RBI Committee to study financial benchmarks

Also to study international experience in addressing issues relating to benchmarks and draw suitable lessons relevant to the Indian context

The Reserve Bank of India (RBI) has set up a committee to study various issues relating to financial benchmarks.

P Vijaya Bhaskar, executive director,  is the chairman of the committee and it will have representation of select market participants, Clearing Corporation of India and academia, RBI said.

The terms of reference of the committee are to study all major financial benchmarks in India, with a view to assessing their current relevance and usage, fallback mechanisms in place in the event of a benchmark being rendered obsolete and suggest changes, if required, for inclusion of new benchmarks or exclusion of some of the existing benchmarks.

According to the treasury heads of a few banks, the main purpose for forming this committee is because the central bank wants to review the method of fixing benchmarks like the Mumbai Interbank Offered Rate, or Mibor, following the Libor (London Interbank Offered Rate) scam in which, banks were found manipulating the benchmark for profit.

The Mibor is currently a polled benchmark. The rate is arrived at by a poll of 30 banks, which is conducted by the National Stock Exchange every morning. The rate is the average of all the quotes given by the banks, though the outliers are ignored while arriving at the average. In the past, the central bank and treasury officials of banks had discussions on whether the method of arriving at the Mibor should be based on dealt rates rather than polled rates.

The committee has been asked to study international experience in addressing issues relating to benchmarks and draw suitable lessons relevant to the Indian context.

It will examine the governance mechanisms within the organisations computing the benchmarks, with a view to assessing conflicts of interest and if  required, would suggest measures for mitigating such conflicts and enhancing transparency.

This committee would look into the need for regulators’ involvement in computation and dissemination of benchmarks and if required, would advise on appropriate systems and processes.

RBI has directed this committee to suggest mechanisms for dealing with transition issues arising out of legacy contracts in the event of markets shifting to a new benchmark.

It is required to propose a system of supervisory oversight in respect of institutions involved in computing and disseminating the benchmarks.

The committee has been asked to give its report by December 31 this year.