Facing the energy crisis in the EU
As highlighted in the 2022 State of the Union address the gas market has changed dramatically: from mainly pipeline gas to increasing amounts of liquefied natural gas (LNG). But the benchmark used in the gas market – the title transfer facility (TTF) – has not been adapted to reflect this. This is why the Commission will work on establishing a more representative benchmark.
In recent years financial markets have become increasingly global, giving rise to new trading platforms and technologies. This unfortunately has also led to new possibilities to manipulate these markets. Following the LIBOR (London Interbank Offered Rate) scandal, serious concerns were raised about the absence of rules governing benchmarks. A benchmark is an index or indicator used to price financial instruments and financial contracts or to measure the performance of an investment fund. Its manipulation can result in significant losses for consumers and investors.
New rules against market abuse
As part of its work to make financial markets sounder and more transparent, in June 2014 the EU enacted new rules against market abuse. The new rules strengthened and replaced the original market abuse directive (MAD). Adopted in 2003, the MAD introduced a framework to harmonise core concepts and rules on market abuse and strengthen cooperation between regulators. However, these rules were eventually outpaced by the growth of new trading platforms, over-the-counter trading and new technology such as high frequency trading. This is why the Commission proposed to replace the MAD with a regulation and a new directive on market abuse.
Market Abuse Regulation
The Market Abuse Regulation (MAR) broadens the scope of instruments covered by the market abuse framework, strengthening in particular the regime for commodity and related derivative markets. It explicitly bans the manipulation of benchmarks (such as LIBOR) and reinforces the investigative and sanctioning powers of regulators. It also ensures a single rulebook while reducing administrative burdens on smaller and medium-sized issuers where possible.
Market Abuse Directive
The new Market Abuse Directive (new MAD) complements the MAR by requiring Member States to introduce common definitions of criminal offences of insider dealing and market manipulation, and to impose maximum criminal penalties for the most serious market abuse offences. Member States have to make sure that such behaviour, including the manipulation of benchmarks, is a criminal offence, punishable with effective sanctions everywhere in Europe.
To complement sanctioning regime provided by the new MAD and MAR, in 2016 the EU adopted a specific Benchmark Regulation. The regulation establishes a common set of rules governing the production and use of benchmarks across different Member States. In particular, under the new rules
- ensuring that benchmark administrators are subject to prior authorisation and on-going supervision depending on the type of benchmark (e.g. commodity or interest-rate benchmarks)
- improving their governance (e.g. management of conflicts of interest) and requiring greater transparency of how a benchmark is produced
- ensuring the appropriate supervision of critical benchmarks, such as Euribor/Libor, the failure of which might create risks for many market participants and even for the functioning and integrity of markets of financial stability
On 24 July 2020 the Commission adopted a proposal to amend EU rules on financial benchmarks to ensure that when a widely used benchmark is phased out it does not cause disruptions to the economy and harm financial stability in the EU.
Targeted consultation on the regime applicable to the use of benchmarks administered in a third country
LIBOR, one of the most used benchmarks globally, will soon cease to be published.
This proposal aims to ensure that when a widely used benchmark is phased out it may be replaced by an alternative benchmark.
The purpose of this consultation is to gather stakeholders’ feedback on the functioning of the EU benchmarks regime, 2 years after entry into application.