By John O'Donnell and Barbara Lewis
BRUSSELS (Reuters) - European Union regulators proposed the first set of EU-wide rules to stamp out rigging of commodity and interest-rate benchmarks, forcing transparency on multi-trillion-euro markets that have previously escaped scrutiny.
The draft law aims to prevent scandals such as the rigging of the London Interbank Offered Rate (Libor), used to price some $300 trillion of products including home loans and credit cards globally.
If agreed, the legislation will affect how all benchmarks are set, including North Sea Brent crude, which helps to determine the price of gasoline. The reform will introduce a basic legal framework, with standards and sanctions, to govern all benchmarks across the 28-country European Union.
The rules will mainly be enforced by national regulators but benchmarks that are considered particularly critical because they are used as a reference for the largest markets will face extra scrutiny from a group of EU member state supervisors.
"For the first time in this sector, regulators are attempting to strengthen the nature of reputational markets, ensuring that administrators and submitters comply with a minimum set of standards to minimise the likelihood of manipulations," Diego Valiante, of Brussels-based think tank the Centre for European Policy Studies, said.
The Commission wants supervisors to be able to force banks or others to contribute data to those critical benchmarks, such as Libor, defined as those used as a reference for at least 500 billion euros ($667 billion) of financial instruments.
This would cover some interest-rate benchmarks, but Commission officials said they expected it to exempt most commodities. This could change in the course of negotiations to finalise the law.
One of Germany's top regulators questioned the practicality of forcing participation.
"It is not a good idea for a regulator or a supervisor to force a bank to submit to a benchmark if the bank has got valid reasons why it's not doing it," Elke Koenig, the president of regulator Bafin told journalists.
Earlier versions of the draft proposed oversight for all benchmarks by an EU body in Paris, as favoured by some lawmakers. But the plans were watered down after objections from the commodities industry and Britain, the bloc's largest financial centre.
The proposed rules chiefly rely on countries and their national authorities, in London and elsewhere, for enforcement.
"It's not weak supervision that I'm proposing," said the EU's regulation chief, Michel Barnier. "I put my confidence in these British or Belgian supervisors to do their jobs."
London's main financial community said it was largely happy with the proposals although commodity traders said their business should be exempt from any Brussels oversight.
Traders, who for decades have relied on an all-but unregulated system of contributing information to guide prices for oil and other valuable commodities, say the rules would discourage market participants from submitting their prices.
For the critical interest-rate benchmarks, regulators would have the power to demand banks submit price data. This would help reverse a trend of banks wanting to disassociate themselves from some benchmarks, making them difficult to compile.
"The EU has watered it down a bit," said one oil industry executive, speaking on condition of anonymity. "But there are still some big problems - like requiring price reporting agencies to make their source sign a code of conduct."
Commodity price assessment agencies Platts, a unit of McGraw-Hill (MHFI.M), and smaller rivals Argus and ICIS, part of Reed Elsevier (REL.L), want Brussels to align merely with non-binding industry guidelines.
The European Parliament and EU member states will have to approve the draft before it become law and could toughen up, scrap or water down any part of it.
Some lawmakers are disappointed that the proposals were eased. The EU originally wanted the European Securities and Markets Authority (ESMA), a thinly-staffed fledgling EU body based in Paris, to oversee the market but member states such as Britain complained.
Instead, groups of supervisors from different countries, as well as ESMA, will exchange information, according to the new proposals.
"It's disappointing," said Sven Giegold, a German member of the European Parliament. "The Commission has given in to British demands to keep oversight of Libor and that is a mistake."
"The national supervisors didn't catch previous manipulation and I would expect more independence from a European Authority," he said.
But in London, some welcomed the change.
"This is a positive sign that European policymakers understand the need for flexibility when it comes to supervising Libor and other benchmarks," said Mark Boleat, Policy Chairman at the City of London Corporation.
"A one-size-fits-all approach would be inappropriate, especially given that significant reforms have already been put forward by British regulators."
The legislative response follows total fines of $2.6 billion on Royal Bank of Scotland (RBS.L), Barclays (BARC.L) and Swiss bank UBS (UBSN.VX) over the rigging of Libor.
The Commission's antitrust chief continues to investigate benchmarks including Libor and has also raided offices of oil majors Shell (RDSa.L), BP (BP.L) and Statoil (STL.OL) in an investigation of suspected manipulation of oil prices.
(Additional reporting by Peg Mackey and Huw Jones in London and Jonathan Gould in Frankfurt; editing by David Stamp and Anna Willard)