Financial benchmarking is estimating and producing standard market rates for leading financial indicator like interest rate, foreign exchange rate, pricing of government securities etc. These rates like interest rate or foreign exchange rate that are followed by institutions and market participants in financial transactions.
Only if the market wide trends about these indicators are known, market participants can engage in correct transactions. For estimating such financial benchmark there will be entities which were given responsibilities to estimate the benchmark. These entities will be usually assigned by the central bank.
In India, the MIBOR, MIBID etc., are main interest rate benchmarks. In the case of foreign exchange rate, the exchange rate of the Rupee vs Dollar is the major benchmark. Government security valuation is also a benchmarking function (estimating the price and yield of G-Secs).
What is a financial benchmark?
Financial benchmarks are standard rates primarily used for pricing, valuation and settlement purposes in financial markets and contracts.
For example, the LIBOR or London Inter Bank Offer Rate is the standard interest rate that some of the world’s leading banks charge themselves when taking and giving loans in European markets.
How financial benchmarks are determined?
Rates or financial benchmarks are obtained through collection of interest rate and foreign exchange rate data from market participants like banks by the benchmark administrator. The exchange rate of the rupee we obtain daily is published by the RBI after its estimation by the benchmark administrator.
In 2012, manipulation of the LIBOR (London Inter-bank Offer Rate) by certain financial institutions in Europe has compelled central banks like the RBI to fool-proof the own financial benchmarking system.
Reforms in Financial benchmarking in India
After the LIBOR scandal in Europe, RBI tried to strengthen the financial benchmarking system in the country. In 2014, the RBI appointed Committee for reforming Financial Benchmarks under Vijay Bhaskar and the Committee recommended certain methodological changes in estimating benchmarks. Besides, the RBI decided to form an independent body for determining benchmark foreign exchange rate and interest rate. Till then, the major financial benchmarks were determined by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers’ Association of India (FEDAI). FIMMDA administered interest rate benchmarks like MIBOR and MIBID whereas the FEDAI administered exchange rate of rupee.
After the Vijay Bhaskar Committee recommendations and in the context of the global developments, RBI decided to shift administration (estimating etc.,) of financial benchmarks to a newly created entity called Financial Benchmark India Pvt. Ltd (FBIL). The FBIL is created under the joint ownership of the existing benchmark administrators – FIMMDA, FEDAI along with the Indian Bank’s Association (IBA).
Why the new Body?
According to the RBI, the FIMMDA and FEDAI has administrative functions related to the governance of benchmarking system. If they continue to estimate the rates, there can come conflict of interests. “In order to overcome the possible conflicts of interest in the benchmark setting process arising out of the current governance structure of the FIMMDA and FEDAI, an independent body, either separately or jointly, may be formed by the FIMMDA and FEDAI for administration of the benchmarks,”. The RBI circular issued on April 16th, 2014 indicates.
Financial Benchmark India Pvt. Ltd (FBIL)
FBIL is an entity jointly created by the financial benchmark administrators – FIMMDA and FEDAI and the IBA to administer financial benchmarks. It is owned by three organizations: FIMMDA (76%) FEDAI (14%) and IBA (10%).
The FBIL was formed in December 2014 as a private limited company under the Companies Act 2013. FBIL is regulated by Reserve Bank of India, the central bank of the country, for the activities of administering specific benchmarks. Its objective is to develop and administer India’s benchmarks relating to:
- Money Market,
- Government Securities and
- Foreign Exchange Market
Functions of FBIL
The FBIL is responsible for all the aspects related to the benchmarks it issues- like- collection and submission of market data (about interest rate, yield of G-secs and exchange rate of rupee) and information including polled data (data polled by financial institutions about the market figures), formulation, adoption and periodic review of benchmark calculation methodologies, calculation, publication and administration of benchmarks confirming to the highest standards of integrity, transparency and precision. Following are the main functions of the FBIL.
- To act as administrator of Rupee interest rate and foreign exchange benchmarks and any other benchmarks.
- To be responsible for all the aspects of benchmark determination process including development of methodology, oversight and accountability system for the benchmark determination process.
iii. To introduce and implement policies and procedures to handle the benchmarks.
- To take up/consider other benchmark as may be required from time to time.
- To periodically assess the needs of the end users and develop new benchmarks to cater to their business needs.
- To ensure that the benchmarks continue to reflect the underlying interests.
After its formation, the FBIL has slowly entered into administrating major benchmarks. In FBIL introduced benchmarks such as Market Repo Overnight Rate (MROR), Certificate of Deposits (CDs) and T-Bills yield curves.
In the case of the interest rate benchmark, MIBOR (previously administered by NSE and FIMMDA), FBIL announced the new benchmark — FBIL Overnight Mumbai Interbank Outright Rate (FBIL-Overnight Mibor) in October 2018.
FBIL’s MIBOR benchmarking
FBIL-Overnight Mibor creates benchmark based on call money transactions from the inter-bank call money market using the Clearing Corporation of India Ltd’s Negotiated Dealing System-Call platform. It is determined on a daily basis, except Saturdays, Sundays and local holidays
FBIL’s valuation of G-Secs
After the instruction from the RBI, the Financial Benchmark India Pvt Ltd (FBIL) started valuation of G-Secs from April 2018 onwards. Previously this was done by FIMMDA. As per RBI directive, FIMMDA has ceased to publish prices/yield of government securities from March 31, 2018.
In the case of exchange rate benchmark ie., the rupee -Dollar exchange rate, FBIL is expected to take over administration of foreign exchange benchmarks and other Indian Rupee interest rate benchmarks in near future from FEDAI.