Recommends suitable amendments to the RBI Act as a long-term measure

A Committee on Financial Benchmarks, headed by Reserve Bank of India Executive Director P. Vijaya Bhaskar, has suggested increased role for the apex bank for the oversight of the benchmark setting process.

The RBI has put up on its website the draft report of the committee for comments.

The committee has recommended a change in the way of determining the money market benchmarks so as to remove any possible scope for manipulation.

The draft report has recommended that the overnight Mumbai Inter-bank Bid Rate-Mumbai Inter-bank Offered Rate (Mibid-Mibor) fixing be based on “the volume-based weighted average of traded rates from 9 to 10 in the morning.’’

That would move pricing away from the current polling method, which is based on a poll of trader submissions.

The committee has also recommended basing the government securities yield curve, including for illiquid debt, on the basis of volume-based weighted average rates instead of last traded yields.

The committed has also proposed banks set pricing for state development bonds at a spread based on the last two auctions, instead of calculating those bond yields at a fixed spread of 25 basis points over government debt.

The report provides an in-depth analysis of the existing benchmark-setting methodology and governance framework of the major rupee interest rate and foreign exchange benchmarks. While finding the existing system to be generally satisfactory, the report, however, has recommended several measures/principles to be followed to strengthen the benchmark quality, setting methodology and governance framework of the benchmark administrators, calculation agents and submitters.

After reviewing the existing regulatory powers of the RBI over the financial benchmarks, the committee has recommended suitable amendments to the RBI Act as a long-term measure. The objective is to explicitly empower the RBI to determine policy with regard to benchmarks used in money, G-sec, credit and foreign exchange markets in India, and also to issue binding directions to all the agencies involved in the benchmark-setting. Although there is no specific provision in the RBI Act for the regulation of financial benchmarks, the committee is of the view that “a broader interpretation of Section 45W of the RBI Act empowers the RBI to issue direction to the benchmark administrators.’’ As a long-term measure, it has suggested amendment to Section 45W of the RBI Act.

Pending amendments, the committee feels that the RBI could entrust the administration functions of the rupee interest rate and foreign exchange benchmarks to the Fixed Income Money Market and Derivatives Association (FIMMDA) and the Foreign Exchange Dealers' Association of India (FEDAI), respectively. They could suitably amend their memorandum and articles of associations, the committee has noted.

The RBI, according to the committee, “may advice banks and primary dealers to strengthen the governance framework for benchmark submission and to extend necessary support to the administrator for strengthening the benchmark setting process.’’

In the committee’s view, “the RBI may bring the benchmark submission system of banks and primary dealers under its on-site supervision and off-site monitoring.’’ It has also favoured the setting up of an internal expert group to conduct periodic on-site inspection of the benchmark administrators and calculation agents, and also monitor their activities through an off-site monitoring system.

The committee was set up in the aftermath of revelations regarding manipulations of several key global benchmark rates, namely, LIBOR, EURIBOR and TIBOR. It was set up on June 28, 2013, with a mandate to study various issues relating to financial benchmarks in India, and to submit the report by December 31, 2013.

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