Documents Considered by the Committee on 22 October 2014 - European Scrutiny Committee Contents

8 Financial services: benchmarks

Committee's assessment (a) Legally and politically important (b) Politically important
Committee's decisionNot cleared from scrutiny; further information requested

Document details(a) Draft Regulation about benchmarks used in the financial services sector; (b) Opinion of the European Central Bank on document (a)
Legal base(a) Article 114 TFEU; co-decision; QMV (b) —
DepartmentHM Treasury
Document numbers(a) (35328), 13985/13 + ADDs 1-2, COM(13) 641

(b) (36347), —, CON/2014/2

Summary and Committee's conclusions

8.1 The draft Regulation (document (a)), held under scrutiny since October 2013, concerns indices used as benchmarks[29] in financial instruments, financial contracts or to measure the performance of investment funds. It seeks to improve governance of the benchmark process, prevent conflict of interests of benchmark administrators[30] and contributors,[31] enhance the quality and accuracy of input data and methodologies used by administrators and ensure adequate protection for consumers and investors using benchmarks.

8.2 The House of Commons is the only national parliament to have issued a Reasoned Opinion on this proposal (in November 2013). This challenged the supposed benefits of EU level action — the enhancement of the single market, the promotion of cross-border transactions and the protection of consumers — as being outweighed by potential disadvantages. Disbenefits included the unsuitability of harmonised rules to a wide variety of specific benchmarks, non-alignment with the International Organisation of Securities Commissions (IOSCO) standards, increased regulatory burdens on benchmark administrators and contributors, the risk to the independence of national statistics authorities and the lack of provision for third country benchmarks. The Commission responded to the Reasoned Opinion, maintaining that the proposal was justified. We have rebutted that response, being further informed by additional comments sought from the Government: the Commission simply rehearsed its original subsidiarity substantiation and much of its reasoning was based on a subjective perception of the proposal's alignment with IOSCO principles.

8.3 The Government now provides a further update on the negotiations of document (a). In April, it told us that there had been little progress in the negotiations given the wide range of views of Member States on the scope of the proposed Regulation: some supporting the wide scope proposed; others, like the UK, wanting a narrower scope. Likewise, the Government now reports on "relatively slow" progress during the Greek Presidency, owing to continued disagreement on scope. Other discussions between Member States have focussed on how to best achieve proportionality in the proposal: should it take a sector-specific approach or focus on the usage or vulnerability of a benchmark? The Government favours an approach where regulatory intensity is targeted towards critical benchmarks. Although the Italian Presidency is hoping for significant progress in negotiations during its tenure, the Government say that any progress will be determined by the nature of discussions on outstanding issues.

8.4 In September it came to our attention at official level that in January 2014 the European Central Bank ("ECB") had issued an opinion on the Regulation (document (b)) at the request of the Council and the European Parliament. Although the document had been publicly available for some time on the ECB website (and in the Official Journal),[32] it had not been deposited by the Government. The Government does so now together with an Explanatory Memorandum.

8.5 We thank the Minister for this helpful update on the proposed Regulation and note that there continues to be slow progress in its negotiation. We welcome the Government's approach to the scope and proportionality of the proposal. We ask the Minister to continue to keep us informed of developments in the negotiations, particularly should the agreement of a general approach become likely.

8.6 We welcome the Minister's recognition that the ECB opinion should have been deposited earlier and the Government's intention to put in place measures to prevent similar omissions in future. We recognise that, in all other respects, the efforts of officials to assist us in the scrutiny of this document have been commendable.

8.7 However, we note that the Government suggests that the obligation to deposit document (b) did not arise before its publication in the Official Journal of the EU. An ECB opinion requested by the Council is, under the terms of paragraph (1)(c)(ii) of Standing Order No. 143, a "document which is published for submission to the European Council, the Council or the European Central Bank"; this indicates that deposit should have taken place at publication on the ECB website. Given the importance of opinions of the ECB (as an EU institution) to proposals within the Minister's remit, we think it reasonable to expect her department to monitor the publication of its opinions and those involved in negotiations to be aware of such opinions.

