Reserve Bank of India seeks overhaul of financial benchmarking methods

Written by PTI | Mumbai | Updated: Jan 4 2014, 20:07pm hrs
RBIFinancial benchmarking is a process by which the central bank can arrive at global best practices.
The Reserve Bank of India (RBI) today suggested an overhaul of existing financial benchmarks, including steps to strengthen the quality, methodology and governance framework.

Apart from this, it also called for amending the statutes to empower RBI to determine the policy for benchmarks and issuing binding directions to all the agencies involved in the benchmark-setting process.

These suggestions are made in a 'Draft report of the committee on financial benchmarks' and sought public comments on the report by January 17.

The RBI had set up a committee under its Executive Director P Vijaya Bhaskar on June 28, 2013 with a mandate to study the various issues relating to financial benchmarks and to submit the report by December 31.

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 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 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.

Pending amendments to the RBI Act, the report recommended "appropriate regulatory and supervisory framework to be put in place by RBI for financial benchmarks under its existing statutory powers." Financial benchmarks are primarily used for pricing, valuation and settlement purposes in financial contracts, the RBI said in the report.

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 for the stability of the financial system, it added.

Financial benchmarking is a process by which the central bank can arrive at global best practices by comparing and evaluating the various aspects of the existing practices in money, government securities (G-Secs), credit and forex markets.

It can be noted that Iosco (International Organisation of Securities Commissions) released its final report on 'Principles for Financial Benchmarks last July, which was endorsed by the FSB. The benchmark administrators are required to disclose their compliance with the Iosco principles by July 2014.

The panel had the mandate to review all the major rupee interest rate and forex benchmarks like the Mibid-Mibor, Mifor, INBMK, Miois, Miocs, G-Secs yield curve, prices for SDL, spreads for GoI FRBs, prices for corporate bonds, T-bills etc, based on their extent of usage and relevance to the financial system.

The major forex benchmarks are RBI reference rate, Fedai's spot fixings, month-end revaluation rates for forex spot and forward contracts, forex-rupee option implied volatility and FCNR-B rates.

The committee reviewed these major benchmarks with regard to their quality, setting methodology and governance systems.

On the benchmark quality and setting methodology, report observes that although the methodologies followed are generally satisfactory, several measures need to be taken to further strengthen the benchmark quality and setting methodology.