MIBOR and MIBID
Mumbai Inter-Bank Offer Rate (MIBOR) and Mumbai Inter-Bank Bid Rate (MIBID) are the benchmark rates at which Indian banks lend and borrow money to each other. The bid is the price at which the market would buy and the offer (or ask) is the price at which the market would sell. These rates reflect the short term funding costs of major banks. In other words, MIBOR reflects the price at which short term funds are made available to participating banks.
MIBID is the rate at which banks would like to borrow from other banks and MIBOR is the rate at which banks are willing to lend to other banks. Contrary to general perception, MIBID is not the rate at which banks attract deposits from other banks.
MIBOR is the Indian version of London Interbank Offer Rate (LIBOR). MIBOR is fixed for overnight to 3 month long funds and these rates are published every day at a designated time. Of the above tenors, the overnight MIBOR is the most widely used one which is used for pricing and settlement of Overnight Index Swaps (OIS). Corporates use the OIS for hedging their interest rate risks. The MIBID/MIBOR rate is also used as a bench mark rate for majority of deals struck for Interest Rate Swaps (IRS), Forward Rate Agreements (FRA), Floating Rate Debentures and Term Deposits. The aggregate amount of outstanding interbank/Primary Dealers (PD) notional principal referenced to MIBOR remained at INR 16,847.6 billion as on October 31, 2013.
MIBOR, MIBID etc. are all financial benchmarks. Financial benchmarks are mainly used for pricing, settlement, and valuation of financial contracts. The IOSCO’s Report on Principles for Financial Benchmarks describes financial benchmarks as:
“Prices, estimates, rates, indices or values that are:
- Made available to users, whether free of charge or for payment;
- Calculated periodically, entirely or partially by the application of a formula or another method of calculation to, or an assessment of the value of one or more underlying Interests;
- Used for reference for purposes that includes one or more of the following:
- determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments;
- determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument; and/or
- measuring the performance of a financial instrument.”
The London Inter-bank Offer Rate (LIBOR) is the primary global benchmark for short term interest rates and has been used for pricing and settlement of large varieties of interest rate and derivative contracts. Hundreds of trillions of dollars worth of outstanding loans and financial contracts world-wide are estimated to be linked to LIBOR. Before the rate fixation scandal, British Bankers' Association (BBA) used to calculate LIBOR. Now the responsibility for its administration has been transferred to Intercontinental Exchange (ICE). Thus, BBA Libor is now known as ICE Libor.
ICE LIBOR is produced for the following five currencies with seven maturities quoted for each - ranging from overnight to 12 months, producing 35 rates each business day.
- CHF (Swiss Franc)
- EUR (Euro)
- GBP (Pound Sterling)
- JPY (Japanese Yen)
- USD (US Dollar)
ICE LIBOR provides an indication of the average rate at which a LIBOR contributor bank can obtain unsecured funding in the London interbank market for a given period, in a given currency. Individual ICE LIBOR rates are the end-product of a calculation based upon submissions from LIBOR contributor banks.ICE Benchmark Administration maintains a reference panel of between 11 and 18 contributor banks for each currency calculated.
The Indian foreign exchange and Rupee interest rate benchmarks are used by the banking sector mainly for two purposes, i.e.
- pricing and settlement of foreign exchange and Rupee interest rate contracts,
- periodic valuation of various foreign exchange and Rupee interest rate related assets and liabilities.
The major foreign exchange and interest rate benchmarks currently in use by the banking sector are listed below.
