London - As international policy makers wrestle with the question of interest rate benchmarks in the wake of the Libor scandal, two financial authorities recommended steps to address weaknesses in the current system, including a move to make the Euribor Steering Committee more independent.
The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) said the steering committee needs more diversified membership as the majority of its members are currently the banks that submit rates.
The two groups also called for the Euribor-European Banking Federation (EEBF) to take greater responsibility for the quality of the data and to have more control of the process.
They said the references for Euribor should focus on maturities with the highest usage and volume of underlying transactions and that there should be no more than a total of seven rates -- for one and two weeks and for one, three, six and nine months. That would be down from 15 currently (one to three weeks and one to 12 months).
"The proposed principles, which are aligned with on-going EU and international work, will give clarity to benchmark providers and users, and are an immediate step to be taken in advance of potential wider changes in the supervisory and regulatory framework for financial benchmarks," said Steven Maijoor, ESMA chair.
Andrea Enria, EBA Chair, added: "ESMA and the EBA are convinced that the prompt and full implementation of today's recommendations is an important step towards ensuring that Euribor represents a transparent and reliable benchmark for financial transactions within the European Union."
Among other recommendations, the group said:
- the definition of Euribor should be clearer, i.e. detailing definitions of prime bank and interbank transactions;
- the Steering Committee should hold more regular meetings and publish its minutes promptly;
- EEBF should assume responsibility for the quality of the data being submitted by the panel banks and subsequently being collated, calculated and distributed;
- EEBF's governance and code of conduct need to be improved and reinforced, specifically with regards to the identification and management of conflicts of interest;
- EEBF should perform internal audits. External audits with public disclosure of the results should follow;
- EEBF should clearly define its minimum expectations regarding the internal procedures and controls being applied by the calculation agent;
- the calculation agent should have its own code of conduct related to reference-rate setting, perform internal audits and be subject to an annual EEBF audit; and
- both EEBF and the calculation agent should keep complete record of all submissions.
The two groups said the weaknesses of the current rate-setting process included 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.
The banking groups said the principles are designed as a first step towards a potential formal regulatory and supervisory framework for benchmarks to be developed in the EU and also take into account other international efforts in this field.