The Reserve Bank of India today placed on its website the Report of the Working Group on Reporting of over-the-counter (OTC) Interest Rate and Forex Derivatives (Chairman: Shri P Krishnamurthy).
The Working Group has observed that non-transparency of the OTC market results in build-up of risks in the system which is widely believed to be one of the contributory causes of the recent financial crisis. Unlike in most jurisdictions, India has had arrangements for reporting of various derivative transactions ranging from summary information to transaction level data. There is, however, a need for consolidation of reporting arrangement with a view to improving the transparency of the market, facilitating its comprehensive monitoring by the regulator and improving the efficiency of post trade processing infrastructure.
The key recommendations of the Working Group are:
- In view of economy of scale and scope as well as by virtue of its experience, Clearing Corporation of India Limited (CCIL) may be the designated repository of interest rate and forex derivative transactions. The repository services may, however, in due course, be housed in a separate entity under its ownership subject to economic viability. This would help segregate the repository activity from clearing and settlement activity and ensure better governance, compliance with standards, etc.
- All interbank forex forward transactions may be reported, under the Reserve Bank of India mandate to CCIL which already has a platform for this purpose.
- It may be made mandatory to report forward transactions and swaps between banks and their clients beyond some threshold, say, USD 100,000, to CCIL with adequate safeguards with regard to confidentiality.
- All interbank forex options contracts, including cross currency, may be reported to CCIL. Option contracts between banks and their clients beyond a threshold may also be reported to CCIL with necessary safeguards.
- The present system of reporting interbank Interest Rate Swaps (IRS) and Forward Rate Agreement (FRA) transactions to CCIL may be formalised as reporting to a Trade Repository (TR). Reporting of client trades in FRA and IRS to CCIL may also be mandated with necessary safeguards.
- CCIL as the TR may offer post-trade processing services, such as, valuation, Management Information System, lifecycle event management, trade compression, etc., with regulatory approval.
- CCIL may disseminate summary trade data with regulatory approval.
- Once the TR becomes functional, the regulatory reporting of the products covered by the TR may be streamlined so that there is no burden of duplicate reporting on the market participants. Similarly, there should also be seamless data flow between the TR and the central counter party (CCP) and a commitment to this effect should be mandated by the Reserve Bank.
- The Report has covered the OTC derivative products currently permitted in the Indian market. As the market develops, more products are likely to be introduced and the reporting framework proposed can be extended with appropriate modifications, wherever necessary, to these products as well.
In the Annual Policy statement for the year 2010-11, it was announced that a Working Group would be set up comprising officials of the Reserve Bank, representatives from the Clearing Corporation of India Limited (CCIL) and market participants to work out the modalities for an efficient single point reporting mechanism for all OTC interest rate and forex derivative transactions. Accordingly, a Working Group on reporting of OTC derivative transactions was set up under Chairmanship of Shri P Krishnamurthy, the then Chief General Manager, Financial Markets Department (FMD), Reserve Bank of India.
The Working Group was assigned the following terms of reference:
- To review the structure of OTC derivatives market in India and availability of information for regulators and market participants.
- To review the international efforts and experience in relation to reporting of OTC trades and setting up of trade repository.
- To examine the reporting format for inter-institution transactions and the transactions of institutions with their clients.
- To recommend modalities for an efficient single point reporting mechanism for all OTC interest rate and forex derivative transactions.
Comments on the Report may please be emailed or forwarded, before June 30, 2011, to the Chief General Manager, Financial Markets Department, 23rd Floor, Reserve Bank of India, Central Office, Mumbai 400 001.