A. Rupee Interest Rate Benchmarks
- Fixed Income Money Market and Derivative Association of India (FIMMDA)- National Stock Exchange (NSE) Mumbai Interbank Bid Rate (MIBID) and Offer Rate (MIBOR)
- FIMMDA-Thomson Reuters Mumbai Interbank Forward Offered Rate (MIFOR)
- Thomson Reuters Indian Benchmark Yield Curve (INBMK)
- FIMMDA-Thomson Reuters Mumbai Interbank Overnight Indexed Swaps (MIOIS)
- FIMMDA-Thomson Reuters Mumbai Interbank Offered Currency Swaps (MIOCS)
- FIMMDA-Primary Dealers Association of India (PDAI) G-Sec Yield Curve
- FIMMDA- PDAI Spread for Government of India (GoI) Floating Rate Bonds
- FIMMDA- PDAI Prices for State Development Loans
- FIIMDA- PDAI Prices for Corporate Bonds
- FIMMDA-Thomson Reuters T-Bill Curve
- FIMMDA-Thomson Reuters Commercial Paper (CP) Curve
- Thomson Reuters Certificate of Deposits (CD) Curve
Of the various benchmarks currently used in the market, MIBOR is the most liquid benchmark in rupee interest rate contracts, accounting for 92 percent share of the total trades.
B. Foreign Exchange Benchmarks
- RBI Reference rates
- Foreign Exchange Dealers’ Association of India (FEDAI) Spot Fixing Rates
- FEDAI Foreign Currency Non-Resident (FCNR(B)) Benchmark Rates
- FEDAI Month end Revaluation Rate – Foreign Exchange Contracts
- FEDAI USD-INR Option Volatility
Evolution of MIBOR- How MIBOR is fixed?
An Internal Committee at NSE for the Development of the Debt Market had studied and recommended the modalities for the development for a benchmark rate for the call money market. Accordingly, National Stock Exchange (NSE) developed and launched the NSE Mumbai Inter-bank Bid Rate (MIBID) and NSE Mumbai Inter-bank Offer Rate (MIBOR) for the overnight call money market on June 15, 1998. The success of the Overnight NSE MIBID-MIBOR encouraged the Exchange to develop a benchmark rate for the term money market. Thus, NSE launched the 14-day NSE MIBID- MIBOR on November 10, 1998 and the longer term money market benchmark rates for 1 month and 3 months on December 1, 1998. Fixed Income Money Market and Derivative Association of India (FIMMDA) became a partner to NSE in co-branding the dissemination of MIBID-MIBOR rates for the overnight and term segments on March 4, 2002 and the product thereafter was rechristened as FIMMDA-NSE MIBID/MIBOR. Later, NSE introduced a 3 Day FIMMDA-NSE MIBID-MIBOR on all Fridays with effect from June 6, 2008 in addition to existing overnight rate.
FIMMDA-NSE MIBID MIBOR was based on rates polled by NSE from a representative panel of 30 banks/ primary dealers. That is, participating banks are asked at what rate they would be borrowing/lending funds of a reasonable market size at the scheduled time of reference. Extreme values are avoided while calculating the reference rates and the mean or average benchmark rate is calculated with "Bootstrapping" scores (i.e., computing the reference rate from a sample with replacement, as an average of the polled rates after an appropriate amount of trimming to minimize noise (outliers) and then computing a measure of dispersion i.e. the confidence intervals for the trimmed means/average).
Every day the FIMMDA-NSE MIBID MIBOR along with their respective standard deviations (probability that the estimated trimmed mean obtained after avoiding extreme values, lies in a given range) were disseminated to the market at 9.40 (IST) for overnight rates (3 day on all Fridays) and at 11.30 PM for the three term rates, viz. 14-day, 1-month and 3-month. The structure of the reporting is given below.
|FIMMDA-NSE MIBID MIBOR for the Day|
|Category||Time||MIBOR||Standard Deviation of MIBOR||MIBID||Standard Deviation of MIBID|
|3 DAY||9:40 a.m.|
|14 DAY||11:30 a.m.|
|1 MONTH||11:30 a.m.|
|3 MONTH||11:30 a.m.|
As is the practice internationally, a polled rate, instead of actual transaction data was used, so as to ensure continuous publication of this systemic benchmark rate, even in times when liquidity is low and there are few transactions on which to base the rate. Further, the method of polling was adopted because market participants generally do not like to reveal the identity of those whom they have lent and at what rate they have lent. However, obtaining benchmark reference rates by polling a few market participants and summarizing the prices they report suffer from lack of transparency, accuracy and truthfulness in reporting and is liable to corruption and fixing since the number of participants is limited.
