Banks, FIMMDA discuss MIBOR replacement with collateralised rate framework

Banks bat for collateralised benchmark with a balanced 50-50 weighting between TREPS and CHROMs

Banks have suggested phasing out the uncollateralised Mumbai Interbank Offer Rate (MIBOR) and proposed a new benchmark for the interest rate derivatives market, according to sources privy to the development.

 

This came after the Reserve Bank of India’s (RBI’s) MIBOR Committee released a report on October 1. It recommended changes in the methodology of MIBOR while proposing a shift to a new benchmark for derivative products.

 

Fixed Income Money Market and Derivatives Association of India (FIMMDA) recently held a meeting with bankers to discuss transitioning India’s interest rate derivatives market from the current uncollateralised MIBOR benchmark to a collateralised framework, similar to international standards.

 

The meeting was organised for feedback on the RBI’s report which sought feedback from the market by November 15.

 

The banks proposed a new benchmark for interest rate derivatives market with a balanced 50-50 weighting between TREPS (Tri Party Repo) and CHROMs (Collateralised Borrowing and Lending Obligations in the Overnight Money Market), according to sources.

 

“FIMMDA sought feedback from member banks and organised a call for discussions on the new proposal. The market is advocating for the transition away from the uncollateralised reference rate to a collateralised rate, similar to the Secured Overnight Financing Rate (SOFR),” said the treasury head at a private bank.

 

“Banks were in agreement with this and discussion was around assigning 50 per cent to TREPs and 50 per cent to CHROMs,” he added.

 

SOFR is a benchmark interest rate that reflects the cost of overnight borrowing, collateralised by US Treasury securities. It was introduced as an alternative to the London Interbank Offered Rate (LIBOR), which had long been used globally across multiple currencies and financial contracts.

 

Operational aspects such as the benchmark’s working hours were also discussed during the meeting.

 

MIBOR is currently based on the first hour of trading, while there were suggestions to base the new rate on a broader window, potentially the full trading day. Banks raised concerns over timing discrepancies, as any delay in publishing could affect market functionality.

 

Another major discussion point was the introduction of a collateralised interest rate derivative product and its coexistence with the current derivative instruments like the Overnight Index Swap (OIS).

 

With India’s limited derivatives market, participants debated whether both products should run concurrently for a transition period or if there should be a clear cutover. The next step involves a consultation between FIMMDA and the RBI to finalise a market-aligned approach.

 

“If we start with a new interest rate derivative product, we will have to figure out how volumes are between the current interest rate derivative product and the new interest rate derivative product, and then eventually the old one will have to get cannibalised,” said the treasury head at a private bank.

 

“Those were some of the thoughts like should we do a cutover or should we run it in parallel for six months. FIMMDA can’t decide on that. The RBI will first have to have a discussion with FIMMDA and then figure out what they finally want markets to do,” said the treasury head.

 

A separate point raised in the MIBOR Committee’s report on foreign portfolio investors should be allowed broader access to the derivatives market for purposes beyond hedging was not discussed in detail during the meeting.