Executive Summary:
The Reserve Bank of India (RBI) issued the "Financial Benchmark Administrators (Reserve Bank) Directions, 2019" on June 26, 2019, to regulate financial benchmarks and improve governance in RBI-regulated markets. These directions are based on the powers conferred by section 45W of the Reserve Bank of India Act, 1934. Administrators of benchmarks notified as significant must apply for authorization within three months of notification.
Key Points / Main Content:
* **Applicability and Definitions:**
* The directions apply to Financial Benchmark Administrators (FBAs) administering significant benchmarks in financial instrument markets regulated by the RBI.
* Benchmarks administered outside India are excluded.
* Key terms defined include "Administration," "Benchmarks," "Calculating Agent," "Financial Benchmark Administrator (FBA)," "Financial Instruments," "Methodology," "Significant Benchmark," and "Submitter."
* **Authorization of FBA:**
* The RBI will notify benchmarks deemed significant.
* Administrators of notified benchmarks must apply for authorization within three months.
* No FBA can administer a significant benchmark without RBI authorization. Existing administrators can continue until their application is processed.
* **Eligibility Criteria for FBAs:**
* FBAs must be companies incorporated in India.
* FBAs must maintain a minimum net worth of ₹1 crore.
* **Responsibilities of Authorized FBAs:**
* Formulation of benchmark calculation methodology
* Determination of benchmark values
* Dissemination of benchmark values
* Ensuring transparency in benchmark administration
* Periodic review of the benchmark
* Putting in place necessary organizational and process controls
* **Oversight Committee:**
* FBAs must establish an Oversight Committee for regular review of the benchmark determination process, with documented procedures for member selection and conflict of interest management.
* The Committee's responsibilities include reviewing methodology, enabling seamless transitions to new benchmarks, overseeing changes, managing operations, ensuring proper expert judgment, and following up on audit report recommendations.
* **Internal Control:**
* FBAs must implement controls for data security, confidentiality, and integrity.
* Policies, procedures, and control frameworks must be in place for identifying, disclosing, managing, and mitigating conflicts of interest.
* Clear segregation of reporting lines is required.
* **Code of Conduct for Submitters:**
* FBAs must formulate a Code of Conduct for submitters, including steps to mitigate operational risks and eliminate conflicts of interest.
* **Other Requirements:**
* Business continuity and contingency plans are required.
* Periodic audits are necessary to verify policy compliance.
* Transparent policies for outsourcing benchmark-related work must be in place.
* A formal complaint management mechanism and whistleblower mechanism are required.
* Data preservation for ten years is mandated.
* **Exemption and Revocation:**
* The RBI may exempt FBAs from certain provisions.
* The RBI may revoke authorization for violations or adverse findings.
* **Transition or Termination:**
* FBAs may terminate operations with prior RBI approval and must have a written policy addressing termination grounds, procedures, stakeholder consultation, and fallback provisions.
* **Publication and Reporting:**
* Significant benchmarks must be made public, either on the release day or within 15 days.
* FBAs must submit data, reports, and compliance reports to the RBI as required.
Impact Analysis
Financial Benchmark Administrators (FBAs)
Impact: FBAs administering significant benchmarks are now subject to regulatory oversight, including authorization requirements, eligibility criteria, and adherence to specific directions. This may involve significant changes to their operational and governance structures.
Action Required: FBAs administering significant benchmarks must apply for authorization within three months of the benchmark being notified as significant. They must also establish an Oversight Committee, implement internal controls, formulate a Code of Conduct for submitters, and ensure compliance with all other requirements outlined in the directions.
Market Participants (Submitters, Users of Benchmarks)
Impact: Market participants who submit data for benchmark determination or use benchmarks in financial instruments will be affected by the enhanced transparency and governance requirements. They may need to adapt their processes to comply with the FBA's Code of Conduct and other related policies.
Action Required: Submitters may need to adhere to the Code of Conduct formulated by the FBAs. All market participants should familiarize themselves with the methodologies of significant benchmarks and any changes thereto.
Reserve Bank of India (RBI)
Impact: The RBI assumes a regulatory role in overseeing FBAs and significant benchmarks.
