EU lawmakers back jail for interest rate riggers

* MEPs want minimum five year jail terms for worst offences

* Suspect traders outside EU could face extradition

* Rules due to be finalised by year-end

By Charlie Dunmore

BRUSSELS, Oct 9 (Reuters) - Traders who try to rig the Liborbenchmark interest rate, stock indexes or oil prices would besent to jail for a minimum of five years under rules backedoverwhelmingly by an influential European Parliament committeeon Tuesday.

The updating of EU market abuse rules was proposed last yearbut news in June of Barclays' record 290 million poundsfine for rigging the London Interbank Offered Rate, or Libor,prompted lawmakers to include extra provisions for benchmarkrates.

The assembly's economic affairs committee voted by 39 to 1to specify that insider dealing or manipulation of benchmarkssuch as Libor is illegal.

"It was a massive failing that we weren't able to prosecutesome of these traders personally in the Libor case, because wedon't have the law to cover it. That will change after today'svote," said Arlene McCarthy, the British centre-left lawmakersteering the changes through parliament.

The UK Financial Services Authority had to fine Barclays forbreaches of its general principles as Libor does not come underthe EU's current market abuse rules.

The revised EU law will make rigging or attempted rigging ofa wide range of markets and benchmarks, not just Libor, acriminal offence.

These include interest rates, currencies, inter bank offeredrates, indexes and other types of financial instruments, as wellas the EU's carbon market and commodities benchmarks includinggold, cocoa and Brent crude.

The revised rules would give enforcement authorities muchwider discretion than under the current system as they also makeattempts to manipulate markets an offence, regardless of theoutcome.

Michael McKee, a partner at DLA Piper, a law firm, said suchwider powers could mean regulators become too powerful, althoughcourts will expect a high standard of proof in criminal cases.

"As a lawyer I do think there is an excessive amount ofdiscretion here, but as a matter of practice, there is notolerance from the general public, never mind governments andregulators, for manipulation and the industry will just have toget used to it," McKee said.


The committee said serious abuses should be punished by jailterms of at least five years, with a minimum of two years forless serious offences.

Traders based outside Europe who are suspected ofmanipulating EU benchmarks could face possible extradition toanswer criminal charges, provided regulators in other countriesare ready to cooperate, McCarthy said.

The vote means that lawmakers will now sit down with theEU's member states to finalise the rules before the end of thisyear, wi th the proposed minimum jail terms likely to prove themost contentious issue.

"We voted that no-one should serve less than five years forserious breaches in terms of a jail term. This remains to benegotiated with the member states, and I hope that they willaccept that perpetrators should face the full force of the law,"McCarthy told Reuters.

The deadline for entry into force of the rules must also beagreed in the negotiations. The committee wants a deadline of nolater than January 2014, whereas the EU's executive - theEuropean Commission - proposed giving countries up to two yearsto put the sanctions in place.

The revision approved by lawmakers also forces stockexchanges to levy higher fees on traders that have many of theirorders cancelled.

This is a direct attempt to curb high-frequency traders whouse computers to dart in and out of markets to exploit tinyprice differences in the blink of an eye.

Policymakers accused them of creating volatility but thesector says it provides useful volumes to markets.

Computerised trading firms would have to tell regulatorsabout any significant changes to their trading strategies.

The European Commission would also specify a ratio forcancelled-to-filled orders, above which trading platforms wouldimpose the higher fees.

The lawmakers backed requiring the European Securities andMarkets Authority to set up two advisory committees, the firston high-frequency trading, the second on new technology infinancial markets in a bid to keep abreast of rapid changes inmarkets that have left regulators having to play catch-up.

(Writing by Huw Jones; Editing by Giles Elgood)

((huw.jones@thomsonreuters.com)(+44 207 542 3326)(ReutersMessaging: huw.jones.thomsonreuters.com@reuters.net))