March deadline for code to tackle fixing of interbank lending rates
European regulators have until March to impose a code of conduct on banks contributing to the creation of the Euribor interbank lending rate benchmark. The deadline is included in recommendations published by the European Securities and Markets Authority and the European Banking Authority following their joint work on benchmark rate-setting processes in the wake of the Barclays Libor scandal and other rate-fixing revelations.
The relevant authorities in European Union member states are recommended to request Euribor panel banks to draft new internal codes of conduct, or review existing codes, for Euribor submissions and have submitters and their direct managers “acknowledge in writing that they have read the code of conduct and that they commit to abide by it”. This should be completed by 11 March 2013, the report says.
The recommendations set out what a code of conduct should include, particularly in the form of a conflicts of interest policy covering “effective procedures to prevent or control the exchange of information between staff engaged in activities involving a risk of conflict of interests where the exchange of that information may affect the benchmark data submitted”.
The rules should also, unsurprisingly, ban “any direct link between the remuneration of staff involved in benchmark data submissions and the remuneration of, or revenues generated by, different staff principally engaged in another activity, where a conflict of interest may arise in relation to those activities”.
There are also potentially onerous requirements on the recording and verification of data: “Competent authorities are recommended to request panel banks to establish, implement and maintain adequate internal control mechanisms designed to secure compliance with the code of conduct. Controls performed on the data submitted should include comparisons with actual, transaction-based, verifiable data. Controls should also aim to identify any reverse transaction subsequent to a submission. The compliance function should report its findings, including reverse transactions to senior management on a regular basis. Submissions and procedures should be subject to periodic independent internal and external reviews.”
To ensure compliance panel banks will be asked by their local regulator to keep “appropriate records of all relevant aspects of submissions, including the staff members involved in single submissions” in a “medium that allows the storage of information to be accessible for future reference with a documented audit trail”.
And for any bank that thinks all of that might be best avoided by not being part of the Euribor panel, ESMA and the EBA say that “competent authorities are recommended to encourage banks to be part of the Euribor panel due to the importance of this reference rate in their own markets”.
Steven Maijoor, ESMA chairman, said: “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.”