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* ESMA wants benchmarks based on "observable transactions"
* New ESMA guidelines a stop gap before new EU law
* EU law would be tougher on financial, commodity indices
* ESMA being lined up to regulate top benchmarks
By Huw Jones and John O'Donnell
LONDON/BRUSSELS June 6 (Reuters) - European Union regulatorspublished guidelines on Thursday to stop banks rigging Libor andother market benchmarks in an interim measure before a morefar-reaching EU law comes in.
The draft law, to be published in a few weeks, would proposeshifting the supervision of Libor from London to Paris.
Two British banks, Royal Bank of Scotland andBarclays, and Swiss bank UBS, were fined atotal of $2.6 billion for rigging Libor, with other banks set tobe punished for similar abuses.
Libor - the London Interbank Offered Rate - is used as abasis for pricing financial products from home loans to creditcards worth over $300 trillion globally.
"The final principles now give clarity to benchmarkproviders and users in the European Union about what is expectedof them when engaged in this critical market activity," saidSteven Maijoor, chairman of the European Securities and MarketsAuthority (ESMA), the Paris-based pan-EU watchdog.
The principles were drawn up with the European BankingAuthority provide a framework for administrating, calculating,publishing and submitting quotes for compiling all benchmarks.
Draft guidelines were published in January and Thursday'sfinal version also requires benchmark providers to havecontingency plans if data for compiling the index dries up.
Another new element is that data used to compile a benchmarkshould represent the underlying asset, such as a commodity orinterest rates and based on "observable transactions enteredinto at arm's length."
This aims to try and satisfy regulators like Gary Gensler,head of the U.S. Commodity Futures Trading Commission, who wantsLibor scrapped and replaced with a benchmark based on markettransactions, a step other regulators say is not feasible in theshort term.
Libor is based on rates at which banks think they can borrowfrom each other but in the aftermath of the Lehman Brotherscollapse in 2008, interbank lending froze but Libor rates werestill published.
Maijoor said the immediate adoption of the principles willhelp restore confidence in financial benchmarks and prepare theway for future legislative changes.
NEXT STOP PARIS
EU financial services chief Michel Barnier will in comingweeks publish the draft law that will incorporate all theprinciples which were originally agreed at the global level.
In an annex to the draft law, Barnier will also set out atougher regime for financial and commodities benchmarks.
The draft law is expected to propose that ESMA directlyregulates such benchmarks that are deemed to be of pan-EUcritical importance to markets, with Libor and its continentalequivalent Euribor almost certainly falling into this category.
Some widely used oil benchmarks could also be included andthis part of the market is already being probed by Brussels.
"Benchmarks have a global relevance," an official familiarwith Barnier's proposal said. "There should be a Europeandimension to their supervision."
Libor was not regulated until Britain's new FinancialConduct Authority was set up in April this year and if approved,its supervision of the interest rate would shift to Paris.
The ESMA principles do not broach the issue of whether banksshould be compelled to contribute to interest rate benchmarks toensure there are enough quotes to make them representative.Several banks have pulled out of panels that compile Libor andEuribor.
