Finance minister Pranab Mukherjee is likely to clarify in Parliament that the new law on the regulation of hybrid financial products will not in any way affect the autonomy of RBI. The language of the recent ordinance in this regard will be suitably altered to ensure only financial products strictly falling between two regulators will be examined by the statutory committee set up under it.
Besides, the Committee will look at such cases, as they may arise in the future, only after the RBI and the high-level coordination committee on capital markets (HLCC) have fully examined them. The panel will not preempt either RBI or HLCC in any way.
The government?s move is aimed at assuaging RBI?s concerns even as it is keen to push the ordinance and convert it into a legislation ratified by Parliament.
Highly placed sources said the central bank won?t have to fear any loss of autonomy let alone suffer a status downgrade owing to the new statutory committee for inter-regulator arbitration in the area of hybrid products. According to the sources, Mukherjee would state specifically when he moves the relevant Bill in the House in the Monsoon Session that the new set-up won?t undermine RBI?s mandate under the RBI Act to frame the policies for and also to regulate transactions in, all kinds of financial derivatives, along with money market instruments and securities.
The move is in the backdrop of RBI’s anxiety that the new committee headed by the finance minister could impinge on its supervisory authority over certain derivative instruments like currency and interest rate futures, as they fall under more than one regulatory jurisdictions. Any oversight on how these derivatives markets behave could adversely influence the rectitude of monetary policy-making, the RBI reckons.
RBI’s fear that its influence could wane is also founded on the difference in the constitution of HLCC and the new statutory committee. While HLCC is headed by RBI governor and due to that very fact, recognises the monetary authority’s primacy over other regulators, the governor is just a member of the new committee along with other regulators and two secretaries to the government.
Section 45 U, V, W and X of the RBI Act unambiguously spell out the anchor role of the central bank in devising policies for derivatives and regulating transactions in these instruments. Derivatives derive value from underlying asset/s including a change in interest rate or foreign exchange rate and can be designed in myriad ways. The complexity of their design could even lead to wrong assessment of the risks they could pose to the financial system.
Sources said the role of statutory committee for resolution of inter-regulator disputes would be distinct from the proposed Financial Stability & Development Council insofar as the former is a problem-solver while the latter is designed to be a set-up for regular regulatory coordination — an imperative in the era of globalised finance and the perceived greater risks to financial systems.
The regulatory duality can arise not only from the hybrid nature of instruments but also due to situations like an institution being under a particular’s regulator’s remit while the instrument it deals with fall under another. For example, an NBFC not registered with RBI comes under Sebi’s purview but if it deals with currency futures, RBI would need to supervise that.
The express purpose of the June 18 ordinance was to declare, in the context of a tussle between Sebi and Irda, that life insurance business includes Ulips or scrips or any such instrument or unit with the twin components of investment and insurance. But the government also used it to set up the statutory committee for resolving disputes over hybrid products that might arise in future between regulators.