The Reserve Bank of India on Wednesday said an independent body, either separately or jointly, may be formed for administration of rupee interest rate and foreign exchange benchmarks by self-regulatory market bodies, FIMMDA and FEDAI. This is to overcome possible conflict of interest in the financial benchmark setting process.
The central bank said the conflict of interest could arise due to the current governance structure of FIMMDA (Fixed Income Money Market and Derivatives Association of India) and FEDAI (Foreign Exchange Dealers Association of India).
FIMMDA is an association of scheduled commercial banks, public financial institutions, primary dealers and insurance companies. FEDAI is an association of banks dealing in foreign exchange in India.
In case of benchmarks determined based on polled submissions, FIMMDA and FEDAI may select the benchmark submitters (banks, public financial institutions, primary dealers and insurance companies) on the basis of their standing, market share in the benchmark/ instrument linked to the benchmark.
These two bodies may put in place a code of conduct specifying various provisions, including hierarchy of data inputs, for submissions as recommended by the RBI’s Committee on Financial Benchmarks.
The selected benchmark submitters have to necessarily participate in the polling process and comply with the various provisions specified in the code of conduct. Financial benchmarks are primarily used for pricing, valuation and settlement purposes in financial contracts. 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.
Recent global developments with regard to manipulation of several key global benchmark rates — Libor, Euribor, Tibor, and London 4 PM FX fixing, among others — have raised concerns about the reliability of the financial benchmarks, particularly about their governance frameworks and setting methodologies.
To strengthen the governance framework for benchmark submission, the RBI has advised benchmark submitters to implement a host of measures, including establishing an effective whistle-blowing policy to facilitate early detection of any potential misconduct or irregularities in the submission of benchmark data.