As Indian financial markets begin to prepare for a new and comprehensive overnight benchmark interest rate, the process may finally culminate in the establishment of a new trading platform, similar to the one that ushered in reforms in local interest rate derivatives markets nine years ago.
Earlier this month, the RBI released the report of a committee on the Mumbai interbank outright rate (MIBOR) benchmark which suggested the creation and eventual shift to a new benchmark for interest rate derivatives-the secured overnight rupee rate or the SORR.
In discussions on market infrastructure with the Reserve Bank of India (RBI) and the Clearing Corporation of India (CCIL), market participants have expressed the view that the shift to such a benchmark, which reflects global practices, may finally need to be accompanied by the launch of a new trading platform, akin to the ‘ASTROID’ system for trading in interest rate derivatives.
“ASTROID played a major structural role in bringing new players into the OIS (overnight index swap) market as the anonymity of the platform and the guarantor role played by the CCIL instilled confidence in what was earlier a very opaque market,” a market source said on condition of anonymity.
“It will take some time for the SORR to become operational, but when it does, the market’s request is that a new trading platform similar to ASTROID be launched for it because ASTROID only caters to MIBOR-based OIS,” the source said.
ASTROID, or the anonymous system for trading in rupee OTC interest rate derivatives, was launched in August 2015 by the Clearcorp Dealing Systems India of the CCIL. Its creation contributed to a steady increase in OIS market share of entities like state-owned banks, which despite having the largest bond portfolios, had largely stayed away from the OIS instrument, which is the principal tool for hedging interest rate risk in India.
The report of the committee released by the RBI earlier this month suggested that the Financial Benchmarks of India (FBIL) may develop and publish a benchmark based on the secured money market computed from trades in the first three hours of the basket repo and tri-party repo segments of money markets. The committee called for the drawing up of operational guidelines and market conventions for interest rate derivatives transactions based on the SORR and said that the CCIL may develop the necessary trading and clearing infrastructure for the instrument.
“There have been comprehensive discussions on various kinds of new products-T-bill swaps, basis swaps, etc. At present, everything is concentrated in the OIS market. There is room to develop products like real market three-month loans which need specific benchmarks for different classes of investors,” another source said.
At present, MIBOR-based OIS contracts are the predominant interest rate derivative instruments, accounting for almost 86% of outstanding contracts worth ₹100 lakh crore.
However, low volumes in the call money market and the concentration of borrowing among the top players makes the MIBOR potentially susceptible to heightened volatility on account of the idiosyncratic behaviour of a few participants, the report said.
The MIBOR is computed based on interbank call money transactions. However, over the past few years, the interbank call money market has progressively ceded volumes to the other segments of the money market-the tri-party repo market and the interbank repo market.
