Banks seek RBI nod for new swap benchmark to replace MIBOR

The proposal suggests replacing the existing Mumbai Interbank Outright Rate (MIBOR) with the newly-proposed Secured Overnight Rupee Rate (SORR) as the reference rate for swaps, the sources said, requesting anonymity as the matter is private.

This initiative aims to enhance price discovery in the interest-rate swap market, a critical but opaque segment of the financial system that aids banks and corporations in managing risks.

An industry body initiated discussions with banks earlier this month to develop the SORR.

Once the rate’s framework is finalised and market conventions are established, swap trades linked to the SORR could commence, the report said, citing sources.

The adoption of SORR could result in two benchmarks for overnight derivatives, offering banks a choice of reference rates.

The RBI, which oversees interest-rate derivatives, approved the development of the SORR on December 6, highlighting the importance of bolstering the credibility of interest-rate benchmarks, said the report

Shift to repo-based benchmark

Banks argue that MIBOR has become less suitable for the swap market because it relies on uncollateralised transactions, which have experienced a steep decline in volumes over the past decade.

In contrast, the SORR would be based on repurchase agreements, where daily volumes in India's tri-party repo market and bilateral repo market stand at Rs 3 trillion ($35.3 billion) and Rs 1.4 trillion, respectively, according to the Clearing Corporation of India Ltd (CCIL).

These volumes have surged over 400% in the past ten years, the report stated.

India’s repo markets attract a diverse range of participants, including mutual funds and insurance firms, which have expanded alongside the country’s economic growth.

Meanwhile, the interbank call-money market, the basis for MIBOR, is limited to banks and primary dealers, and its daily trade volume has dropped by 31% over the last decade to around Rs 106 billion, according to CCIL data.

Transitioning fully to the SORR would require time and consensus on several key aspects, such as legal considerations and client preferences for existing positions, the sources noted.