15 January 2014

ECB publishes opinion on indices used as benchmarks

In October 2012, the Council and EP asked the ECB for its opinion on a proposal for a regulation on indices used as benchmarks in financial instruments and financial contracts.

General observations

The ECB supports the proposed regulation’s objective of establishing a common set of rules at Union level for the benchmark-setting process for financial instruments and financial contracts in the interest of integrity and reliability of the financial benchmarks and the wider concern of protection of investors and consumers. The ECB considers that the regulatory response is justified and proportionate to the deficiencies that have been identified in the benchmark-setting process. The restoring of integrity and public confidence in financial benchmarks is all the more important in the wake of recent alleged manipulation of the key interbank interest rate benchmarks Libor and Euribor, which have led in a number of instances to significant fines and allegations of misuse of other indices.

For the Eurosystem, it is critical to safeguarding the integrity and reliability of these key benchmarks that the quality of the contributions (input data) to these indices and the integrity of their administrator is maintained.

In the Eurosystem’s response to the Commission’s 2012 public consultation on the regulation of indices, the ECB stressed the systemic importance of the Euribor benchmark for financial stability and made specific recommendations on both short and medium to longer term measures for improving the integrity and reliability of Euribor and other such benchmarks. The ECB, together with the national central banks (NCBs) of the Eurosystem, has also provided Eurosystem responses to other similar consultations on the future of benchmark indices, both at Union and international levels.

The ECB would also like to make a few forward-looking remarks on the reform of critical interest rate benchmarks. While progress has been made in strengthening the governance process and restoring credibility, further steps need to be taken. The ECB strongly supports market initiatives that aim at identifying transaction-based reference rates that could constitute viable complements or substitutes to Euribor and support facilitating market choices in a changing financial system so that users can choose reference rates which better match their needs. Furthermore, the design of new reference rates needs to consider the sound principles for reference rates put forward by ESMA, the European Banking Authority (EBA), and IOSCO. Therefore, the ECB strongly encourages market participants to be actively involved in the rate design process, in order to ensure that the resulting rate meets the market’s needs. It is also very important in this transitional phase to new reference rates that any Union framework is workable for market participants. This is particularly crucial as the proposed regulation is very broad in scope. The ECB would also like to stress that its specific observations below are focused primarily on the impact of the regulation on the key interest rate benchmarks.

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