assessment and explanatory memorandum:
· that the benchmark industry
is international and that benchmarks are particularly important
for pricing cross-border transactions; and
· that few benchmarks are national
in use or production (nor could their use be so restricted and
that national rules would create divergence between benchmarks.
10.5 On the second limb of the test
(EU added-value of the proposal), the Commission again refers
back to original justifications in its impact assessment and explanatory
memorandum. These partly rehearse the above arguments on the first
limb of the test. In addition, the Commission:
· states that consistent, common
EU rules based on and "aligned" with (as the proposal
is) IOSCO principles (endorsed by the Financial Stability Board
and the G20) will avoid manipulation, avoid variation in reliability
and robustness and enhance the single market;
· suggests that the burdens
on administrators and contributors will not be as significant
as argued by the House of Commons since the requirements of the
proposal broadly align with IOSCO principles;
· states that any additional
costs caused by administration and registration are unlikely to
result in the discontinuation of benchmarks, instead resulting
in enhanced competitiveness and reliability;
· comments on how cost of compliance
is calculated (which does not seem to relate to the concerns raised
in the Reasoned Opinion); and
· states that, if necessary,
the requirements for statistical authorities (whose benchmarks
also fall within the scope of the proposal) can be adapted to
suit their special features and thus ensure independence.
Our assessment
10.6 Much of the Commission's response
to the Reasoned Opinion consists of rehearsing assertions initially
made in its impact assessment and explanatory memorandum. There
is some attempt made to address the specific points raised in
the Reasoned Opinion on the disadvantages of EU-level action,
but much of the Commission's reasoning in dismissing these concerns
is based on the Commission's subjective perception of the proposed
Regulation's "broad" alignment with existing international
standards, contrary to the view of the UK Government.
10.7 We also find it hard to understand
the Commission's logic on how the objective of harmonisation of
benchmarks can be achieved if there is to be the degree of flexibility
suggested in relation to statistical authorities and wonder whether
that flexibility will be illusory. Finally, we do not understand
the relevance to our Reasoned Opinion of the Commission's comments
about the cost of compliance and to which specific ground of our
Reasoned Opinion this relates.
Wider "benchmark industry" concerns
10.8 There has been some wider interest
in the Reasoned Opinion on the benchmark Regulation. In addition
to a specialist press inquiry, we have also received a query from
APX, an Anglo-Dutch energy exchange, which operates electricity
financial markets in the Netherlands, the UK and Belgium.[31]
It raised with us the level of British "benchmark industry"
concern about the draft Commission Implementing Regulations on
capacity allocation and congestion management (CACM) network code
and governance guidelines. These CACM Regulations form part of
the European Network Codes.
10.9 The concerns we have raised were
specific to the context of a subsidiarity assessment within the
meaning of Protocol No. 2 to the EU Treaties. Considerations unrelated
to that assessment which might be raised in relation to Implementing
Regulations in general, for example, in respect of competence,
legal base, proportionality and, unlawful sub-delegation of powers
could not be included in the Reasoned Opinion. However, it is
possible that the disadvantages of the proposed EU-level action
that were identified in the Reasoned Opinion could have some relevance
to industry objections to the draft CACM Implementing Regulations.
Conclusion
10.10 Before responding to the Commission,
we ask the Government for:
· its
view of the Commission's response; and
· 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.
10.11 We also ask 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.
Annex: The Commission's Response
Brussels, 26.2.2014
C(2014) 808 final
Dear Mr Cash,
The Commission would like to thank the
House of Commons for its Reasoned Opinion concerning the Proposal
for a Regulation of the European Parliament and of the Council
on indices used as benchmarks in financial instruments and financial
contracts {COM (2013) 641 final}.
The Commission would like to respond
to the points raised in the Reasoned Opinion.
