'RBI should've more power over financial benchmarks'

A Reserve Bank of India (RBI) committee 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. In its report released on Friday, the committee also recommended the computation of overnight Mumbai Interbank Bid Rate (Mibid) and Mumbai Interbank Offered Rate (Mibor) to be shifted to a method based on volume weighted average of trades.

The significance of financial benchmarks emerged in the wake of revelations regarding manipulations of key global benchmark rates such as 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.

In view of the extensive directions to be issued by RBI to various agencies involved in benchmark determination, the reported noted that necessary amendments may be made to let RBI determine policies on money, G-sec, credit and foreign exchange benchmarks.

Currently, the computation of overnight Mibid-Mibor is through a polling-based method. According to the recommendations, this should be shifted to the volume-weighted average of trades executed between 9:00 AM and 10:00 AM on negotiated dealing system-call operated by Clearing Corporation of India (CCIL). According to the report, Fixed Income Money Market and Derivatives Association of India (FIMMDA) may decide an appropriate timeline for effecting the change in consultation with RBI.

The report notes that FIMMDA may encourage more banks to participate in the polling for Mumbai Interbank Forward Offer Rate (Mifor) and, if need be, mandate the major banks in the foreign exchange forward market to participate in the polling.

According to the report, the 14-day, one-month and three-month Mibid-Mibor may be fixed by CCIL through the polling process.

RBI may bring the benchmark submission system of banks and primary dealers under its on-site supervision and off-site monitoring.

The central bank may also entrust the administration function of rupee interest rate benchmarks and foreign exchange benchmarks with FIMMDA and Foreign Exchange Dealers' Association of India, respectively.