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Proposed benchmark legislation being revised by the chair of the European Parliament's Economic and Monetary Affairs Committee, Sharon Bowles, looks set to forbid EU-based institutions from holding any products linked to unauthorised benchmarks, said Caroline Dawson, a senior associate at law firm Clifford Chance. Dawson said few benchmarks from outside Europe are likely to meet the requirements, which may, unless altered, extend to over-the-counter derivatives. This would mean that banks' proprietary holdings could not include assets such as derivatives or exchange-traded funds tracking even such well-known financial references as the S&P 500. "There is the potential that it could capture OTC derivatives … and that would be tremendously restrictive", Dawson said.
If OTC derivatives are covered, then the legislation would force banks to unwind positions. The original proposal, from the European Commission, would have prevented EU financial institutions from using any benchmarks from outside Europe unless produced by administrators with equivalent rules to those of the EU. Bowles is working to modify this to permit benchmarks from jurisdictions that have accepted principles laid out by the International Organisation of Securities Commissions.
The European Council has yet to weigh in with its view of the proposal. European officials are working to have the legislation ready before parliamentary elections in May, but it is unlikely to become law until late 2014 or early 2015. The legislation's main target, the big market benchmarks such as Libor, may itself prove hard to pin down, because of its insistence that banks pool their information to set rates.
Financial services bodies have been arguing for changes to the benchmark legislation, including the Global Financial Markets Association, which called for "immediate exemptions for major benchmarks produced by non-EU central banks and public sector agencies". "Any lack of clarity on the status of such benchmarks under the regulation has the potential to lead to significant market volatility, and may disadvantage EU-based users of such benchmarks", the association said.