RBI issues norms for setting up FBAs for fixing efficient benchmarks for financial instruments

The Reserve Bank of India (RBI) on Wednesday issued guidelines for setting up of financial benchmark administrator (FBA) for administering "significant benchmarks" in the markets for financial instruments.

Benchmarks administered outside India do not fall under the scope of the guidelines, the RBI said in a statement.

Significant benchmark means any benchmark notified by the Reserve Bank of India, it said adding that the central bank will notify a benchmark as a 'significant benchmark' taking into consideration its use, efficiency and relevance in domestic financial markets.

"No FBA will administer a 'significant benchmark' without obtaining authorisation of the Reserve Bank under these directions. However, FBAs that were already administering the 'significant benchmark' may continue to do so till the disposal of their applications by the Reserve Bank," it said.

FBA will be a company incorporated in India and will maintain a minimum net worth of Rs 1 crore at all times, it said.

FBAs will ensure that a 'significant benchmark' is designed to be an accurate and reliable representation of the referenced (specified) financial instrument, it said.

It will also ensure that the "data used to construct a 'significant benchmark' is based on an active market involving arm's length transactions. Where such transactions are not available, it shall record justification for any data, information or expert judgment used to construct the benchmark," it said.

FBAs will submit to the RBI such data and reports within such timelines and in such formats as advised from time to time, it said adding that they should also submit periodic return or report on their compliance with the directions or instructions issued by the the central bank within such timelines and in such formats as advised from time to time.

The guidelines are based on the report submitted by a committee under its executive director P Vijaya Bhaskar on June 28, 2013.

The panel was set up in the aftermath of revelations that several key global benchmark rates like the Libor, Euribor of European Union, Tibor of Tokyo, etc, were rigged by leading market operators like RBS, and several global standard setting bodies, national regulators.

This led to self-regulatory bodies reviewing the benchmark setting processes and coming out with wide ranging reforms to enhance the robustness and reliability of financial benchmarks.

The RBI's draft report, while noting that the existing system is generally satisfactory, called for "several measures/principles to strengthen the benchmark quality, setting methodology and governance framework of the benchmark administrators, calculation agents and submitters".

It had also called for "amendments to the RBI Act, as a long-term measure, to explicitly empower RBI to determine the policy with regard to benchmarks used in money, G-secs, credit and forex markets and to issue binding directions to all the agencies involved in the benchmark-setting.