UPDATE 1-Europe sets out plans to stop benchmark rigging
* EU's Barnier pares back ambition on EU oversight
* Earlier plans for blanket legal liability softened
* Industry warns new rules could undermine commodities
BRUSSELS, Sept 18 (Reuters) - European Union regulators proposed new rules on setting commodity and interest-rate benchmarks on Wednesday that backed away from their earlier plans for sweeping EU oversight of the multi-trillion-euro markets.
The draft law would regulate benchmarks for the first time at the European level and aims to prevent scandals such as the rigging of the London Interbank Offered Rate (Libor), used to price some $300 trillion of products including home loans and credit cards globally.
The rules will affect how all benchmarks are set, including North Sea Brent crude, which helps to determine the price of gasoline. Those such as Libor that are considered particularly critical because they are used as a reference for the largest markets will face extra supervision.
Earlier versions of the draft proposed oversight by an EU body in Paris, as favoured by some EU lawmakers. But the plans were watered down after objections from the commodities industry and Britain, the bloc's largest financial centre.
"It's not weak supervision that I'm proposing," said the EU's regulation chief, Michel Barnier. "I put my confidence in these British or Belgian supervisors to do their jobs."
The proposed rules chiefly rely on countries and their national authorities, in London and elsewhere, for enforcement.
However, the EU rules set guidelines for sanctions on individuals and firms and require contributors to sign a legally-binding EU-wide code of conduct.
London's main financial community said it was largely happy with the proposals although commodity traders said their business should be exempt from any Brussels oversight.
Traders, who for decades have relied on an all-but unregulated system of contributing information to guide prices for oil and other hugely valuable commodities, say the rules would discourage market participants from submitting their prices.
"The EU has watered it down a bit," said one oil industry executive, speaking on condition of anonymity. "But there are still some big problems - like requiring price reporting agencies to make their source sign a code of conduct."
Commodity price assessment agencies Platts, a unit of McGraw-Hill, and smaller rivals Argus and ICIS, part of Reed Elsevier, want Brussels to align merely with non-binding industry guidelines.
Analysts also said the proposals, which could take years of debate and revision before they become law, still had bite.
"For the first time in this sector, regulators are attempting to strengthen the nature of reputational markets, ensuring that administrators and submitters comply with a minimum set of standards to minimise the likelihood of manipulations," Diego Valiante, of Brussels-based think tank the Centre for European Policy Studies, said.
The European Parliament and EU member states will have to approve the draft before it become law and can toughen up, scrap or water down any part of it. 1/8ID:nL6N0G6342
Some lawmakers are disappointed that the proposals were eased. The EU originally wanted the European Securities and Markets Authority (ESMA), a thinly-staffed fledgling EU body based in Paris, to oversee the market but member states such as Britain complained.
Instead, groups of supervisors from different countries, as well as ESMA, will exchange information, according to the new proposals.
"It's disappointing," said Sven Giegold, a German member of the European Parliament. "The Commission has given in to British demands to keep oversight of Libor and that is a mistake."
"The national supervisors didn't catch previous manipulation and I would expect more independence from a European Authority," he said.
But in London, some welcomed the change.
"This is a positive sign that European policymakers understand the need for flexibility when it comes to supervising LIBOR and other benchmarks," said Mark Boleat, Policy Chairman at the City of London Corporation.
"A one-size-fits-all approach would be inappropriate, especially given that significant reforms have already been put forward by British regulators."
The gentle legislative response follows total fines of $2.6 billion on Royal Bank of Scotland, Barclays and Swiss bank UBS over the rigging of Libor.
The Commission's antitrust chief continues to investigate benchmarks including Libor and has also raided offices of oil majors Shell, BP and Statoil in an investigation of suspected manipulation of oil prices.