In the wake of misconduct of financial benchmark setters in international financial markets (A few big banks were found to have fixed the polled benchmark rates in order to benefit from derivative trades which are settled on these benchmark rates), the RBI committee on ‘Financial Benchmarking’ (Chairperson: Shri P.Vijaya Bhaskar) recommended measures to improve the system of bench marking in India.
Acting on these recommendations, Board of Financial Benchmarks India Pvt. Ltd (FBIL) was jointly formed by FIMMDA, Foreign Exchange Dealers’ Association of India (FEDAI) and Indian Banks’ Association (IBA). FBIL was incorporated in December 2014 and commenced operations in February 2015.
As part of the measures to initiate reforms in the area of benchmark setting, the existing benchmark ie. MIBOR based on ‘polled rates’ administered by FIMMDA and NSE has been replaced by a new Benchmark known as ‘FBIL Overnight Mumbai Interbank Outright Rate’ (FBIL-Overnight MIBOR) and the new benchmark has been in operation from July 22,2015. The new benchmark setting is based on “transaction rates’ rather than ‘polled rates’ by banks. That is, it is based on trade weighted inter-bank call money transactions on the Clearing Corporation of India Ltd (CCIL)’s platform for call money transactions - Negotiated Dealing System (NDS)-Call platform - between 9 A.M. and 10 A.M. The trades will be pulled out from the NDS-CALL system immediately after the cut-off time. CCIL will be the calculating agent. The approved methodology for the benchmark is also being placed on the websites of FIMMDA and Clearing Corporation of India Ltd(CCIL).
A minimum of 10 trades with a total traded value of Rs.500 crore in the NDS-Call segment will be considered as the minimum threshold limit (both) for estimation of the volume weighted average rate. A rate Range will be computed – Max will be Weighted Average Rate + 3* Standard Deviation and Min will be Weighted Average Rate - 3* Standard Deviation. Any trades executed at rates outside the said Max and Min range will be considered as outlier and will be excluded from the computation process (i.e. higher than Max and lower than Min). In case either of the criteria mentioned above (a minimum of 10 trades with a total traded value of Rs.500 crore) is not met, the timeframe for computation of rates will be extended by 30 minutes. If the threshold criteria are still not met, then time frame is extended by another 30 minutes. If the threshold criteria are not met even after the two extensions, no rate computation will be initiated. The previous day’s values will be used for dissemination. This may continue for a maximum of two consecutive working days after which if the threshold criteria are still not met, CCIL will not disseminate any rate on such days and Banks will use their own fallback mechanism. Thus, Volume weighted average (VWA) is calculated by averaging the reported trades after weighting them with their respective volume. The VWA needs price volume data of all executed deals and is a reliable measure of the market sentiment, however, suffers from discontinuity if the market is not liquid.
Accordingly, computation & dissemination of FIMMDA-NSE MIBID - MIBOR for overnight and three days were discontinued w.e.f July 22, 2015. The other rates (14 Day, 1 month and 3 month rates) are still being published, for which NSE is awaiting further directions as on date. The FBIL proposes to take over administration of forex benchmarks and other Indian Rupee interest rate benchmarks over a period of time after careful examination of the methodology and utility to the financial markets in consultation with the stakeholders. There will be periodic review of the benchmark methods to ensure that they are robust and conform to the best governance standards.
Reserve Bank of India (RBI) announced in the Sixth Bi-monthly Monetary Policy Statement for the year 2017-18 in February, 2018 that Financial Benchmarks India Private Limited (FBIL) will assume, i.e. take over from RBI, the responsibility of computation and dissemination of reference rate for USD/INR and exchange rate of other major currencies at some appointed date. FIBIL has commenced the process of computing and disseminating reference rate for USD/INR and exchange rate of other major currencies with effect from July 10, 2018. Accordingly, the dissemination of Exchange Rate on RBI’s website has been discontinued now.
- The FBIL overnight MIBOR can be seen here.
- The FBIL Term MIBOR can be seen here.
- FIMMDA-NSE MIBID MIBOR can be seen here.
- The FAQ on LIBOR
- Report of the RBI committee on ‘Financial Benchmarking’
- FIMMDA Press Release dated 22 July 2015
- NSE’s brief on MIBOR