Money Market Regulator On Cards

After several unsuccessful attempts, banks and primary dealers are finally forming an autonomous, self-regulatory body for the money and securities market trading that will promote a liquid debt and derivatives market and set common standards for the participants.

The move has come as a shot in the arm for the money and gilts market which, until now, had no authority to take up its cause or put in place a regulatory framework. The daily turnover of this segment is approximately Rs 10,000 crore.

Christened Fixed Income Money Market and Derivatives Association (FIMMDA), the association will help the inter-bank term rate to take off. The association will be modeled on the lines of Zurich-based International Securities Dealers Association (ISDA) and the International Securities Management's Association (ISMA). The articles of association of the organisationhave already been drafted.

 

FIMMDA has set up a pilot committee of five banks: ANZ Grindlays Bank PLC, State Bank of India, Deutsche Bank AG, Bank of America and Global Trust Bank. The committee is trying to get statutory recognition for the association. It will invite the Reserve Bank of India for a debate on the issue before it applies for a formal registration.

Previous attempts to form such a regulatory association had failed as nationalised banks were wary of foreign banks' participation. However, SBI's involvement has evoked a good response from all the banks. SBI has vowed to support the venture, which proposes to standardise market practices and develop a code of conduct for the participants.

While the Foreign Exchange Dealers Association of India (Fedai) sets guidelines and imparts depth to the forex market, the Indian Banks' Association takes up the broader issues related to the banking industry. This has led to the money and securities market being virtually ignored.

Further, there is no clear definition of the role of each player in the inter-bank market. In fact, this was one of the main reasons behind the 1992 securities scam.

In1991-92, banks were caught between brokers and counter-party transactions. Brokers were acting as counter-party agents. The lack of a code of conduct and established guidelines led to the scam, said a foreign bank treasury head. Moreover, some banks defaulted when calls zoomed to dizzy heights a few years ago. Thus hence the need for the er-bank participants.

Membership to FIMMDA is open to all scheduled commercial banks, primary dealers and developmental financial institutions recognised by the RBI. It is intended to include market makers and principals only.

THE OBJECTIVES

* Standardise market practices and documentation for physical and derivatives markets

* Develop international practices and a code of conduct

* Undertake market developmental activities such as introduction of a benchmark rate