Fledgling pan-E.U. securities regulator seeks to spread its wings

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Head office of the European Securities and Markets Authority in Paris. Courtsey ESMA

A reported proposal by the European Commission to put the London Interbank Offered Rate (Libor) and hundreds of other financial benchmarks under the oversight of the newish Paris-based European Securities and Markets Authority (ESMA) is likely first to raise a wry smile in London, and then bared teeth.

A draft of the regulation seen by the Financial Times, which first reported it, seeks to end the self-, and in the case of the commodities markets, non-regulation of these benchmarks, entrusting them instead to the supervision of the euro-bureaucrats. The draft regulations would require E.U. approval for any published benchmark used as a price reference for any financial instrument or contract — potentially covering hundreds of benchmarks used from oil markets to shipping and futures contracts.

In the case of the scandal-tainted Libor, that supervision would be taken away from London and conducted directly from Paris alongside that for its continental cousin, Euribor, as a “critical union benchmark”. Other benchmarks would be subject to a single rule book administered nationally, ESMA’s standard model.

Set up in 2011 to regulate credit rating agencies, ESMA is expanding its rule making across a range of financial activities from high frequency trading to shadow banking in line with its remit of investor protection and financial market stability. Its proposals on benchmarks oversight are likely to be published later this year, but not likely to get into law until at least next year, and then not without a fight.

Brussels has long sought to bolster its fledgling institutions of pan-European financial regulation. London is equally determined to resist them as a threat to its preeminence among Europe’s financial centers. Most recently it has dug its heels in against the imposition of a financial transactions tax and a proposed European banking union.

The alleged rigging of Libor has given the European Commission an opening that it has seized. It may have similar hopes for the outcome of an investigation it has recently launched into possible manipulation of energy market benchmarks.