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The Reserve Bank of India (RBI)’s panel on financial benchmarks has made several recommendations to bring in more transparency and improve the functioning of financial benchmarks.
The panel said in its draft report the methodology used to calculate these benchmarks should be based on observable transactions. “The benchmark calculation may be based on observable transactions, wherever available, as the first layer of input subject to appropriate threshold criteria. The executable bids and offers, wherever available, subject to appropriate threshold and polled submissions, may be used as second and third layer of inputs respectively, in terms of hierarchy of inputs,” said the report.
Manipulation of several key global benchmark rates such as Libor, Euribor and Tibor led to the setting up of a committee to review the benchmark process.
The report was placed on RBI’s website for public comments. The terms of reference of the committee formed under the chairmanship of P Vijaya Bhaskar, executive director, RBI, were to study all major financial benchmarks in India to assess the relevance, usage and fallback mechanisms in the event of a benchmark being rendered obsolete as well as suggest changes to the list of benchmarks.
According to the recommendations, Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers’ Association of India (FEDAI) might be designated as administrators for rupee interest rate and foreign exchange benchmarks, respectively.
On the benchmark quality and setting methodology, the committee said though the methodologies followed for the benchmarks were generally satisfactory, several measures were needed to further strengthen the quality of benchmarks.
The committee favoured more RBI oversight in benchmark determination. Though there was no specific provision in the RBI Act on regulation of financial benchmarks, the committee’s opinion was that a broader interpretation of the provisions of the Act gave RBI the power to issue directions to benchmark administrators.
The overnight Mumbai Interbank Bid Rate or the Mumbai Interbank Offered Rate should be set up by volume-weighted average of trades executed between 9 am and 10 am on negotiated dealing system call operated by the Clearing Corporation of India, the report said. One recommendation also said banks might strive to develop the dollar/rupee basis swaps and dollar/rupee forwards (beyond one year), to obviate the need to use the Mumbai Interbank Forward Offer Rate.
Another recommendation said RBI might continue with the system of fixing reference rates, keeping in view the recent international moves where the official sector has assumed greater role in fixing financial benchmarks. Several central banks in developed and emerging economies publish such reference rates, said the report.
Besides, RBI reference rates might be based on volume-weighted average of actual transactions executed during a sufficiently longer time window in place of the existing polling method.
PANEL RECOMMENDS
- Amend RBI act to give it enhanced role in benchmark determination
- Make FIMMDA and FEDAI administrators for rupee interest benchmarks and foreign exchange benchmarks respectively
- Use volume weighted average of trades for Mibor settings
- Develop code of conduct for those submitting data
