Neutral agency might be mandated to fix Mibor

A shift in the calculation of the Mumbai Interbank Offered Rate (Mibor) from the polled to the dealt method will be effective if the calculation is entrusted to a separate company, one that has no vested interest in the market, it is felt.

Currently, the Mibor is calculated through the polling-based method. In 2002, the Fixed Income Money Market and Derivatives Association of India (FIIMDA) and the National Stock Exchange of India Ltd (NSEIL) had joined hands to publish daily quotes on the Mibor. The polling process is conducted by NSEIL; treasury officials of banks are asked to participate in the poll.

Last week, in a report on financial benchmarks, a Reserve Bank of India (RBI) committee suggested the computation be shifted to the volume-weighted average of trades executed between 9 am and 10 am on the Negotiated Dealing System (NDS) call operated by the Clearing Corporation of India. The committee is headed by P Vijaya Bhaskar, executive director of RBI.

The report said the FIMMDA would decide an appropriate timeline for effecting the change, in consultation with RBI. FIMMDA would also take necessary steps to facilitate a smooth transition in this regard, it added.

“To my mind, taking the dealt method of computation is the best thing to do, against the polled method. But one agency has to be appointed for doing the computation. The agency will publish the Mibor. This agency should have no interest in this market; only then will the objective be achieved. This can be done either by FIMMDA floating a separate company and putting the responsibility of calculating the Mibor on this company or the government can set up a company that will not have vested interests in the market,” said the head of treasury of a public sector bank.

When it comes to benchmark computation, liquidity is seen as an important aspect. “The dealt method is the best method if there are substantial volumes in the market. Liquidity should be a criterion in setting the benchmark. Initially, pilot-testing should be done and then, it should be finalised, based on the results,” said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund.

Earlier, revelations regarding manipulations of several key global benchmark rates such as the London Interbank Offered Rate (Libor), the Euro Interbank Offered Rate and the Tokyo Interbank Offered Rate had shown the importance of financial benchmarks. Experts believe with the calculation of the Mibor becoming more transparent, its use will increase in time.

Currently, the Mibor is used for most interest rate swap deals, forward rate agreements, floating rate debentures and term deposits. However, its application is meagre compared to the Libor, which is used as a global benchmark for interest rates.

Libor is used as the base rate for deciding interest rates for loans, savings and mortgages. It is also used as the base rate for many financial products, including futures, options and swaps.

MIBOR Primer:

* MIBOR is currently a polled benchmark.

* MIBOR is used for deals struck for interest rate swaps, forward rate agreements, floating rate debentures and term deposits.

* Experts believe manipulations can occur even in the dealt method of calculating MIBOR.

* There is a need for pilot testing for computation of MIBOR based on volume weighted average of trades

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