8.8 Bearing in mind the importance of the Regulation (document (a)) reflected by the Reasoned Opinion submitted by the House, we request the Minister, when she next writes, to explain why:

i)  there was not earlier and wider awareness of document (b) within her department which should have triggered deposit nearer to the document's original publication by the ECB; and

ii)   the document is not expected to play any part in the negotiations, even though it was produced at the request of the Council.[33]

8.9 In the meantime, we retain both documents under scrutiny.

Full details of the documents: (a) Draft Regulation on indices used as benchmarks in financial instruments and financial contracts: (35328), 13985/13 + ADDs 1-2, COM(13) 641; (b) Opinion of the European Central Bank of 7 January 2014 on the Benchmark Regulation: (36347), —, CON/2014/2.

Background and previous scrutiny of document (a)

8.10 The background to document (a), an account of its provisions, the draft Reasoned Opinion and our assessment of the Commission's response are set out in our Forty-seventh Report of 2014-15 and our Twentieth, Twenty-third and Thirty-ninth Reports of 2013-14. The debate on the Reasoned Opinion took place on 28 November 2013.[34]

Minister's letter of 15 August on document (a)

8.11 The Economic Secretary to the Treasury (Andrea Leadsom) provides the following update on progress in the negotiation of the document as at the end of the Greek Presidency:

    "The Greek Presidency held five Council working group meetings to discuss the benchmarks proposal. These focused predominantly on the scope of the proposal, as without knowing how broad the scope will be, it is not possible to effectively develop rules and provisions that will apply. Given the range of views amongst delegations on the question of scope, progress has been relatively slow.

    "Council discussions have also focused on how best to ensure appropriate proportionality in the proposal. During discussions delegations have considered a range of options. Some were based on sector specific approaches, others potentially considering the usage of the benchmark as a threshold, whilst some support an approach that considers the vulnerability of a benchmark. Council has yet to settle on a specific approach and discussions continue.

    "The Government favours an approach in which regulatory intensity is calibrated according to the significance of benchmarks and the potential impacts of their failure on markets across the EU. Under this approach, the focus of regulatory intensity would be on critical benchmarks. However there would be appropriate proportionality introduced for non-critical benchmarks to ensure proper governance, but in a manner that appreciates the differences in the broad universe of benchmarks, is not unnecessarily burdensome, and is in line with internationally agreed principles."

8.12 The Minister finishes her letter by saying that although the Italian Presidency hopes to make significant progress on the file, they are aware of a number of major outstanding issues and discussions on those will determine the amount of progress.

Document (b)

8.13 Opinions of the ECB are not legally-binding,[35] but can have an influence on the progress of the negotiation of a proposal to which they relate. This opinion sets out the ECB's strong support for the proposed Regulation and its wide scope. This is subject to the removal of central banks from that scope (in alignment with IOSCO principles) since they already fall within the control of public authorities.

8.14 The ECB also provides conclusions on elements of the proposed Regulation as they affect benchmark administrators and contributors. It says that:

·  the European Supervisory Authorities (ESAs) should play a role in supervising the setting of Euribor but that it welcomes the proposed binding mediation by the European Securities and Markets Authority (ESMA) to coordinate cooperation between competent authorities on benchmarks;

·  it supports the stricter regime for critical benchmarks as proposed subject to a tighter definition of "critical benchmark" as the current wording (based on a quantitative threshold) would not provide a "secure basis" for the development of new critical benchmarks. They would be better defined by qualitative financial stability considerations;

·  the proposed trigger for a competent authority's power to require mandatory contributions to benchmarks (based on criteria relating to 20% of contributors ceasing to contribute in a year) should be replaced with qualitative criteria based on financial stability; and

·  that trigger should be complemented by regular testing by administrators of whether their panel is representative, including whenever a contributor leaves the panel.

8.15 The ECB also questions the viability of proposed supervisory arrangements such as the 'college of competent authorities' for critical benchmarks, particularly in emergencies such as market failure.

