Documents considered by the Committee on 6 January 2016 - European Scrutiny Contents

17   Financial services: benchmarks

Committee's assessment Legally and politically important
Committee's decisionCleared from scrutiny (decision reported on 25 November 2015); further information requested; drawn to the attention of the Treasury Committee
Document detailsProposed Regulation on benchmarks used in the financial services sector
Legal baseArticle 114 TFEU; ordinary legislative procedure; QMV
DepartmentHM Treasury
Document Numbers(35328), 13985/13 + ADDs 1-2, COM(13) 641

Summary and Committee's conclusions

17.1  This proposed Regulation concerns indices used as benchmarks[126] in financial instruments, financial contracts or investment funds. It seeks to improve governance of the benchmark process, prevent conflict of interests of benchmark administrators and contributors, enhance the accuracy of input data and methodologies and ensure adequate protection for consumers and investors. On the basis of our predecessors' recommendation, the House of Commons issued a Reasoned Opinion[127] on this proposal (in November 2013) on the grounds that an overly prescriptive approach to benchmark regulation which diverged from international benchmark standards undermined the supposed benefits of action at EU level.

17.2  The scrutiny background to this proposal is set out in paragraph 17.5 of this Report. In our last Report we cleared the document from scrutiny to enable the Government to support final agreement of a text in December which met the Government's negotiating objectives of a more proportionate approach to benchmark regulation which accommodated the use of third country benchmarks. As we requested in that Report, the Economic Secretary to the Treasury (Harriett Baldwin) now writes to inform us of developments in December.

17.3  We thank the Minister for her letter.

17.4  We draw this Report to the attention of the Treasury Committee.

Full details of the documents: Proposed Regulation on indices used as benchmarks in financial instruments and financial contracts: (35328), 13985/13 + ADDs 1-2, COM(13) 641.


17.5  In February 2015 the preceding Committee granted a scrutiny waiver to enable the UK to support a General Approach in view of improvements to the text: a focus on a limited number of "critical benchmarks" and a reduced role for the European Securities and Markets Authority in favour of national supervisory authorities. On 16 September, we granted a conditional scrutiny waiver to enable the Government to support a text in line with the UK's negotiating objectives which centred on the need for a proportionate approach to the diverse range of benchmarks and consistency with the Principles for Financial Benchmarks published by the International Organisation of Securities Commission (IOSCO). In the event, the proposal was not agreed nor even discussed at that Council meeting. On 23 November, the Minister wrote to ask that we clear the document from scrutiny in advance of anticipated final agreement of the text in December.

Minister's letter of 17 December 2015

17.6  In light of the proposal's importance, reflected by the Reasoned Opinion issued by the House, we reproduce the Minister's letter in full. She says:

"The trilogue on 24 November 2015 was the final political trilogue on the file, and negotiations have therefore concluded at working level. The final compromise text was discussed at Coreper II on 9 December and we do not expect the European Parliament to oppose the draft text. We will update the Committee further when we are in a position to share the final agreed text.

"As outlined in my previous letter, our judgment is that the UK's objectives have broadly been achieved and the Government intends to vote in favour of the Regulation in Council. This will maximise the chance that the UK secures a positive outcome on this file that has material consequences for financial markets in the United Kingdom and the European Union.

"On proportionality and categorisation, the three tier categorisation framework (of Non-Significant, Significant and Critical) will be the basis for the Regulation, with diminishing restrictions applying to those benchmarks that are in the less significant categories. A benchmark is classed as 'Significant', if its usage within the EU totals €50 billion and 'Critical' if it exceeds €500 billion. Additionally, the NCA of the administrator will be able to place benchmarks that do not satisfy these quantitative thresholds in a tighter regime if they deem appropriate. Finally, the Annexes giving distinct treatment to commodity, interest rate, and regulated data benchmarks remain.

"The Government believes that requirements applicable to each category are broadly appropriate, especially for the smallest benchmarks. This allows the Regulation to focus on addressing the supervision and robustness of benchmarks of systemic importance to the functioning of the Single Market, and away from placing additional costs on small businesses. While the UK would be supportive of even further proportionality, we believe the current drafting to be an acceptable basis for compromise.

"The Committee may also be interested in the developments on the third-country regime for benchmarks administered outside the European Union. Given the widespread use of third-country benchmarks in EU markets, both the Parliament and Council agree that alternative mechanisms beyond simple equivalence are required to ensure a workable third-country regime. The Regulation therefore makes provisions for third country administrators to be 'recognised' or 'endorsed' to be used within the EU. As the UK has consistently called for, demonstrable compliance with the International Organization of Securities Commissions (IOSCO) principles has formed the basis of these mechanisms. Overall, we are content that the current package of measures is sufficient to ensure that third country benchmarks can continue to be used in the EU while not creating an uneven playing field between EU and third country administrators."

Previous Committee Reports

Tenth Report HC 342-x (2015-16), chapter 20 (25 November 2015); Sixth Report HC 342-vi (2015-16), chapter 7 (21 October 2015); Fourth Report HC 342-iv (2015-16), chapter 7 (16 September 2015); First Report, HC 342-i (2015-16), chapter 32 (21 July 2015); Thirty-seventh Report HC 219-xxxvi (2014-15), chapter 1 (18 March 2015); Twenty-eighth Report HC 219-xxvii, (2014-15), chapter 7 (7 January 2015); Twenty-second Report HC 219-xxi, (2014-15), chapter 8, (26 November 2014); Fifteenth Report HC 219-xv (2014-15), chapter 8 (22 October 2014); 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).

126   A benchmark is a standard against which a security's performance is compared or measured. It is usually based on the performance of a predetermined set of securities. Back

127   Reasoned Opinion of the House of Commons, 2 December 2013 a Draft Regulation on indices used as benchmarks in financial instruments and financial contracts1. Back

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Prepared 15 January 2016