Mibor

A detail presentation on Mumbai Inter-Bank Offer Rate

1. FINANCIAL DERIVATIVES Mumbai Inter-Bank Offer Rate (MIBOR) Presented by Irfan Khan C.N

2. Introduction The MIBID/MIBOR rate is used as a bench mark rate for majority of deals struck for Interest Rate Swaps, Forward Rate Agreements, Floating Rate Debentures and Term Deposits. Fixed Income Money Market and Derivative Association of India (FIMMDA) has been in the forefront for creation of benchmarks that can be used by the market participants to bring uniformity in the market place. To take the process of development further, FIMMDA and NSEIL have taken the initiative to co-brand the dissemination of reference rates for the Overnight Call and Term Money Market using the current methodology behind NSE – MIBID/MIBOR. The product was rechristened as 'FIMMDA-NSE MIBID/MIBOR'. The 'FIMMDA-NSE MIBID/MIBOR' is now jointly disseminated by FIMMDA as well as NSEIL through their websites and other means and simultaneous dissemination of the information would be as per international practice.

3. What is MIBOR ? The interest rate at which banks can borrow funds, in marketable size, from other banks in the Indian interbank market. The Mumbai Interbank Offered Rate (MIBOR) is calculated everyday by the National Stock Exchange of India (NSEIL) as a weighted average of lending rates of a group of banks, on funds lent to first-class borrowers . A reference rate is an accurate measure of the market price. In the fixed income market, it is an interest rate that the market respects and closely watches. It plays a useful role in a variety of situations .

4. History The Committee 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, NSE had developed and launched the NSE Mumbai Inter-bank Bid Rate (MIBID) and NSE Mumbai Inter-bank Offer Rate (MIBOR) for the overnight 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. 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.  Further, the exchange introduced a 3 Day FIMMDA-NSE MIBID-MIBOR on all Fridays with effect from June 6, 2008 in addition to existing overnight rate.

5. Importance Unbiased The National Stock Exchange of India (NSEIL) has been trusted by the securities markets for its unbiased independence and professionalism. The function of forecasting has become more meaningful as the information comes from a source, which is not only reliable but has no vested interest of its own in the market movements. Market Representation FIMMDA-NSE MIBID MIBOR is based on rates polled by NSE from a representative panel of 30 banks/ primary dealers. Transparent The reference rate is released to all the market participants simultaneously through various media, making it transparent with the aspiration of the market. Ensuing transparency helps the market participants to judge the market mood and the probable rate one is likely to encounter in the market. This information is useful not only to the banks but also to the issuers and investors. Reliable The high level of co-relation between actual deals and the reference rate gives an indication of its reliability. The bootstrapping technique guards against the possibility of cartelisation and of extreme observations influencing the mean. Scientifically Computed The methodology of "Polling" with "Bootstrapping" is scientific and the values are generated through a system that has been extensively tested. The technique involves generating multiple data sets based on the rates polled with a dynamically determined number of iterations, identification of outliers, trimming the data set of its extreme values and computation of the mean and its standard deviation. Elimination of Noise The trimming procedure is vulnerable to market manipulation of the rates due to the amount of sampling noise. Excessive trimming may lead to loss of information whereas no trimming may lead to excessive influence of the extreme values. To derive a true representative benchmark for the market NSE ensures that after trimming at least 14 data points should remain in observation for the bid and for the ask rates. Consistency The Exchange ensures that everyday the FIMMDA-NSE MIBID MIBOR along with the respective standard deviations are disseminated to the market at 0955 (IST) for overnight rate and at 1200 (IST) for 14 day, 1 month and 3 month rates..

6. Methodology 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 the calculation of VWA has some constraints in the Indian context, as most participants prefer to keep their transactions confidential . Polling (Delphic oracle)  is used for obtaining reference rates by polling a few market participants and summarizing the prices they report. The highly liquid CME Eurodollar contract uses this method for its futures contract. The procedure involves querying bid and offer prices from eight market participants. Identifying and isolating noise in data:  Having selected an appropriate technique for collecting data, one has to devise methods to identify and isolate the noise in data so as to minimize the impact of the extreme values on the final result, i.e. the reference rate . Traded mean:  Calculating fixed trimmed mean of the reported rates have been used by some organizations which need to use a reference rate, e.g. the CME for its Eurodollars contract, the CBOT for its Municipal Bond Index, etc. They collect rates from individual dealers and compute a reference rate as the trimmed mean is obtained after deleting "n" highest and lowest observations . Bootstrapping:  The bootstrap technique is a non-parametric method for computing the test statistics, i.e. Computing the reference rate as an average of the polled rates after an appropriate amount of trimming to minimise noise. Computing a measure of dispersion i.e. the confidence intervals for the trimmed means. Thus, the methodology adopted by FIMMDA-NSE MIBID/MIBOR not only seeks to tackle the limitation of the polling method but also uses adaptive trimming to identify and isolate the extreme value to derive a true representative benchmark for the market. Moreover, the entire process of polling and processing of data is completed in a time-bound schedule and the reference rates are released to the market every day.

