The Fixed Income Money Market and Derivatives Association of India (FIMMDA) and the Foreign Exchange Dealers Association of India (FEDAI) may be designated as administrators for all rupee interest rate and foreign exchange benchmarks, respectively, according to an RBI committee.
These two administrators will be primarily responsible for all aspects of the financial benchmark determination in their respective areas, according to the draft report of the committee on financial benchmarks.
FIMMDA is a voluntary market body for the bond, money and derivatives markets. FEDAI is a self-regulatory body, whose major activities include framing of rules governing the conduct of inter-bank foreign exchange business and liaison with the RBI for reforms and development of the forex market.
Financial benchmarks are primarily used for pricing, valuation and settlement purposes in financial contracts.
The aggregate volume of underlying financial contracts referenced to or valued through financial benchmarks being quite huge, the robustness and reliability of financial benchmarks play a critical role in the stability of the financial system.
Recent global developments with regard to manipulation of several key global benchmark rates have raised concerns about the reliability of financial benchmarks, particularly about their governance frameworks and setting methodologies.
The mechanics The Benchmark Administrator may publicly disclose individual submissions after a suitable lag, the committee, which was headed by P. Vijaya Bhaskar, said.
The overnight MIBID-MIBOR (Mumbai Interbank Bid Rate – Mumbai Interbank Offered Rate) setting may be shifted from the existing polling method to volume weighted average of trades executed between 9 am and 10 am. MIBID is the interest rate that a bank would be willing to pay to attract a deposit from another participant bank in the interbank market. MIBOR is the interest rate at which banks can borrow funds from other banks in the interbank market.
The committee said the RBI may continue with the existing system of fixation of reference rates keeping in view the recent international developments where the official sector is assuming greater role in fixation of financial benchmarks and the fact that several central banks in developed as well as emerging economies publish such reference rates. The US Dollar (USD)/Indian Rupee (INR) reference rate of the RBI may be based on volume weighted average of spot transactions obtained from defined source/s covering a sufficiently longer time window.
The RBI may fix only USD/INR reference rate and publish other three rates — Euro/INR, British Pound/INR and Yen/INR — by crossing the USD/INR reference rate with the ruling EUR/USD.
As liquidity in the FCY/INR option market improves, FEDAI may, in consultation with active market makers, take steps for developing a dealing platform for the instrument.