After recently stating that the extra-jurisdictional overreach from developed economies hangs over Financial Benchmarks of India Limited, Reserve Bank of India Deputy Governor T Rabi Sankar said that the issue is regarding the recognition of the financial infrastructure of the domestic agency.
“The legal requirements of recognition for infrastructure – financial infrastructure – also extends to FBIL, because it is doing benchmarks. A similar sort of exercise (similar to ESMA’s de-recognition of CCIL) is going on in FBIL as well. Which is why the point has been raised,” Rabi Sankar said at the sidelines of an event organised by the Indian Banks’ Association on Saturday.
Rabi Sankar made the comments at a time when the European Securities and Markets Authority (ESMA) and the Bank of England (BoE) have de-recognised Clearing Corporation of India (CCIL), which hosts the trading platform for government bonds and overnight indexed swaps. The move by the European regulators likely came after the RBI declined to permit rights of audit and inspection over CCIL.
“Essentially, the offshore regulators would want things like file reports of transaction legs etc from FBIL. Every regulator wants to have an oversight on participants who are operating within their domain,” a treasury official said on condition of anonymity.
Commenting specifically on the issue of de-recognition of the CCIL by the ESMA and the BoE, Sankar said that talks were on regarding the matter. The ESMA’s move, which was announced on October 31, comes into effect from May 1, 2023. If put in place, the decision would severely hamper the bond and derivative trading operations of European banks in India.
“We are engaging with them (ESMA and BoE), this is continuing, we will be able to find a resolution to this,” Sankar said.
Addressing a seminar organised by the FBIL on November 28, Sankar had said the extra-jurisdictional overreach over the FBIL posed a serious potential disruption to foreign exchange markets both onshore and non-deliverable forwards.
The FBIL, which is jointly owned by the Fixed Income Money Markets and Derivatives Association, the Foreign Exchange Dealers’ Association of India and the Indian Banks’ Association, was formed in December 2014. The FBIL develops and administer benchmarks for money markets, government securities and foreign exchange.
The RBI had, in 2019, issued directions of Financial Benchmark Administrators and set in place a regulatory framework for benchmark administrators in markets regulated by it.
The FBIL’s benchmarks include the Mumbai Interbank Outright Rate (MIBOR), the Market Repo Overnight Rate, the Mumbai Interbank Forward Outright Rate (MIFOR) curve and reference rate for the rupee versus four currencies – the US dollar, the British pound, the euro and the Japanese yen. It also provides valuation of government securities as well as the benchmark rates for certificates of deposits issued by banks.
The MIBOR is the reference rate for overnight indexed swaps, which are the key tool for hedging interest rate risk in India. Open interest in OIS contracts has risen to Rs 77 trillion in the current financial year from Rs 19 trillion in 2016-17, Sankar recently said.
In the foreign exchange market, the FBIL’s reference rate is used for settlement of NDF and exchange-traded futures. The average daily turnover in NDF, or offshore, rupee trades grew to $46.4 billion in 2022 from around $16.4 billion in 2016, the RBI Deputy Governor said last month.
The Bank of International Settlements (BIS) 2019 triennial survey showed that the rupee’s volumes in offshore markets surpassed that of the onshore market. In April 2019, the combined domestic spot and exchange-traded volume was around $48 billion, currency dealers said.
The 2022 round of the BIS triennial survey of over-the-counter foreign exchange turnover showed that the rupee’s share globally had dipped to 1.6 per cent from 1.7 per cent three years back. In exchange traded derivatives, however, the rupee’s share was the fourth largest, at 12.9 per cent.