Action Required: The RBI will notify benchmarks deemed significant, process authorization applications from FBAs, and monitor their compliance with the directions. The RBI will also handle requests for exemptions and, if necessary, revoke authorizations.
Key Entities Referenced
Reserve Bank of India Act, 1934: An act of the Indian Parliament that established the Reserve Bank of India and provides the legal basis for its operation. Section 45W of this act is specifically cited as the source of the RBI's power to issue these directions.
Financial Benchmark Administrators Reserve Bank Directions, 2019: The formal name of the policy document being analyzed, which outlines regulations for financial benchmark administrators.
Financial Benchmark Administrator (FBA): A key entity defined in the document, referring to a person who controls the creation, operation, and administration of significant benchmarks.
Significant Benchmark: A benchmark that the Reserve Bank of India has identified as important due to its use, efficiency, and relevance in domestic financial markets.
Financial Markets Regulation Department: A department within the Reserve Bank of India responsible for regulating financial markets. It is the department to which applications for authorization should be sent.
Mumbai, Maharashtra: The city in Maharashtra State, India, where the Central Office of the Financial Markets Regulation Department of the Reserve Bank of India is located.
International Organization of Securities Commissions (IOSCO): An international body that brings together the world's securities regulators and is recognized as the global standard setter for the securities sector. The directions are based on practices recommended by IOSCO.
Oversight Committee: A committee to be set up by Financial Benchmark Administrators (FBAs) for regular review of various aspects of the significant benchmark determination process.
RESERVE BANK OF INDIA
www.rbi.org.in
RBI/2018-19/221
FMRD.FMSD.17/03.07.035/2018-19
June 26, 2019
To
All eligible market participants
Dear Sir/Madam
Financial Benchmark Administrators (Reserve Bank) Directions, 2019
Please refer to Paragraph 2 of the Statement on Developmental and Regulatory Policies of
the Fourth Bi-monthly Monetary Policy Statement for 2018-19 dated October 05, 2018,
wherein it was announced that the Reserve Bank will introduce a regulatory framework for
financial benchmarks, to improve the governance of the benchmark processes in markets
regulated by it.
2. The draft Directions were released for public comments on February 15, 2019. Based on
the feedback received, the Directions have been finalized. The Directions are enclosed
herewith.
3. These Directions have been issued by RBI in exercise of the powers conferred under
section 45W of the Reserve Bank of India Act, 1934 and of all the powers enabling it in this
behalf.
Yours faithfully
(T. Rabi Sankar)
Chief General Manager
�वत्तीय बाज़ार �व�नयमन �वभाग,क�द्र�य कायार्लय, पहल� मंिजल, मख्ु य भवन,शह�द भगत �सहं माग,र् फोटर्,मंबु ई–400001.भारत
फोन: (91-22) 2260 3000,फैक्स: (91-22) 22702290 ई-मेल: cgmfmrd@rbi.org.in
Financial Markets Regulation Department, Central Office, 1st Floor, Main Building, Shahid Bhagat Singh Marg, Fort, Mumbai – 400001. India
Tel: (91-22) 2260 3000, Fax: (91-22) 22702290 e-mail- cgmfmrd@rbi.org.in
िहन्दी आसान ह,ै इसका प्रयोग बढ़ाइएRESERVE BANK OF INDIA
FINANCIAL MARKETS REGULATION DEPARTMENT
1ST FLOOR, CENTRAL OFFICE (MAIN BUILDING), FORT
MUMBAI 400 001
Notification No. FMRD.FMSD.18/2019 dated June 26, 2019
Financial Benchmark Administrators (Reserve Bank) Directions, 2019
The Reserve Bank of India (hereinafter called ‘the Reserve Bank’) having considered it
necessary in public interest and to regulate the financial system of the country to its
advantage, in exercise of the powers conferred by section 45W of the Reserve Bank of
India Act, 1934, (hereinafter called ‘the Act’) read with section 45U of the Act and of all the
powers enabling it in this behalf, hereby issues the following Directions to Financial
Benchmark Administrators1.
