About FIMMDA and financial benchmarking in India

About FIMMDA and financial benchmarking in India

The FIMMDA or the Fixed Income Money Market and Derivatives Association of India is an association of Banks, Financial Institutions, Primary Dealers and Insurance Companies in India. It was incorporated as a non-profit company under section 25 of the Companies Act, 1956 in 1998. The FIMMDA is a voluntary market body for the bond, money and derivatives markets.

FIMMDA has members representing all major segments of the bond and derivatives market. The membership includes banks such as the State Bank of India, its associate banks and other nationalized banks. Other banks representing the private sector include ICICI Bank, HDFC Bank, IDBI Bank. Foreign Banks include Bank of America and Citibank. Financial institutions include EXIM Bank, NABAR and Insurance Companies include Life Insurance Corporation of India (LIC), ICICI Prudential Life Insurance Company. All Primary Dealers are members of FIMMDA.

What is the role of FIMMDA?

It functions as an interface with regulators like Reserve Bank of India, Securities Exchange Board of India, Ministry of Finance - Government of India and external organisations such as the International Monetary Fund and the World Bank.

It was originally mandated by the Reserve Bank of India for carrying out the valuation of Government bonds, corporate bonds and securitized papers. This is required for the valuation of investment portfolios of Banks and Primary Dealers.

It provides important financial infrastructure such as the creation of benchmarks against which new products are developed and traded. For instance, Mumbai Inter-bank Offered Rate, Commercial Papers, Securitized Asset, Overnight Indexed Swaps are originated and developed with FIMMDA’s assistance.

It suggests legal and regulatory framework for the development of new products, provide training and development support. It also helps in standardisation of various siloed market practises.

Recent developments with respect to financial benchmarks in the country

Firstly, what are financial benchmarks?

Financial benchmarks are the 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 when taking and giving loans in European markets.

Now, a little bit of history.

In June 2013, the Reserve Bank of India set up a Committee on Financial Benchmarks to review the existing systems governing financial benchmarks in India. The Committee made several recommendations to reform the availability and administration of financial benchmarks in India. These recommendations were accepted by the Reserve Bank of India, which further identified

FIMMDA and FEDAI (Foreign Exchange Dealer's Association of India) as the benchmark administrators for the Indian rupee interest rates and forex benchmarks respectively.

It was also suggested that these associations may jointly or independently form a separate entity to administer the benchmarks. This was the first major step for formation of Financial Benchmark India Private Ltd (FBIL) as an independent benchmark administrator for interest rates and foreign exchange.

FBIL is jointly owned by FIMMDA, FEDAI and IBA (Indian Banks’ Association). It was formed in December 2014 as a private limited company under the Companies Act 2013. Its aim is to develop and administer financial benchmarks relating to money market, government securities and foreign exchange in India. It is responsible for all the aspects relating to the benchmarks to be issued by it. Such as, collection and submission of market data and information. This includes polled data, formulation, adoption and periodic review of benchmark calculation methodologies, calculation, publication and administration of benchmarks.

In 2018, the Reserve Bank of India had appointed the Financial Benchmark India Pvt. Ltd. for valuation of portfolios of government securities, which was earlier done by the FIMMDA. In its last bi-monthly monetary policy review of 2017-18, the RBI had proposed that FBIL take over the task from the Fixed Income Money Market and Derivatives Association of India. As per an earlier RBI directive, FIMMDA had ceased to publish prices/yield of government securities.

In a 2018 notification, the RBI said, “FBIL will commence publication of the g-sec (government securities) and SDL (state development loans) valuation benchmarks based on the extant methodology. Going forward, FBIL will undertake a comprehensive review of the valuation methodology.”

Banks, non-banking financial companies, primary dealers, co-operative banks and all financial institutions which are required to value government securities as per FIMMDA now use FBIL prices. Besides, the other market participants who have been using government securities prices/yields published by FIMMDA can use the prices/yields published by FBIL for valuation of their investments.

After its formation, the FBIL has slowly entered into administrating other major benchmarks in the country. 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-Overnight Mibor is a benchmark based on the 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. 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.

Hopefully this article has given you a brief overview of financial benchmarking in fixed income markets in India. Within a brief period of a decade, the industry has moved from FIMMDA which was the original standard setter and data provider to FBIL, a specialized entity setup to provide financial benchmark data on fixed income market in India.