Ever since the LIBOR rigging scandal broke out, there have been different people who looked to close the Pandora’s Box in one way or the other – from market officials who wanted a quick solution and substitution of the rate to legislators who wanted tighter restrictions on the financial markets. There were also investors and participants of the markets who wanted some sort of punishment handed to the people involved. It seems that the European Union Parliament has moved ahead in order to seek jail time for the guilty personnel.
Monday saw the parliament’s economic affairs committee back new rules that would make this activity an abuse of EU market rules and would be brought under the umbrella of insider trading. In this case, insider trading is made up of gaming the system to take advantage in any way possible. There have been calls to set minimum criminal sentences of 2-5 years. The prison sentence is being used for the first time compared to fines earlier. The harsher stance is due to the fact that fines have mostly been ineffective before and failed to reach their desired goals.
The move can be seen as a positive effect on the markets as it protects the investors from future manipulations. However, one has to ask what will these rules and laws hold for other countries and how comprehensive is European Union Parliament’s jurisdiction. Another question that has to be asked is the fact that a rate or measure that is set in the UK by the BBA and used mostly in the UK and US has laws being set by the European Union Parliament rather British or American institutions.
It is not sure if it will be imposed on any of the countries that were actually involved. For example, European Union Parliament laws would be more applicable to the EURIBOR (Europe Interbank Borrowing Rate) which only applies in Europe which raises question marks on its implementation. Lastly, many of the companies involved are multinationals so trying to target them can be a question of infringement of a country’s sovereignty where the offence actually took place.
These issues still have to be looked into and need a further debate. The debate can involve joining these laws together so that prosecution can practise a more freehand in investigating and punishing the parties involved. A cross border task force can be created which would not only joins hands and resources to investigate any such actions before they take place and if they do, come together to punish the guilty accordingly. This will be able to carry out the necessary steps in order to rectify the situation that exists right now and would set precedents for the future as well.
The investigation till now has fined Barclays £290 million ($464.67m) as it has been seen as the major bank which used the LIBOR in order to earn illegal profits. The bill, which is expected to be signed into law next Tuesday, will cover interest rates, currencies, benchmarks, indices, interbank rates like EURIBOR and LIBOR and any derivatives which can be manipulated by the market. Authorities in the UK and US have been dealing with this dilemma as they want to regulate the markets so that manipulation cannot take place. However, they do not want to give an indication that they are overreaching in terms of regulation or intervening into free markets which should be left on their own to operate as they want. Till now, action by the SEC and FSA has mostly concerned all the stake holders.
The bill proposed is a positive one and it should strengthen the investor confidence that exists in the market. The implementation and legality of such a law is still under question and how it would apply to the LIBOR manipulation has to be seen. The committee which was created to propose the laws did get suggestions from the financial industry and that is why the laws proposed seem to be equitable after taking into consideration the offences that have been committed in the past. Future cooperation and integration across borders is still required in order to make the laws more effective and potent in case of future abuses. The next few months would be key to see if the European Union Parliament is able to use this platform it has put in place to rectify the situation or becomes an obsolete lawmaking body where laws are made but not enforced.