Published On: Tue, Jun 23rd, 2015

Money market traders’ firm to set Mumbai inter-bank rate

Money market traders’ firm to set Mumbai inter-bank rate
Mumbai: The association of bond dealers, local currency traders and bankers on Monday formed a new firm to fix the
Mumbai Inter-Bank Offer Rate (Mibor), in line with a Reserve Bank of India (RBI) panel recommendation which seeks to avoid a Libor (London Interbank Offer Rate) like fiasco in India.
Mibor is the rate at which banks lend and borrow overnight money to each other.
The Fixed Income Money Market and Derivatives Association of India (FIMMDA), the Foreign Exchange Dealers’ Association of India (FEDAI) and the Indian Banks’ Association have together formed a new firm named the Board of Financial Benchmarks India Pvt. Ltd (FBIL), which will henceforth administer the Mibor.
“(This new rate) is a first step in the process of taking over responsibility of benchmark setting over a period of time. Based on a detailed analysis of overnight call money market data, the board has decided to adopt a benchmark based on trade weighted inter-bank call money transactions on the Clearing Corp. of India Ltd’s NDS-Call platform between 9am and 10am. The new benchmark will be known as the FBIL Overnight Mumbai Interbank Outright Rate (FBIL-Overnight Mibor),” the firm said in an emailed release.
The new firm comes into existence after an RBI committee led by executive director P. Vijaya Bhaskar suggested that Indian money markets should move their benchmark rates to transaction-based rather than a poll-based system to ensure that benchmark interest rates are not manipulated. RBI had accepted the committee’s recommendations and directed FIMMDA, FEDAI and IBA to take necessary action in 2014. “In order to overcome the possible conflicts of interest in the benchmark setting process arising out of the current governance structure of FIMMDA and FEDAI, an independent body either separately or jointly may be formed,” RBI had said.
The Bhaskar panel was formed in 2013 following reports of widespread rigging of the Libor in Europe.
FIMMDA chairman and chief financial officer (CFO) at IDBI Bank Ltd N.S. Venkatesh, who was also a part of the panel, said the main change in the new Mibor setting will be that the rate will be set on “dealt rates rather than polled rates by banks”.
“Earlier, the National Stock Exchange (NSE) system used to poll rates to get the daily benchmark rate, which meant banks could say whatever rate they felt which kept the possibility of rigging alive. Now this new company will arrive at the benchmark by taking only the rates at which trades are dealt, which will negate the possibility of rigging,” Venkatesh said.
“This will improve integrity and credibility of the local financial market,” Venkatesh added.
FIMMDA owns 76% of the new firm, FEDAI owns 14% and IBA owns the remaining 10%, Venkatesh said.
The new rates will start functioning from 22 July, FBIL said in the emailed statement.
“The current FIMMDA-NSE Mibor polled overnight benchmark will cease to be published from the effective date. All transactions outstanding on the effective date referenced to the current benchmark FIMMDA-NSE Mibor will automatically switch to the new reference rate…” the release said.
The Mibor rate closed at 7.21% on Monday, slightly higher from 7.17% of Friday.
Following the transition of the Mibor rate, FBIL will take over administration of forex benchmarks and other rupee interest-rate benchmarks over a period of time after a careful examination of the methodology and utility to the financial markets in consultation with the stakeholders, the company said.
“There will be periodic review of the benchmark methods to ensure they are robust and conform to the best governance standards,” the company said.
The FBIL board is headed by former RBI deputy governor Usha Thorat and includes five other members, namely, former FIMMDA chief executiveC.E.S. Azariah; FEDAI CEO D.G. Patwardhan; N.R. Prabhala, head of research of the RBI-backed Centre for Advanced Financial Research and Learning; D.V.S.S.V. Prasad, current FIMMDA CEO; and former State Bank of India managing director Sangeet Shukla.
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