Short Title and Commencement: These directions shall be called the ‘Financial
Benchmarks Administrators (Reserve Bank) Directions, 2019’ and shall come into force
with effect from June 26, 2019.
1. Extent and applicability:
i. These directions shall apply to Financial Benchmark Administrators (FBAs)
administering ‘Significant Benchmarks’ in the markets for financial instruments
regulated by the Reserve Bank under Section 45 W of the Act.
ii. Benchmarks administered outside India do not fall under the scope of these
directions.
2. Definitions:
i. ‘Administration’ refers to all stages and processes involved in the production and
dissemination of a benchmark.
ii. ‘Benchmarks’ mean prices, rates, indices, values or a combination thereof related to
financial instruments that are calculated periodically and used as a reference for
pricing or valuation of financial instruments or any other financial contract.
iii. ‘Calculating Agent’ means a person who calculates a benchmark in accordance
with the methodology set out by the financial benchmark administrator.
1
These 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 and the Report of
the Committee on financial benchmarks set up by the Reserve Bank on June 28, 2013.
1iv. ‘Financial Benchmark Administrator’ (FBA) means a person who controls the
creation, operation and administration of significant benchmark(s).
v. ‘Financial instruments’ mean instruments referred to or specified under section
45W of the RBI Act.
vi. ‘Methodology’, for the purpose of benchmarks includes the written rules and
procedures according to which information is collected and the benchmark is
determined.
vii. ‘Significant benchmark’ means any benchmark notified by the Reserve Bank as a
‘significant benchmark’ under these Directions.
viii. ‘Submitter’ means any natural or legal person contributing input data for
determination of a benchmark.
3. Authorization of FBA:
i. The Reserve Bank shall notify a benchmark as a ‘significant benchmark’ taking into
consideration its use, efficiency and relevance in domestic financial markets.
ii. 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.
iii. 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.
4. Eligibility criteria for FBAs:
i. FBA shall be a company incorporated in India.
ii. FBAs shall maintain a minimum net worth of ` 1 crore at all times.
5. Grant of authorization to administer a ‘significant benchmark’:
i. The administrator of a benchmark notified as a ‘significant benchmark’ shall make an
application to the Chief General Manager, Financial Markets Regulation Department,
Reserve Bank of India, 1st Floor, Main Building, Shaheed Bhagat Singh Marg,
Mumbai – 400001, for grant of authorization.
ii. The Reserve Bank may call for any additional information or seek any clarification
from the applicant which, in the opinion of the Reserve Bank, is relevant and the
2applicant shall furnish such additional information or clarification within the time
prescribed by the Reserve Bank.
iii. The Reserve Bank may, after being satisfied that the applicant fulfils the eligibility
criteria, grant authorization to administer a ‘significant benchmark’ subject to the terms
and conditions stipulated therein.
6. 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
a. formulation of the benchmark calculation methodology;
b. determination of the benchmark values;
c. dissemination of the benchmark values;
d. ensuring transparency in the benchmark administration;
e. periodic review of the benchmark; and,
f. putting in place necessary organizational and process controls for effectively
carrying out the above responsibilities.
ii. ‘Significant Benchmarks’: Formulation, Determination and Review -
a. FBAs shall ensure that a ‘significant benchmark’ is designed to be an accurate
and reliable representation of the referenced (specified) financial instrument.
b. FBAs shall ensure that the data used to construct a ‘significant benchmark’ is
based on an active market involving arm’s length transactions. Where such
transactions are not available, it shall record justification for any data, information
or expert judgment used to construct the benchmark.
c. FBAs shall establish and publish the procedure regarding the hierarchy of data
inputs and exercise of expert judgment used for the determination of ‘significant
benchmarks’.
d. FBAs shall document the methodology of calculating the ‘significant benchmarks’
that they are administering with illustrations and publish the same on their official
website. The document shall, at the minimum, contain the following details:
(i) the inputs for calculation of the benchmark;
(ii) the sources of inputs;
(iii) the basis and manner of selection of the sources of inputs;
(iv) the method of calculation including the mathematical formulae used;
3(v) instances where the methodology would not or cannot be adhered to and
the alternatives adopted to calculate the benchmark in such exceptional
cases; and,
(vi) the rationale underlying the methodology and treatment of exceptions.
