* Proposal could be adopted quickly
* Oil traders say no need for tougher regime
* Member states could decide on how tough penalty should be
By Barbara Lewis
BRUSSELS, July 26 (Reuters) - Manipulating international commodity benchmarks such as Brent crude oil would be a criminal offence, punishable by jail, under a set of reforms the EU Commission has proposed in response to the rigging of a major interest reference rate.
The Commission, the EU's executive arm, announced on Wednesday plans to tighten supervision of financial benchmarks after a scandal involving interbank lending rate Libor, used to set prices for trillions of dollars of financial products.
The benchmarks the Commission wants to make more "reliable, transparent and credible" also include commodities such as gold, cocoa, and Brent crude.
It would become an offence to transmit false or misleading information, provide "false or misleading inputs, or any action which manipulated the calculation of a benchmark", if the European Parliament and 27 EU member states endorse the proposals.
Although not cited specifically, that could include false reporting to oil price reporting agencies like Platts, the leading assessor of benchmark prices for physical Brent and other cash oil markets.
The proposals could be agreed quickly, possibly by the end of the year, as amendments to existing proposals on regulating market abuse.
Under the draft proposals, traders on over-the-counter physical markets and the price assessment agencies -- who collect information on physical trades that help to set benchmark values -- stand to come under greater scrutiny.
Individual EU member states would still be allowed to decide what penalties to set for offences, but it would no longer be possible for them to take a soft stance.
Sanctions have to be "effective, proportionate and dissuasive", the Commission said.
For years, national regulators have turned a blind eye to trading practices, especially in over-the-counter deals, that have pushed up or pulled down reference prices such as Brent. The benchmark is used for pricing more than two-thirds of the world's crude oil.
"By imposing criminal sanctions for serious market abuse throughout the EU we send a clear message to deter potential offenders -- if you commit insider dealing or market manipulation you face jail and a criminal record," the EU commissioner for the internal market, Michel Barnier, said.
"These proposals will heighten market integrity, promote investor confidence and level the playing field in the internal market."
Traders have long argued there is no need for increased regulation of commodity dealing, which they say are rooted in the physical realities of supply and demand, in contrast to major financial markets.
"Physical oil trading is a complex issue," said a senior oil market source, who would only comment on condition of anonymity. "We don't want to have to justify every transaction to a regulator who doesn't understand the nuance of the business."
Another senior oil executive drew a contrast between the oil trade and Libor.
"We're dealing with a liquid, real material. People do not get together to decide the price every day," he said. "And the price-reporting agencies quote a representative, fair value of what has been done."