The House of Commons argues that there
has been a failure by the Commission to comply with the principle
of subsidiarity as well as with essential procedural requirements
in Article 5 of Protocol No. 2. The Commission considers that
it has provided sufficient reasons leading to the conclusion that
the objectives of the proposal can be better achieved at Union
level, both in the explanatory memorandum and in the impact assessment
accompanying the proposal.
Regarding the first limb of the subsidiarity
test ("if and in so far as the objectives of the proposed
action cannot sufficiently be achieved by the Member States"),
and the argument that the proposal does not address a common issue
in all Member States, both the explanatory memorandum and the
impact assessment explain that the benchmark industry is international
and benchmarks are in particular vital for pricing cross border
transactions. Action by Member States could address some of the
problems at a national level; such an approach could, however,
not achieve wider European objectives because a patchwork of divergent
national rules would result in an inconsistent and uncoordinated
approach and impede the cross border use and provision of benchmarks.
While national approaches could tackle problems with entirely
national benchmarks, few benchmarks are entirely national in their
production and use. Nor would it be permissible for a benchmark
provider to restrict the use of a benchmark to its own Member
State and thereby ensure that it remained subject to national
legislation. In practice, it would therefore be difficult for
a set of national approaches to achieve the objectives of this
proposal.
Regarding the second limb of the subsidiarity
test ("but rather, by reason of the scale or effects of the
proposed action, be better achieved at EU level"), the impact
assessment provides strong and clear evidence that benchmarks
are used to price a wide variety of cross border transactions,
in particular in the mortgages, interbank funding market, commodity
and derivatives areas. As a result, the impact assessment as well
as the explanatory memorandum conclude that a patchwork of national
rules would impede the provision of cross border benchmarks and
therefore impede cross border transactions. This need has been
recognised by the G20 and the Financial Stability Board (FSB),
which charged the international standard setter International
Organisation of Securities Commissions (IOSCO) with producing
a global set of principles to apply to financial benchmarks. Common
EU rules based on the IOSCO principles will help enhance the single
market by creating a common framework for reliable and correctly
used benchmarks across different Member States, subject to the
same rules.
The Commission would like to point out
that the wide scope of the proposal is aligned with that of the
Principles on Financial Benchmarks issued by IOSCO and endorsed
by the FSB and the G20. A narrower scope would result in an inconsistent
application of the international standards to the provision and
use of different types of benchmarks in the EU Thus, the reliability
and robustness of different types of benchmarks would not be consistent
across the EU which would negatively impact the single market.
In addition, the risk of manipulation across different types of
benchmarks evidenced in the impact assessment would not be effectively
addressed.
The Commission considers that the administrative
burdens for benchmark administrators and contributors to benchmarks
would not be as significant as argued by the House of Commons,
since the requirements of the proposal are broadly in line with
those of the IOSCO Principles for Financial Benchmarks and existing
industry good practice. Furthermore, any additional costs relating
to administration and registration are unlikely to result in the
discontinuation in the provision of some benchmarks, as their
reliability and competitiveness will be enhanced.
The Commission's impact assessment does
not base the calculation of the total costs of compliance on the
total number of benchmarks provided in the EU as the key requirements,
and particularly those carrying potential additional costs, apply
to the benchmark administrators and contributors and not the benchmarks
themselves. Thus, the aggregate costs depend more on the aggregate
number of administrators than on the total number of benchmarks.
Benchmarks provided by statistical authorities
also fall under the scope of the proposal as they share the same
risks and vulnerabilities identified for other types of benchmarks
in the impact assessment. If necessary, the requirements for statistical
authorities can be adapted to take account of their specificities
in order to ensure their independence.
In the light of the above, the Commission
remains of the view that the proposal is justified in terms of
subsidiarity and that a European framework for the provision and
use of benchmarks is necessary to ensure the robustness and reliability
of benchmarks provided and used in the EU and to prevent manipulation.
The Commission hopes that these clarifications
address the concerns raised by the House of Commons and looks
forward to continuing our political dialogue in the future.
Maroš Šefèoviè
Vice-President
31 APX group. Back
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