In order to overcome the possible conflict of interests in the benchmark setting process arising out of the current governance structure of the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers' Association of India (FEDAI), the Reserve Bank of India (RBI) has suggested the setting up of an independent body, either separately or jointly, by the FIMMDA and FEDAI for administration of the benchmarks.
The RBI had appointed FIMMDA and FEDAI as the administrator of the Indian rupee interest rate and foreign exchange benchmarks, respectively, as per the recommendations of a committee on financial benchmarks headed by P Vijaya Bhaskar, executive director of RBI, submitted on 7 February 2014.
In case of benchmarks determined based on polled submissions, RBI said, the FIMMDA and FEDAI may select the benchmark submitters on the basis of their standing, market-share in the benchmark / instrument linked to the benchmark and representative character and may put in place a code of conduct specifying various provisions including hierarchy of data inputs for submissions as recommended by the committee.
The benchmark submitters, selected by the respective administrator, have to necessarily participate in the polling process and comply with the various provisions specified in the code of conduct. They should extend necessary support and cooperation to the respective benchmark administrator in strengthening the benchmark determination process, RBI said.
In order to strengthen the governance framework for benchmark submission, RBI wants the benchmark submitters to ensure the following:
- An internal board approved policy on governance of the benchmark submission process, which ensures that clearly accountable personnel at appropriate senior positions with requisite knowledge and expertise are responsible for benchmark submissions;
- An effective conflicts of interest policy, which facilitates identification of potential and actual conflicts of interest with respect to benchmark submissions and lays down procedures to be followed for management, mitigation or avoidance of such conflicts;
- Establish a maker-checker system to ensure integrity of the submissions and periodically review the submissions by appropriate senior level officials in terms of minimum variance threshold with respect to the published benchmark levels;
- Establish appropriate internal controls to secure compliance with the benchmark submission procedures, verify the bona fides of the transactions which are taken as the basis for submission to ensure that they represent bona fide arm's length commercial transactions;
- Establish an effective whistleblowing policy to facilitate early detection of any potential misconduct or irregularities in the benchmark data submissions;
- Maintain all records relating to benchmark submissions, including those containing procedures and methodologies governing the submissions, including findings of internal and external audits and remedial actions taken thereof for a minimum period of eight years;
- Subject the benchmark submissions to periodic internal audit, and where appropriate, to external audit;
- Undertake submissions by way of written communications or through robust contribution devices which leave an audit trail to eliminate possibilities of errors;
- Conduct a reality self-check of their existing governance framework vis-à-vis the above guidelines and report the status to the respective benchmark administrator by 31 May 2014; and
- Periodically submit a confirmation to the benchmark administrator for having complied with the regulatory guidelines as well as the provisions of the code of conduct to be issued by the respective benchmark administrator.
The Committee on Financial Benchmarks headed by RBI executive director P Vijaya Bhaskar had submitted its report on 7 February 2014 recommending several measures/principles to be adopted in respect of major Indian rupee interest rate and foreign exchange benchmarks to strengthen their quality, setting methodology and the governance framework. The Reserve Bank said it has accepted the recommendations of the committee and as per the announcements made in the first bi-monthly monetary policy statement 2014-15 on 1 April 2014.
RBI has set in motion the process to implement the recommendations of the committee in consultation with the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers' Association of India (FEDAI).