EU Commission pushes for clampdown on Libor-style rigging

Wed Jul 25, 2012 6:40pm IST

* EU's Reding criticises Bank of England for slow response

* Regulation chief raises prospect of tighter supervision

* EU's Barnier says all options on table bar status quo

By John O'Donnell

BRUSSELS, July 25 (Reuters) - The European Commission warned on Wednesday that the EU could take over supervision of benchmarks such as Libor as one of its most senior officials unleashed a broadside at the Bank of England for its failure to stamp out rigging.

Manipulation of Libor, which is used to set prices for trillions of dollars of financial products around the globe, has landed Barclays with a penalty of $453 million, claimed the scalp of its chief executive and threatens to drag in several other banks into the rate-fixing scandal.

Announcing measures to criminalise the fixing of such indexes, Michel Barnier, the European commissioner in charge of regulation, said he was examining tighter supervision of such benchmarks and questioned their current method of calculation.

Banks currently supervise Libor and its continental European equivalent Euribor themselves but self-regulation is set to end.

"Everything has been put on the table except one and that is that of status quo and self regulation," Barnier told journalists. "We will need to propose further ... methods in relation to the ... public supervision of all reference rates and benchmarks."

The European Banking Federation, which oversees Euribor, said it backed public supervision as fast as possible.

Barnier made his remarks as he outlined a proposal to criminally sanction traders and others involved in rigging an index such as the London Interbank Offered Rate - new rules are not set to take effect until 2015.

Viviane Reding, the EU's Justice Commissioner said such measures were just a first step in dealing with the misconduct of bankers, whom she compared to "corrupt casino dealers betting with their clients' savings".

"I was not very much convinced by the action of the Bank of England," she said, in frank remarks that Barnier declined to repeat. "It has already got, years before, a warning that things were going wrong. It has not acted. The Libor scandal reveals major faults in the governance of the process."

Reding suggested the European Central Bank could become the supervisor to "end this very cosy relationship that exists today between some national supervisors and banks", in remarks that are likely to anger those in Britain that wish to retain autonomy in policing finance.

"We need rigour, independence. We need it at the European level. We cannot continue with the casino mentality," Reding said.

The Bank of England, which currently is not Britain's financial regulator, says it was unaware of any fraudulent rigging of the rate, though they acknowledged banks had difficulties with their estimates for Libor submissions when the money markets froze in the 2008 financial crisis.

CALCULATION

Barnier said he was also examining how such indexes are compiled.

The Libor rates, compiled from estimates by large banks of how much they believe they have to pay to borrow from each other, are used to determine interest rates on over $500 trillion in contracts around the world.

"Should we head towards a systematic approach to the way in which these benchmarks are composed based on real facts and figures rather than estimates?" Barnier asked.

Central bankers are calling for a fundamental changes in the way such indexes are compiled. The European Central Bank is privately pushing for a rethink on Euribor, sources familiar with the matter told Reuters last week.

This could include shifting the basis of the calculation to actual lending rates instead of the current system, which like Libor uses banks' assessments of what they expect to be charged. Regulators fear the existing set-up allows too much discretion.

The head of Britain's financial regulator said on Tuesday the dishonesty that was discovered in setting Libor was now in the past.

Barnier intends to criminalise the fixing of such indexes across all 27 countries in the European Union by amending new legislation that lays down minimum penalties for market abuse such as insider dealing.

Britain, whose Barclays bank was the first to be fined for attempting to manipulate the London Interbank Offered Rate, has called in its anti-fraud prosecutors to pursue traders involved in the fixing scandal.

It turned to the Serious Fraud Office to launch a criminal investigation because its watchdog, the Financial Services Authority, does not have the power to impose such sanctions.

Had Barnier's proposed change to criminal sanctions already been in place, it would have been easier for the FSA to prosecute.

The change to the EU-wide rules means it would no longer be possible for countries to take a softer stance on such offences. Insider dealing is, for example, dealt with differently by countries such as Germany, Italy and Spain.

Barnier wants to leave it up to countries to decide what penalties they want for those found guilty of index rigging. By criminalising it, however, he gives them a free hand to impose harsher punishment.

Thomson Reuters Corp is the British Bankers' Association's (BAA) official agent for the daily calculation and publishing of Libor. The company has said it continues to support the BBA in calculating and distributing Libor rates.

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