While the European benchmark legislation was designed to add clarity to the marketplace after the LIBOR scandal, it may wind up causing European banks to drop derivatives positions.

Under the European Parliament Economic and Monetary Affairs Committee’s revised European benchmark legislation, EU based institutions will be forbidden from holding any products linked to unauthorized benchmarks.

Banks are finding this to be problematic, as it seems a majority of non-EU benchmarks will not meet the required standards to be considered authorized, which, as the rules currently stand, could include over the counter (OTC) derivatives.

In the original proposal for European benchmark legislation, the European Commission would have prevented EU financial institutions from using any benchmarks outside of Europe, unless they were produced by institutions with rules comparable to that of the EC. However, many are hoping to have this changed so that benchmarks from institutions who have agreed to the practices laid out by the International Organization of Securities Commission can also be accepted—though even that would rule out most non-EU benchmarks.

It seems unlikely that the European Commission will be giving much leeway to banks in this area, and while European officials are hoping to have the final rule ready by May, it will not be taking effect until later in 2014 or early 2015.