Benchmark panel wants more powers for RBI to fix financial benchmarks

Significance of financial benchmarks emerged following revelations about manipulations of several key global benchmark rates like LIBOR, EURIBOR, TIBOR

The Reserve Bank of India (RBI) committee in its final report on financial benchmarks has asked for more powers for RBI including a tweak in the RBI Act so that the regulator has more role in fixing benchmarks. Besides that the committee has recommended the computation of overnight Mumbai Interbank Bid Rate (MIBID)- Mumbai Interbank Offered Rate (MIBOR) to be shifted to a method based on volume weighted average of trades.

The significance of financial benchmarks emerged following the revelations regarding manipulations of several key global benchmark rates like LIBOR, EURIBOR, TIBOR, etc

“Although the RBI Act does not have any specific provision for regulation of financial benchmarks, a broader interpretation of section 45W of the Act may empower RBI to issue directions to the Benchmark Administrators,” said the report submitted by the committee on financial benchmarks chaired by RBI executive director, P. Vijaya Bhaskar. However, in view of the extensive directions required to be issued by RBI to various agencies involved in benchmark determination, necessary amendments may be made in the section 45W, as a long term measure, to enable RBI to determine policies with regard to money, g-sec, credit and foreign exchange benchmarks in India and to issue binding directions to different agencies, the report added.

Currently the computation of overnight MIBID-MIBOR is through polling based method. As per the recommendations this should be shifted to volume weighted average of trades executed between 9 AM to 10 AM on Negotiated Dealing System (NDS) CALL operated by Clearing Corporation of India (CCIL). According to the report Fixed Income Money Market and Derivatives Association of India (FIMMDA) may decide appropriate timeline for effecting the change in consultation with RBI.

As per the report, FIMMDA may encourage more banks to participate in the polling for MIFOR and if need be, mandate the major banks in the foreign exchange forward market to participate in the polling.

However, according to the recommendations of the report, the 14-day, 1-month and 3-month MIBID-MIBOR may be fixed by CCIL through the polling process.

One of the recommendation also said that in the absence of interbank transactions in certain benchmarks/benchmark tenors, namely 1-month, 2-month and 1-year MIFOR; MITOR; and all Indian benchmark tenors except 1-year, may be phased out.

As per the report, RBI may bring the benchmark submission system of banks and Primary Dealers (PDs) under its on-site supervision and off-site monitoring. Besides that RBI may entrust the administration function of Rupee interest rate benchmarks and foreign exchange benchmarks with FIMMDA and Foreign Exchange Dealers’ Association of India (FEDAI) respectively.