The Financial Benchmark India (FBIL) is in discussions with the Reserve Bank of India (RBI) and market participants to develop a new benchmark based on repo transactions, which is likely to replace the Mumbai Interbank Offered Rate (MIBOR), in a few years, sources aware of the matter have confirmed to FE. The British financial regulator is also planning to phase out the London Interbank Offered Rate (LIBOR) that is currently used to price almost $350 trillion of contracts worldwide. The idea is to move towards a transaction-based rate rather than a polling-based rate which was the subject of a big scandal in 2008. Although the MIBOR is already computed using actual transactions—based on trades executed on the NDS-Call systems excluding reciprocal and reported deals within the first one hour of trading— it is based on unsecured lending in a market that is witnessing falling volumes. As a result, the FBIL is exploring a new benchmark that will be based on repo transactions that have higher volumes and more participants than the call market on which the MIBOR is based.
“If you look at the money market today, you will realise that the call segment volumes are falling and has been taken over by market repo. This means there are more participants in the repo market with more number of transactions. And obviously the repo transactions are collateralised with government securities. So, it can work as a risk-free rate,” said a source involved in the process. CCIL data shows that on Monday, the repo volume stood at Rs 44,213.66 crore against a call volume of Rs 15,329.82 crore. “We are in discussions with the RBI and work is in progress to develop the methodology to develop the new repo benchmark,” the source added. Currently, the MIBOR is used in overnight indexed swap (OIS) transactions, certain floating rate debentures and loans. FBIL is not planning to completely phase out the MIBOR. It will continue to coexist with the repo benchmark till the time when the market completely shifts to the repo benchmark, the source pointed out.
“We can continue to keep the MIBOR as long as there are trades in the market. But over time if the volumes continue to decline and there is insufficient data set, it will be difficult. In this situation, you have to take stock if this benchmark is relevant for the country,” said the source. Bankers point out that the market is looking at a rate which is linked to a segment where more volumes and participants are involved rather than just the banks. “You want a benchmark which is liquid and which is as inclusive of a wide spectrum of market participants rather than just a few,” said a treasurer with a foreign bank. However, migration to a different underlying might have legal ramifications according to the banker.
“Usually the biggest issue is what do you do with the existing contracts based on MIBOR because some of them will last much longer. When the MIBOR shifted to the transaction-based methodology, there weren’t many difficulties because just the calculation agent and the methodology changed. When you are changing the underlying characteristics—in this case from call market to repo market—there is an issue with the migrating contracts also. It might have legal ramifications,” the banker pointed out. Different countries are now focussing on different possible successors when LIBOR is eventually phased out. For example, the US is looking at Treasury repo financing rate, while Switzerland is looking at SARON, which is based on its domestic repo market.