* EU's Barnier pares back ambition on EU oversight
* Earlier plans for blanket legal liability softened
* Industry warns new rules could undermine commodities
European Union regulators proposed new rules on Wednesday on how commodity-price and interest-rate benchmarks are set, but the plans are a paring back of original ambitions for greater EU oversight of the multi-trillion-euro markets.
The draft law, presented by the EU's regulation chief Michel Barnier, is a central element of the bloc's response to the rigging of the London Interbank Offered Rate (Libor) - a benchmark used to price products from home loans to credit cards worth $300 trillion.
It will also affect how the price of commodities, including North Seat Brent crude, a critical oil benchmark, are set.
Although the legislation introduces regulation to an area that has until now thrived beyond such scrutiny, it will chiefly rely on countries and their national authorities, in London and elsewhere, for enforcement.
The rules row back on earlier plans for blanket legal liability on those who contribute data to set prices, although there is provision for sanctions as well as a legally binding code of conduct that has worried some in the commodities industry that this could undermine their price setting.
"Benchmarks are at the heart of the financial system: they are critical for our markets as well as the mortgages and savings of millions of our citizens, yet until now they have been largely unregulated and unsupervised," said Barnier.
"Today's proposals will ensure for the first time that all benchmark providers have to be authorised and supervised; they will enhance transparency and tackle conflicts of interest."
The announcement fell short of what some lawmakers in Brussels had hoped for, while many in the commodities industry felt it went too far and could undermine the benchmarks they use to determine prices. The rules will also apply to benchmarks used to set the price of physical commodities such as North Sea Brent crude oil.
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.
An earlier suggestion that the European Securities and Markets Authority (ESMA), a thinly-staffed fledgling EU body based in Paris, could do alone the job was dropped.
In the draft document, officials instead say that groups of supervisors from different countries, as well as ESMA, should exchange information.
"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.
Following criticism, the draft rules attempt to avoid imposing liability should the benchmark prove misleading, although lobbyists said that a proposal that participants sign a code of conduct could scare some off.
Industry lobbyists conceded that the European Commission, which proposes draft EU laws for approval by the bloc's countries and parliament, has softened the rules, but they still want a further scaling back.
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.
The European Parliament and EU member states will have to approve the draft before it become law, a process that could drag on for years.