8 Financial services: benchmarks
| Committee's assessment
| (a) Legally and politically important (b) Politically important
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| Committee's decision | Not 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) —
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| Department | HM Treasury
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| Document numbers | (a) (35328), 13985/13 + ADDs 1-2, COM(13) 641
(b) (36347), —, CON/2014/2
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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".
THE ECB'S CONCLUSIONS
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."
LATE DEPOSIT OF DOCUMENT (B) AND LACK OF ROLE IN
THE NEGOTIATIONS
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: https://www.ecb.europa.eu/ecb/legal/opinions/html/act_12949_amend.en.html
and published in the Official Journal OJ C 113, 15.4.2014, p.
at: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.C_.2014.113.01.0001.01.ENG. 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
http://www.publications.parliament.uk/pa/cm201314/cmgeneral/euro/131128/131128s01.pdf. 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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