Libor control to remain in London

Brussels has ditched its plan to put the scandal-mired Libor lending rate under the direct control of a European supervisor in Paris, in a concession that removes a serious political nuisance for Britain.

Early drafts of the European Commission regulation, which is to be unveiled next week, called for shifting direct supervision of Libor from London to the European Securities and Markets Authority, based in France.

A revised version, seen by the Financial Times, waters down the reforms so that London remains the primary authority for Libor, able to implement its wide-ranging review to restore faith in the flagship interest rate benchmark.

However the Commission will propose that a college of supervisors from various member states should play a role in oversight, given the EU-wide risks of cross-border fallout from poor controls.

This includes giving Esma the legal clout to mediate disputes between supervisors with binding decisions. London has resisted giving this power to a European watchdog in other financial regulation. "Esma's legally binding mediation is a key element of the achievement of co-ordination, supervisory consistency and convergence," the draft said.

The changes are a significant victory for the UK Treasury, which mounted a concerted behind-the-scenes effort in Brussels to kill the original Libor supervision plan.

When amending the draft, Michel Barnier, the commissioner responsible for the plans, took account of both the strength of UK objections and the capacity of Esma to take on further responsibilities given its limited resources.

It is one of several significant changes to the reforms, which overhaul regulation of pricing benchmarks for thousands of markets from oil and gold to shipping. The broad sweep and intrusiveness of the draft blueprint worried both providers and users of benchmarks.

The Commission has diluted a strict liability measure that make providers and contributors responsible for compensating users for "any loss suffered" as a result of a faulty benchmark or a breach of the rules. The latest draft goes no further than existing national law.

However for "critical benchmarks" such as Libor and Euribor, regulators will be given the power to force banks to participate - a power that raised concern in industry. Several banks quit the Euribor benchmark in spite of warnings that contributions may be mandatory in future.

Some tweaks are also made to clarify that oil benchmarks will not be defined as "critical" and therefore under a tougher regime. However the amendments are unlikely to fully assuage fears that the burden of new rules will convince contributors to give up on benchmarks, especially in obscure commodity markets.

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Mr Barnier's proposal will be unveiled at a late stage in the legislative calendar, raising a big doubts over whether the reforms can be passed before the European elections next year.

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