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* IOSCO says benchmarks should be based on transactions
* But bid, offer quotes and expert judgement can be used
* Watchdog will check on compliance within 18 months
* IOSCO members to make benchmark rigging a specific offence
By Huw Jones
LONDON, July 17 (Reuters) - Global regulators will givebanks and traders some leeway in compiling financial benchmarkssuch as Libor, stopping short of U.S. calls for more radicalaction to stamp out price rigging.
The guidance from the International Organisation ofSecurities Commissions (IOSCO) on Wednesday will cover allbenchmarks, which are central cogs in the global economy, frominterest rates to equities and gold.
It follows public outrage after banks UBS, RBS and Barclays were fined $2.6 billion in totalfor manipulating the London Interbank Offered Rate or Libor.
Libor, which is used to price over $300 trillion in homeloans to credit cards, is based on banks estimating whatinterest rate they think they could borrow at from another bank.
Gary Gensler, chairman of the U.S. Commodity Futures TradingCommission and co-chairman of IOSCO, has called for Libor to bescrapped as soon as possible and replaced with a benchmark basedonly on transactions, rather than estimates.
Critics of this approach point to the fact that interbankmarkets dried up at the height of the financial crisis, makingit impossible to use actual transactions to compile a benchmark.
Banks say benchmarks based on trades can also bemanipulated, while IOSCO's other co-chairman, Martin Wheatley ofBritain's Financial Conduct Authority, believes a rapidtransition to a transactions-only benchmark is not practical andwould disrupt markets.
IOSCO's guidance, the first attempt to forge a globalapproach and avoid conflicting national rules, allows someflexibility and represents a toning down of what was perceivedas its initial view that benchmarks should be based only ontransactions.
The watchdog said on Wednesday data used to construct abenchmark should be based on prices, rates and indices from anactive market but this "does not mean that every individualbenchmark determination must be constructed solely fromtransaction data".
It sets out a "hierarchy of data inputs", saying althoughtransactions are the best basis for a benchmark, others such asbid and offer quotes and "expert judgement" can also be used.
COMPLIANCE CHECK
The watchdog, comprising regulators from the world's mainsecurities markets, said it will check within 18 months if itsmembers are applying the guidance, which is not legally binding.
Critics worry that steps already being taken by Britain,Singapore, Japan, Hong Kong and the European Union - all IOSCOmembers and required to apply the watchdog's rules - may notmesh together.
IOSCO also said it expects oil price reporting agencies(PRAs) such as Platts to stick to a separate set of principlespublished last October, which kept in place existing practices.
It said it would decide whether to bring oil price PRAs'principles closer to new benchmark guidance when an ongoingreview of PRAs' principles is finished next year.
IOSCO said its members will also have to adopt rules thatmake rigging benchmarks an offence, a step Britain and theEuropean Union have just taken.
Gensler said in the IOSCO statement he was pleased thatbenchmarks will have to be anchored by observable transactions.
The appointment last week of U.S. exchange NYSE Euronext asthe new administrator for Libor in London may help reassure theUnited States that serious reform is underway.
The guidance is part of wider benchmark reform efforts bythe world's group of top 20 economies (G20) and published tocoincide with a meeting of G20 finance ministers in Moscow.
The G20's regulatory task force, the Financial StabilityBoard, has set up its own working group on interest ratebenchmarks and reports back next year. It will look at howtransition to a more market based interest rate benchmark couldwork and what to do when markets dry up.
