Banks lobby RBI to approve new benchmark for overnight indexed swaps

By Bhaskar Dutta

 

A group of Indian lenders has asked the central bank to approve a new benchmark for overnight indexed swaps, according to people familiar with the matter.

 

The banks want the swaps to reference the newly-proposed Secured Overnight Rupee Rate (SORR) instead of the prevailing Mumbai Interbank Outright Rate (MIBOR), the people said, asking not to be named as the discussions are private. 

 

The move is intended to improve price discovery in the interest-rate swap market, an opaque but important part of the financial system that helps banks and corporations manage their risks. 

 

An industry body reached out to banks this month to start work on the formulation of the SORR, the people said. Swap trades linked to the new rate could start once deliberations on the SORR are complete and the industry body publishes the market conventions, they said.

 

Following this, there could be two benchmarks for overnight derivatives, giving banks the choice of which reference rate to use. 

 

The RBI, which regulates interest-rate derivatives, approved a proposal to develop the SORR on Dec. 6, citing the need to improve the credibility of interest-rate benchmarks. The central bank didn’t respond to an email request for comment.

 

Shift to Repo

The banks argue that MIBOR is no longer the best benchmark for the swap market since it is based on uncollateralized transactions, which have seen a sharp drop in volumes over the past decade. 

 

In contrast, SORR will be based on repurchase agreements. Daily volumes in India’s tri-party repo market are around 3 trillion rupees ($35.3 billion), while those in the bilateral repo market are around 1.4 trillion rupees, according to data from the Clearing Corporation of India Ltd. Volumes in both markets have jumped more than 400% over the past decade.

 

India’s repo markets have a wide range of participants including mutual funds and insurance companies, whose assets have grown significantly as the economy expanded. Meanwhile, the interbank call-money market — the reference point for MIBOR — is restricted to banks and primary dealers.

 

The daily volume of interbank call-money trades fell by 31% over the past decade to around 106 billion rupees, according to CCIL data.

 

A full transition to the SORR would take time as consensus would be required on key issues, including legal matters and client preferences regarding the status of outstanding positions, the people said.