8.16 It also proposes changes to the proposed transparency regime to avoid forcing the publication of potentially commercially sensitive or confidential information. Instead administrators should store data subject to proper oversight. Additionally, the ECB proposes that transparency provisions should also mandate benchmark administrators to produce contingency plans in case of abrupt disruptions of benchmarks.

8.17 The ECB doubts that the third country equivalence regime is workable, since many important benchmarks for EU businesses are produced outside it, and few third countries subject benchmark contributors to similar requirements as proposed. Nor does the proposal provide for a transitional period or set out the consequences for contracts based on non-equivalent benchmarks.

The Government's view of document (b)

8.18 The Minister reminds us in her Explanatory Memorandum of 14 October that the proposed Regulation (document (a)) is currently being considered by the European Parliament and the Council. She restates the Government position on the Regulation. Although it supports benchmark reform (the UK being an international leader in implementing "significant domestic reforms"), it is working with the EU institutions to achieve a regime which "is intelligently designed, proportionate, appropriate, and internationally consistent".


8.19 She then comments on three main aspects of the ECB's opinion. She sets out the extent of the Government's agreement with the ECB on two of those: the scope of the proposed Regulation and the third country equivalence regime. She explains why the Government disagrees with the mediatory role of ESMA.

Scope of the Regulation

8.20 The Minister notes that the scope is "extremely broad", reflective of an inappropriate "one size fits all approach" to all benchmarks. She adds:

    "Benchmarks are numerous and diverse, and the rules we design to regulate them should reflect this. As such we agree with the ECB that the most critical benchmarks should be subjected to stricter rules, and that the process for defining who falls into this category should be clear and robust. The UK also argues that the EU should ensure the proposed regime will apply in a proportionate manner to smaller and less critical benchmarks."

Third country equivalence regime

8.21 The Government also agrees with the ECB that the third country equivalence regime raises "significant problems". It prefers instead a regime aligned with IOSCO principles, agreed internationally by regulators in all major jurisdictions and committed to by G20 countries.

Mediatory role of ESMA

8.22 However, the Government disagrees with the ECB on the role of ESMA and binding mediation, because, the Minister says:

    "Responsibility should be left to national competent authorities, who have the best understanding of their domestic markets and the implications of any decisions made."


8.23 Noting that the opinion was first published on 7 January 2014, the Minister says that following publication of document (b) in the Official Journal of the EU on 4 April 2014, it "should have been captured and deposited for scrutiny".

8.24 She explains:

    "We apologise for this omission, which does not reflect the work undertaken to date to keep Parliament informed of developments on this proposal, and measures are being discussed across Government to prevent similar omissions in future. Following identification by the Committee, the Government deposited the document for scrutiny on 23 September."

8.25 She adds that no Council discussion of the ECB Opinion has taken place or is expected in the ongoing negotiations in Council.

Previous Committee Reports

(a) Forty-seventh Report HC 83-xlii (2013-14), chapter 12 (30 April 2014); Twenty-third Report HC 83-xxi (2013-14), chapter 5 (20 November 2013); Twentieth Report HC 83-xix (2013-14), chapter 4 (30 October 2013); (b) None.

29   Defined in the proposal as "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 an index that is used to measure the performance of an investment fund". Back

30   Defined in the proposal as "the natural or legal person that has control over the provision of a benchmark". In practical terms this means those responsible for the establishment, design, production and dissemination of a Benchmark. Back

31   Defined in the proposal as "a natural or legal person contributing input data". This is data used by the administrator to determine the benchmark. Back

32   Available on the ECB website at: and published in the Official Journal OJ C 113, 15.4.2014, p. at: Back

33   Requests made on 18 and 28 of October 2013 respectively. Back

34   Stg Co Deb, European Standing Committee B, 28 November 2013 cols. 3-10 Back

35   The ECB's competence to produce an opinion is based on articles 127(4) and 282(5) of the TFEU. Back

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Prepared 3 November 2014