e. Any amendment to the methodology that FBAs decide to make shall be
announced in their official websites at least 15 days prior to coming into effect of
such amendments. The announcement shall delineate all aspects of the
methodology that would be amended and explain the amended methodology with
illustrations.
f. FBAs shall establish a formal process for interacting with market participants at
any stage in the benchmark administration process.
iii. Organizational and Process Controls (Role of Oversight Committee) -
a. FBAs shall develop an appropriate oversight function for regular review of various
aspects of the significant benchmark determination process. The oversight
function shall be carried out by a committee, to be called ‘Oversight Committee’,
specifically set up for carrying out the function.
b. The procedures involved in the ‘oversight’ function, including criteria for selection
of members, processes for selection, nomination, removal and replacement of
members, and declaration of conflicts of interest, shall be documented and made
available to the stakeholders, and
c. FBAs shall have a policy to ensure that the Oversight Committee has fair
representation of major stakeholders.
d. No person shall be a member of the Oversight Committee for more than five
years irrespective of the number of terms.
e. The responsibilities of the Oversight Committee shall include, at the minimum,
the following:
(i) Periodic review of the methodology of the ‘significant benchmark’.
(ii) Enabling seamless transition to a new benchmark whenever an existing
‘significant benchmark’ is replaced, rescinded or amended.
(iii) Reviewing and overseeing of any changes to the ‘significant benchmark’
setting methodology and assessing whether the changed methodology
continues to appropriately reflect the underlying variable the benchmark
intends to represent.
4(iv) Overseeing the management and operation of the ‘significant benchmark’
including the activities undertaken by a third party involved in the benchmark
determination.
(v) Ensuring that exercise of expert judgement, if any, by the FBA is as per the
laid down policies.
(vi) Following up for implementation of the remedial actions recommended in the
audit reports.
f. In case of ‘significant benchmarks’ determined through submissions by
contributing entities (submitters), the Oversight Committee shall
(i) Oversee the compliance by the submitters to the Code of Conduct, (ref. para
6 iv e) issued by the FBA and institute an effective system to address breach
of the Code by submitters. The findings of the Oversight Committee shall be
put up to the Board of Directors along with the action taken report.
(ii) Undertake regular review to detect potential anomalous or suspicious
submissions and initiate follow up action thereafter. The details of such
submissions and follow up action shall be reported to the Board of Directors.
iv. Internal Control -
a. FBAs shall ensure effective controls over data collection, storage, processing and
dissemination to maintain data security, confidentiality and integrity.
b. FBAs shall document and implement policies, procedures and control framework
for the identification, disclosure, management, mitigation or avoidance of existing
and potential conflicts of interest. They shall also address the conflict of interest
that may exist between the ‘significant benchmark’ determination process and
any other business of the Administrator or any of its affiliates. A separate
document detailing the measures taken to minimize the conflict of interest shall
be placed on the website of the FBA, a copy of which shall also be submitted to
the Reserve Bank. These policies and procedures shall be periodically reviewed
and updated by the FBA.
c. There shall be proper segregation of reporting lines within an FBA to define
responsibilities and prevent any conflict of interest or perception of such conflicts
of interest.
d. In case of ‘significant benchmarks’ determined on the basis of submissions, FBAs
shall be responsible for the following:
(i) Ensure that the submitters, as a group, appropriately represent the
underlying variable the benchmark seeks to represent.
5(ii) Employ a system of appropriate measures so that submitters comply with
submission guidelines, as defined in the submitter Code of Conduct and
the Administrator’s quality and integrity standards for submission.
(iii) Employ measures to effectively monitor and scrutinize submissions.
e. Code of Conduct for Submitters:
(i) FBAs shall formulate a Code of Conduct for submitters of inputs for
calculation of ‘significant benchmarks’.
