EBA and ESMA Get Tough On Euribor

The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published the results of their joint work on Euribor. ESMA and the EBA have identified significant weaknesses and insufficiencies in the governance of the Euribor rate-setting mechanism.

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

1. 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;

2. 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); 3. 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;

4. The definition of Euribor is not sufficiently clear as it is based on terms which create ambiguity; and

5. The rates being quoted are not assessed sufficiently against evidence from real transactions.

The two authorities also made a number of recommendations to EEBF, aimed at improving the governance of the rate-setting process. ESMA and EBA want to transform Euribor into a more 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 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.

There are ten recommendations, mostly to create a more independent, impartial and transparent Euribor Steering Committee. The recommendations include increasing the ESC’s independence from the banking industry by diversifying their membership, re-defining Euribor in a clearer way, and performing internal and external audits.

Andrea Enria, EBA Chair, said: “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.”

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 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.