A European proposal to regulate financial benchmarks that have been tainted by manipulation allegations is running into criticism from the U.S. Treasury Department.
The plan requires that other countries have equivalent oversight of indexes, which could prevent European banks and asset managers from using U.S. benchmarks, according to a counselor to Treasury Secretary Jacob J. Lew. Europe wants national governments to take responsibility for regulating financial and commodity benchmarks—something the U.S. has no plans to do.
The "prescriptive standard" included in the European Commission's proposal "goes well beyond" the scope of new oversight of benchmarks envisioned by a group of global authorities, Randall DeValk, the Treasury counselor, wrote in a Dec. 16 letter to lawmakers. The U.S. "does not plan to adopt direct supervision of benchmarks," DeValk added.
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Benchmarks are used to price everything from student loans to mortgages, oil, and currencies. Global regulators have moved to tighten oversight of the gauges after the world's largest banks paid billions of dollars to settle allegations of rigging the London interbank offered rate (LIBOR) and other interest rates. Six banks paid US$4.3 billion last month to settle probes into the manipulation of foreign-exchange rates.
Meanwhile, European Commission investigators have been examining possible rigging of energy-price benchmarks since early 2013 and in October raided companies involved in the production, distribution, and trading of ethanol.
The European Commission's regulatory proposal, first released in September 2013, was designed to curb conflicts of interest at banks and other firms that submit data to firms administrating benchmarks. The plan would apply to all benchmarks that are used to reference products traded on exchanges.
The broad scope of Europe's proposal has spurred opposition from New York-based McGraw Hill Financial Inc., which owns Platts energy benchmarks and S&P Dow Jones Indices. The requirement that the U.S. have equivalent oversight of its administrators is "rigid and narrowly drawn," the company said in a paper last month responding to the proposal.
"There is risk in over-reaching regulation which would impede market growth without appreciable benefits," David Wargin, a McGraw Hill spokesman, said in a statement. The proposal "could lead to less transparent and less effective functioning of benchmarks," he said.
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The company's concerns are shared by the Commodity Futures Trading Commission (CFTC), the primary U.S. regulator of the derivatives market. In a Nov. 19 letter to U.S. lawmakers, CFTC Chairman Timothy Massad said the proposal would prohibit European banks and asset managers from using thousands of products on U.S. futures exchanges and swap-trading platforms.
In a letter this year, U.S. Representatives K. Michael Conaway and David Scott asked Treasury and the CFTC for their views on the proposal. The two lawmakers, who are senior members of the House Committee that oversees derivatives regulation and the CFTC, said it would disrupt commodity benchmarks, including those for oil.
"The rules proposed by the European Commission appear to move away from international harmonization and towards fragmentation of these benchmarks," Conaway, a Texas Republican, and Scott, a Georgia Democrat, wrote in Nov. 10 letter to Lew.
The proposal is currently being debated in the European Parliament and within governments of the 28 nations represented in the group.
Cora van Nieuwenhuizen, the legislator leading parliament's work on the draft law, has said the rules for benchmarks set in non-European Union nations are too demanding. Italy, which holds the rotating presidency of the EU, also said yesterday in a report that work is underway to rewrite the proposal because it would be too tough on rates set outside the group.
Bloomberg LP, the parent of Bloomberg News, competes with Platts and other companies in providing energy markets news and information.
–With assistance from Ian Katz in Washington.
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