EU softens new rules on benchmark rigging

* EU Commission to outline rules following Libor rigging

* New law will also apply to commodity benchmarks

* Earlier plan for central EU supervision pared back

By Barbara Lewis and John O'Donnell

BRUSSELS, Sept 17 (Reuters) - EU regulators will abandonearlier plans to place commodity and financial benchmarks underthe sole watch of a Paris-based regulator when they announce alegal framework to prevent price rigging on Wednesday.

The draft law, to be presented by the European Union'sregulation chief Michel Barnier, is a central plank of thebloc's response to the rigging of the London Interbank OfferedRate (Libor) - a benchmark used to price products from homeloans to credit cards worth $300 trillion.

But while the new rules, which will also apply to benchmarksused to set the price of physical commodities such as North SeaBrent crude oil, introduce regulation to an area that thrivedbeyond the scrutiny, they will chiefly rely on countries toenforce them, according to a draft seen by Reuters.

An earlier suggestion that the European Securities andMarkets Authority (ESMA), a thinly-staffed fledgling EU bodybased in Paris, could do alone the job was dropped.

In the draft document, officials instead say that groups ofsupervisors from different countries, as well as ESMA, shouldexchange information.

Industry lobbyists conceded that the European Commission,which proposes draft EU laws before they are approved by thebloc's countries and parliament, has softened the rules, butthey still want a further scaling back.

"The EU has watered it down a bit," said one oil industryexecutive, speaking on condition of anonymity. "But there arestill some big problems - like requiring price reportingagencies to make their source sign a code of conduct."

Price assessment agencies Platts, a unit of McGraw-Hill, and smaller rivals Argus and ICIS, part of ReedElsevier, want Brussels to just align with non-bindingindustry guidelines.

"As it makes its way through the European legislativeprocess, we will continue to work with regulatory andlegislative officials," a spokesman for Platts said.

Argus earlier this year warned that the new rules could makebenchmarks unworkable.

Following criticism, the draft rules attempt to avoidimposing liability should the benchmark prove misleadingalthough lobbyists said that a proposal that participants sign acode of conduct could scare some off.

The gentle legislative response follows total fines of $2.6billion on Royal Bank of Scotland, Barclays andSwiss bank UBS over the rigging of Libor.

The Commission's antitrust chief continues to probebenchmarks including Libor and has also raided offices of oilmajors Shell, BP and Statoil in aninvestigation of suspected manipulation of oil prices.

The European Parliament and EU member states will have toapprove the draft before it become law, a process that coulddrag on for years.