RBI releases Financial Benchmark Administrators (Reserve Bank) Directions, 2019 under section 45 W of the RBI Act, 1934

The Reserve Bank of India released the Financial Benchmark Administrators (Reserve Bank) Directions, 2019 on 26th June  2019.

These directions shall apply to Financial Benchmark Administrators(FBA) administering ‘significant benchmarks’ in the markets for financial instruments regulated by the Reserve Bank. The identification of a benchmark as a ‘significant benchmark’ shall be based on use, efficiency and relevance of the benchmark in domestic financial markets. Financial Benchmark Administrators administering significant benchmarks shall adhere to these directions to ensure that accepted standards of governance, quality of benchmarks, quality of methodology and accountability in respect of the benchmark administration process are duly observed.

Background

The Reserve Bank of India had, in its Statement on Developmental and Regulatory Policies, dated October 05, 2018, announced that it will introduce a regulatory framework for financial benchmarks in markets regulated by it. The robustness and reliability of financial benchmarks are critical for efficient pricing and valuation of financial instruments. The London Inter-Bank Offered Rate (LIBOR) controversy and the related events underlined the need to establish or reform the frameworks for administration and governance of financial benchmarks. The need for setting standards for the benchmark administrators has since been accepted worldwide in several jurisdictions. The directions being issued today are intended to improve the governance of the benchmark processes, ensure transparency in benchmark administration and prevent misuse of benchmarks. The directions are based on the practices recommended by the International Organization of Securities Commissions (IOSCO) in their report on Principles for Financial Benchmarks dated July 2013 as well as in the Report of the Committee on Financial Benchmarks set up by the Reserve Bank on June 28, 2013.

Eligibility criteria for FBAs:

1. FBA shall be a company incorporated in India.
2. FBAs shall maintain a minimum net worth of ₹ 1 crore at all times.

Authorization of FBA:

1. The Reserve Bank shall notify a benchmark as a ‘significant benchmark’ taking into consideration its use, efficiency and relevance in domestic financial markets.
2. On the Reserve Bank notifying a benchmark as a ‘significant benchmark’, the person administering that benchmark shall make, within a period of three months from the date of the notification, an application for authorization to continue administering that benchmark.
3. No FBA shall administer a ‘significant benchmark’ without obtaining authorization of the Reserve Bank under these directions. However, FBAs that were already administering the ‘significant benchmark’ may continue to do so till the disposal of their applications by the Reserve Bank.

Authorized FBAs shall adhere to the following directions for administering ‘significant benchmarks’:

i. Overall Responsibility of FBAs - FBAs, in respect of the ‘significant benchmarks’ administered by them, shall be responsible for
- formulation of the benchmark calculation methodology;
- determination of the benchmark values;
- dissemination of the benchmark values;
- ensuring transparency in the benchmark administration;
- periodic review of the benchmark; and,
- putting in place necessary organizational and process controls for effectively carrying out the above responsibilities.

ii. ‘Significant Benchmarks’: Formulation, Determination and Review

iii. Organizational and Process Controls (Role of Oversight Committee)

iv. Internal Control

v. Outsourcing of ‘significant benchmark’ related work

vi. Complaint Management

vii. Data Preservation

The directions on FBA(2019) also cover the following aspects:

• Exemption from the provisions of these directions
• Revocation of authorization
• Transition or Termination of administration
• Benchmark Publication
• Reporting

For detailed directions please click on the following link:Financial Benchmark Administrators (Reserve Bank) Directions, 2019

Source: rbi.org.in