Traders who try to rig the Libor benchmark interest rate, stock indexes or oil prices would be sent to jail for a minimum of five years under rules backed overwhelmingly by an influential European Parliament committee on Tuesday.
The updating of EU market abuse rules was proposed last year but news in June of Barclays' record 290 million pounds fine for rigging the London Interbank Offered Rate, or Libor, prompted lawmakers to include extra provisions for benchmark rates.
The assembly's economic affairs committee voted by 39 to 1 to specify that insider dealing or manipulation of benchmarks such as Libor is illegal.
"It was a massive failing that we weren't able to prosecute some of these traders personally in the Libor case, because we don't have the law to cover it. That will change after today's vote," said Arlene McCarthy, the British center-left lawmaker steering the changes through parliament.
The UK Financial Services Authority had to fine Barclays for breaches of its general principles as Libor does not come under the EU's current market abuse rules.
The revised EU law will make rigging or attempted rigging of a wide range of markets and benchmarks, not just Libor, a criminal offence.
These include interest rates, currencies, interbank offered rates, indexes and other types of financial instruments, as well as the EU's carbon market and commodities benchmarks including gold, cocoa and Brent crude.
The revised rules would give enforcement authorities much wider discretion than under the current system as they also make attempts to manipulate markets an offence, regardless of the outcome.
Michael McKee, a partner at DLA Piper, a law firm, said such wider powers could mean regulators become too powerful, although courts will expect a high standard of proof in criminal cases.
"As a lawyer I do think there is an excessive amount of discretion here, but as a matter of practice, there is no tolerance from the general public, never mind governments and regulators, for manipulation and the industry will just have to get used to it," McKee said.
FIVE YEARS JAIL
The committee said serious abuses should be punished by jail terms of at least five years, with a minimum of two years for less serious offences.
Traders based outside Europe who are suspected of manipulating EU benchmarks could face possible extradition to answer criminal charges, provided regulators in other countries are ready to cooperate, McCarthy said.
The vote means that lawmakers will now sit down with the EU's member states to finalize the rules before the end of this year, with the proposed minimum jail terms likely to prove the most contentious issue.
"We voted that no-one should serve less than five years for serious breaches in terms of a jail term. This remains to be negotiated with the member states, and I hope that they will accept that perpetrators should face the full force of the law," McCarthy told Reuters.
The deadline for entry into force of the rules must also be agreed in the negotiations. The committee wants a deadline of no later than January 2014, whereas the EU's executive - the European Commission - proposed giving countries up to two years to put the sanctions in place.
The revision approved by lawmakers also forces stock exchanges to levy higher fees on traders that have many of their orders cancelled.
This is a direct attempt to curb high-frequency traders who use computers to dart in and out of markets to exploit tiny price differences in the blink of an eye.
Policymakers accused them of creating volatility but the sector says it provides useful volumes to markets.
Computerized trading firms would have to tell regulators about any significant changes to their trading strategies.
The European Commission would also specify a ratio for cancelled-to-filled orders, above which trading platforms would impose the higher fees.
The lawmakers backed requiring the European Securities and Markets Authority to set up two advisory committees, the first on high-frequency trading, the second on new technology in financial markets in a bid to keep abreast of rapid changes in markets that have left regulators having to play catch-up.
(Writing by Huw Jones; Editing by Giles Elgood)