The European Commission (EC) has acted to make interest-rate manipulation a crime across the EU. This will cover behaviour of the type seen in London and elsewhere in the London Interbank Offered Rate (LIBOR) scandal. Meanwhile, the EC’s investigation into possible cartels linked to the manipulation of interest-rate benchmarks continues.
The EC adopted amendments to its proposals for a Regulation and a Directive on insider dealing and market manipulation, including criminal sanctions, initially put forward for agreement to the Member States and the European Parliament on 20 October 2011.
These amendments will clearly prohibit the manipulation of benchmarks, including LIBOR and the Euro Interbank Offered Rate (EURIBOR), and make such manipulation a criminal offence.
EU action is necessary because of the cross-border dimension of these benchmarks, the organisations, such as major banking groups, that contribute data to these benchmarks and the financial instruments which can be affected. Without clear EU-level rules, there is a danger that national rules could be circumvented.
The amendments to the proposed Regulation on insider dealing and market manipulation will include a definition of benchmarks and expand the definition of market manipulation to explicitly include manipulating those benchmarks. Once agreed by national ministers and by the European Parliament the Regulation will apply directly EU-wide, without the need for additional measures in national law.
The amendments to the proposed Directive on criminal sanctions for insider dealing and market manipulation will reflect the above changes to the Regulation and will include manipulating benchmarks in the list of offences subject to criminal sanctions. The EC is not proposing to set the minimum types and levels of the relevant criminal sanctions at this stage, but does propose that each Member State should provide for criminal sanctions in national laws implementing the Directive.
Vice president Viviane Reding, the EU’s Justice Commissioner, said: “EU action is needed to put an end to criminal activity in the banking sector and criminal law can serve as a strong deterrent. This is why we are today proposing EU-wide rules to tackle this type of market abuse and close any regulatory loopholes. A swift agreement on these proposals will help restore much needed confidence of the public and investors in this crucial sector of the economy.”
The EC is in parallel investigating possible price-fixing cartels linked to manipulation by some banks of interest rate benchmarks. If some banks colluded to manipulate a benchmark rate, such collusion would seriously distort competition in markets for interest rate derivatives such as swaps and futures. In 2011, interest rate derivatives had a gross market value of US$20 trillion.
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