India has become a global leader in reforming its interbank offered rate, the Mumbai Interbank Offered Rate (Mibor). That would be helpful if the benchmark were more frequently used.
The Reserve Bank of India (RBI) acted quickly to bring Mibor fixing in compliance with the International Organisation of Securities Commission’s (Iosco) principles for financial benchmarks.
That follows the regulator’s efforts to adhere to global reforms, and is also in line with demands for greater transparency.
RBI has taken cues from what’s happening internationally with London Interbank Offered Rate (Libor) fixing in the UK having an important influence on the thought process here, said Ashwin Ramanathan, partner at AZB & Partners. “This was a preemptive move to a more transparent and market-driven way to determine the interbank offered rate,” he said.
The changes were outlined in a February RBI report. Mibor will now be fixed according to market transactions in the first hour of trading rather than a poll of market participants.
That’s expected to increase transparency in the rate-setting process. “They’re trying to address issues of manipulation – if not eliminate them completely,” Ramanathan added.
But RBI’s recommendations did not go as far as those in other jurisdictions. For example, the Monetary Authority of Singapore (MAS) has said that rate rigging will be a criminal offence in its proposed legislation on financial benchmarks.
Indian law may already have provisions in place for benchmark manipulation. As a matter of law, there’s always a course of action for lying, cheating and conspiracy, depending on what’s established in the penal code, said Ramanathan.
“I don’t necessarily think that legal reform will be necessary if a decision is made to pursue manipulation of the benchmark rate in a criminal court,” he added. “Fundamentally, that can be done through the judicial system.”
KEY TAKEAWAYS
The Reserve Bank of India has released its plans to reform the setting of the Mumbai Interbank Offered Rate (Mibor);
Its proposals reflect the Iosco’s financial benchmark principles and follow global best practice;
But it’s unclear whether the reforms will have a significant impact on the market as the benchmark isn’t common in India’s underdeveloped derivatives market.
What’s next
Counsel are now determining how to account for the changes to Mibor-setting in relevant documents. Shan Bottlewalla, a senior associate at Juris Corp, said that the existing methodology is being worked out to shift from the old polled rate to the new benchmarked rate.
In particular he is assisting relevant market players to assess the number of existing contracts, the volumes and measure that will be needed to ensure that the shift is seamless.
But that might be less of an issue in India than other jurisdictions. Mibor isn’t a particularly common benchmark in India, said Ramanathan.
It’s used in interbank lending, but lending and borrowing from RBI itself is more common, so Mibor isn’t used frequently, he added.
And then the overnight Mibor is used. Term Mibor, which is published in three tenors, hasn’t been used in nearly seven years.
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"This was a preemptive move to a more transparent and market-driven way to determine the interbank offered rate" |
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Ramanathan added that Mibor is rarely used as a benchmark in derivatives; that’s because banks are required to establish their own base rates. “Banks are transparent with their own interest rates but in reference to their own base rates,” he added.
The RBI report noted that term Mibor, published for 14-day, one-month and three-month tenors, have not been used since trade data reporting requirements were implemented in August 2007.
The report added that the term Mibors may have to be phased out in the absence of any meaningful utility, although they provide helpful feedback about market participants’ view on the term money rates. If they do remain, they will likely continue to be set through a polling process.
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