ESMA and EBA take action to strengthen Euribor and benchmark rate-setting processes

11 January 2013

ESMA and EBA have today published the results of their joint work on Euribor and are proposing principles for benchmark rate-setting processes. Deadline for comments on their consultation paper is 15 February, 2013.

The publications include:

• a review of Euribor’s administration and management and clear recommendations to the Euribor-European Banking Federation (EEBF) to improve the governance and transparency of the rate-setting process;
• formal EBA Recommendations to national authorities on the supervisory oversight of banks participating in the Euribor panel; and
• a joint ESMA-EBA consultation on Principles for Benchmark Setting Processes in the EU which establish a framework for the conduct of benchmark rate-setting and the activities of participants in the process.

ESMA and the EBA have identified significant weaknesses and insufficiencies in the governance of the Euribor rate-setting mechanism and have made a number of recommendations to EEBF. These are aimed at improving the governance of the rate-setting process, which would contribute to a transparent and reliable benchmark for financial transactions. The recommendations are made within the current legislative setting, while the need for broader structural changes is being assessed by the European Commission.

The work carried out by ESMA and the EBA focuses on the governance aspects of the Euribor rate setting mechanism and complements the current legal investigations related to Euribor being conducted by competent authorities within the EU, without pre-empting their final outcome.

The main weaknesses and insufficiencies in the current rate-setting process are the following:

• the Steering Committee, responsible for the governance of the rate-setting process, is not sufficiently independent as a majority of its members come from the panel banks;
• EEBF, as manager and administrator, does not assume sufficient direct responsibility for, and exercise direct control on, the rate-setting process, including the calculation agent (currently Thomson Reuters);
• no formal requirements exist for Euribor panel banks to have adequate internal governance, a code of conduct and conflicts of interest management in relation to the submission process;
• the definition of Euribor is not sufficiently clear as it is based on terms which create ambiguity; and
• the rates being quoted are not assessed sufficiently against evidence from real transactions.

ESMA and the EBA have made a number of recommendations aimed at addressing the current weaknesses and insufficiencies in the Euribor rate-setting process. ESMA and the EBA are calling for a prompt and full implementation of these recommendations to ensure Euribor is a reliable benchmark for financial transactions. ESMA and the EBA will review the implementation of these recommendations by EEBF within six months.

EBA Recommendations on Supervisory Oversight of activities related to banks’ participation in the Euribor panel

To ensure appropriate internal governance processes are also in place within the banks participating in the Euribor panel, the EBA adopted a set of formal Recommendations addressed to national supervisory authorities aiming at setting consistent supervisory practices for the oversight of the Euribor submission process. The Recommendations focus on strengthening the panel banks’ internal governance arrangements, including a code of conduct.

Consultation on Principles for Benchmark Setting Processes in the EU

In response to concerns regarding the perceived weaknesses in current arrangements for benchmark rate-setting, ESMA and the EBA have also developed a set of Principles to address the activities of reference-rate and other benchmark providers, administrators, publishers and market participants who submit data. The deadline for submission of responses to this consultation is 15 February, 2013.

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