(ii) The Code shall include steps to be taken by them to mitigate operational
risks and eliminate conflicts of interest. The Code shall also include a
provision for submission during transition periods arising on account of
revocation of authorisation by the Reserve Bank or termination of the
benchmark by an FBA.
f. FBAs shall have a business continuity plan and contingency procedures to
overcome disruptions to normal business.
g. FBAs shall carry out periodic audit to verify the compliance to their policies as
well as instructions issued by the Reserve Bank.
h. FBAs shall carry out independent audit of the entire benchmark administration
process that shall include audit of the inputs, calculation process and values of
the ‘significant benchmark’ on a periodic basis.
v. Outsourcing of ‘significant benchmark’ related work -
a. FBAs shall put in place transparent written policies setting out the roles and
obligations of any agency to which it outsources work to act as a calculating
agent or any other function that affects the value of the benchmark and regularly
monitor their compliance with the policies.
b. FBAs shall also put in place appropriate contingency plans to manage the
operational risks involved in the outsourced functions.
c. FBAs shall retain adequate access to and control over the data and calculation
process.
d. In respect of any work related to ‘significant benchmark’ administration that an
FBA outsources to any entity, the FBA shall be responsible for all acts of
omissions and commissions of the entities to which it has outsourced its work.
vi. Complaint Management -
a. FBAs shall have a formal mechanism to handle the complaints related to
‘significant benchmark’ administration.
6b. FBAs shall establish an effective ‘whistleblower’ mechanism to facilitate early
detection of any potential misconduct or irregularities in the ‘significant
benchmark’ determination process.
vii. Data Preservation -
FBAs shall preserve all data in their possession in connection with ‘significant
benchmarks’ for a period of ten years from the date of receipt/creation of data.
Without prejudice to the aforesaid time period, data related to any litigation/ dispute /
arbitration / adjudication shall be preserved for a period of two years after final
disposal of the case / litigation / dispute / arbitration / adjudication.
viii. FBAs shall adhere to any other terms/ conditions stipulated by the Reserve Bank at
the time of grant of authorization or subsequently.
7. Exemption from the provisions of these directions:
The Reserve Bank, on being satisfied that it is necessary to do so, may exempt an FBA
either generally or for such period as may be specified, from any or all of the provisions of
these Directions, subject to such terms or conditions or limitations or restrictions as it may
think appropriate, in the interest of public or financial system of the country.
8. Revocation of authorization:
i. The Reserve Bank may revoke the authorisation granted to an FBA for administration
of one or more ‘significant benchmarks’, based on adverse findings/ observations or
material violation of any of the provisions of these directions or any condition of
authorisation.
ii. On revocation of the authorisation, the FBA shall cease administration of the
‘significant benchmark’ in the manner and within the timeframe stipulated by the
Reserve Bank. The Reserve Bank may stipulate the FBA to continue administering
the benchmark in the manner prescribed by it till such time an alternate arrangement
is made. During this interim period, the FBA may also be subjected to enhanced
monitoring including third party audit as the Reserve Bank may deem fit.
9. Transition or Termination of administration:
i. An FBA, who is holding a letter of authorisation to commence or carry administration
of a ‘significant benchmark’, may terminate its operation with prior approval of the
Reserve Bank and shall comply with the terms and conditions stipulated by the
Reserve Bank.
7ii. FBAs shall have a written policy addressing the following:
a. the grounds for termination of a ‘significant benchmark’;
b. procedures for its termination;
c. procedure enabling seamless transition to a new benchmark whenever an
existing ‘significant benchmark’ is replaced;
d. consultation with stakeholders on termination; and,
e. alternative or fallback provisions.
iii. Notwithstanding anything contained herein above, the Reserve Bank may require an
FBA to continue administering a ‘significant benchmark’ till such time any alternative
arrangement is made. During this interim period, the FBA may also be subjected to
enhanced monitoring including third party audit as the Reserve Bank may deem fit.
10. Benchmark Publication:
FBAs shall make public the ‘significant benchmarks’, either on the day of its release or with a
lag not exceeding 15 days from the release.
11. Reporting:
FBAs shall submit to the Reserve Bank such data and reports within such timelines and in
such formats as advised from time to time. FBAs shall also submit periodic return/report on
their compliance with the directions/instructions issued by the Reserve Bank within such
timelines and in such formats as advised from time to time.
8