EU Parliament Change Could Delay LIBOR Regulation

June 30, 2014


The indexing industry’s push for better regulation has been dealt a blow by the dissolution of the European Parliament’s Economic and Monetary Affairs Committee (ECON), following last month’s European elections.

The new regulations have been shrouded in controversy and slow to come to market since the LIBOR scandal two years ago, and now face further delays while a new committee is appointed. The committee, which had been making headway with the new rules, was disbanded following the European elections and members of the committee either resigned or were not re-elected. It is now unclear whether the new committee will continue where its chair, Sharon Bowles, left off or start all over again.

Should the process begin again, it could be a blow to the indexing industry. It was hoped that new regulation would help fix the LIBOR issues, while protecting the industry as a whole.

The indexing industry covers all asset classes: equities, FX, fixed income, commodities, real estate, hedge funds, among others and there are also many different types of indexes. It is also considered to include: index providers such as MSCI, STOXX and Solactive who get their prices from regulated exchanges; price reporting agencies, such as Platts and Argus who report the traded prices of the oil and other commodity markets; and rate setters for rates such as LIBOR and EURIBOR that are considered price takers as they take prices that are submitted by banks.

However, one of the issues index providers have spent time addressing with the regulators is the difference between price takers and price providers, and avoiding a blanket approach in the regulation.

Alex Matturri, CEO at S&P, told warned that regulators appear to be heading for a one-solution-fixes-all, which is unsuitable for index providers.

“LIBOR became a political issue, but then we had allegations of currency manipulation, manipulation in commodities, so I think the regulators are afraid of what is next to fall,” Matturri said.

“With this one size fits all approach they do understand that there are differences between price takers and price providers, but they are afraid of ‘what if’ something happens down the road. It means there is a risk that they are going to over-regulate, which will be detrimental to the industry in the long run.”

One of the risks with over-regulating is that it could make barriers to entry too high.

Rick Redding, CEO of the Index Industry Association, also told “The concern on the regulatory cost is that they will make the barriers to entry too high and new players won’t be able to get in…..If you only have a couple of users and the only thing that you have to compete on is price, it means that the asset manager loses out and therefore the investor is likely to lose out.”

Next month it will become clear who is on what committee and whether the work that has been undertaken so far will be continued, or whether the new committee will start again. In the meantime, the rules published by the International Organisation of Securities Commission (IOSCO) this time last year, will come into force next month. They are anticipated to be used and followed by the commercial index providers.


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