RBI Introduces Regulatory Framework For Financial Benchmarks

The Reserve Bank of India has put in place a framework for management of financial benchmarks to avoid any possibility of manipulation like in the case of London Interbank Offered Rate or Libor.

Like every other market, India too has its own set of financial benchmarks used to price products in the currency and debt markets. The RBI's rules are intended to put in place a governance framework for these benchmarks. Some of the more commonly used in India include Mibor or the Mumbai Interbank Offered Rate; Mifor or the Mumbai Interbank Forward Rate and the CD or Certificate of Deposit rate benchmark.

In rules issued on Wednesday, the RBI said that it would classify some of these as “significant” benchmarks, based on how commonly they are used. An entity issuing such a benchmark will need to be authorised by the RBI within three months of the benchmark being labelled as “significant”. Such organisations will also need to be incorporated in India and have a minimum capital of Rs 1 crore.

To limit scope for manipulation, the RBI has sought transparency on all aspects of calculation of the benchmark. The Financial Benchmark Authority will need to publish the following information:

• Inputs used for calculation of the benchmarks.
• Sources of input.
• Basis and manner of selection of the sources of inputs.
• Method of calculation including the mathematical formulae used.
• Instances where the methodology would not or cannot be adhered to and the alternatives adopted to calculate the benchmark in such exceptional cases.
• Rationale underlying the methodology and treatment of exceptions.

The RBI has also asked that all significant financial benchmarks be referred to an oversight committee, which has representation of all stakeholders. In addition, the Financial Benchmark Authority will need to ensure adequate safety of data collected in the process of determining a benchmark.

The authority managing the benchmark must also have a formal complaint mechanism and a whistleblower policy.