7. Panel of Participants Private Sector Banks Axis Bank Ltd. HDFC Bank Ltd. ICICI Bank Ltd. IndusInd Bank Ltd. IDBI Bank Ltd. Kotak Bank Yes Bank Ltd. Foreign Banks CitiBank N.A. Deutsche Bank AG Development Bank of Singapore HSBC Standard Chartered Bank Public Sector Banks Bank of Baroda Bank of India Canara Bank Central Bank of India Corporation Bank Indian Bank Indian Overseas Bank Punjab National Bank State Bank of India State Bank of Hyderabad State Bank of Patiala Syndicate Bank Union Bank of India UCO Bank Primary Dealers SBI DFHI Ltd. ICICI Securities Ltd. (I-Sec). PNB Gilts Ltd. Securities Trading Corporation India Ltd. (STCI)

8. Dissemination FIMMDA-NSE MIBID MIBOR rates are broadcast through the NEAT-WDM trading system immediately on release. The NSE website carries the daily rates as well as the historical data on the FIMMDA-NSE MIBID MIBOR. The FIMMDA also disseminates the FIMMDA-NSE MIBID MIBOR rates through its website and other means. In addition leading information vendors carry these rates on a daily basis. Reuters on its news information page, Bridge News Service (Knight Ridder ) on page no.2811, Bloomberg on its money market page as well as a news story and PTI on its money market page. FIMMDA-NSE MIBID MIBOR rates are also carried by all leading financial dailies including Economic Times, Financial Express, Business Standard and Business Line. In addition to the above, FIMMDA-NSE MIBID MIBOR rates are released to contributors and users through E-mail.

9. Product linked to MIBID/MIBOR Floating Rate Notes GE Capital Corporate Debentures L&T GE Capital Term Deposit ICICI bank Interest Rate Swaps Parties: Standard Chartered Bank & Multinational entity Parties: HSBC & Corporate entity Parties: HDFC Bank & KEC International Parties: ABN AMRO N. V. & Multinational entity Parties: ABN AMRO N. V. & Reliance Industries Parties: ABN AMRO N. V. & Multinational entity Parties: Deutsche Bank & ICICI Ltd. Parties: Deutsche Bank & Multinational entity Forward Rate Agreements Bank : HSBC

10. Advantages Traders can make many decisions as offsets compared with the prevailing reference rate. Derivatives require a clearly defined reference rate as a foundation, off which the pay-off from the derivative is defined. A variety of contracts can be structured as offsets from the future levels of a reference rate .

11. Current MIBOR Rate FIMMDA-NSE MIBID MIBOR for the Day Last Updated on 28-March-2013 Time Series:  Overnight      3-Day       14-Day      1-Month      3-Month Category Time MIBID SD(MIBID) MIBOR SD(MIBOR) OVERNIGHT 9:40 a.m. 8.78 0.5001 8.98 0.5757 3 DAY 9:40 a.m. 13.49 0.4105 14.44 0.3866 14 DAY 11:30 a.m. 9.49 0.3419 9.9 0.2485 1 MONTH 11:30 a.m. 9.3 0.2517 9.63 0.2108 3 MONTH 11:30 a.m. 9.47 0.1907 9.78 0.1116

12. The CCIL -MIBID/MIBOR Rates ( The Clearing Corporation of India Ltd.) Date Fixing Time Offer_No MIBOR MIBOR ( σ) Bid_No MIBID MIBID ( σ) Offer_Max_Rate Offer_Min _ Rate Bid_Max_Rate Bid_Min_Rate Deals WAONR* Dealt( σ) Value** 28/03/2013 1st Fixing 10:00 A.M. 25 13.9099 2.7488 73 12.4025 2.6503 17 8.9 16 7.75 36 13.6201 2.7787 3565 28/03/2013 2nd Fixing 1:00 P.M. 47 14.6068 2.3291 86 12.6496 2.6726 18 8.9 16 7.6 66 14.3024 2.1974 7875 26/03/2013 1st Fixing 10:00 A.M. 59 7.781 0.0314 109 7.7826 0.0327 7.9 7.75 7.9 7.7 134 7.7904 0.0502 18665 26/03/2013 2nd Fixing 1:00 P.M. 68 7.7943 0.0685 126 7.8064 0.0692 8 7.75 8.05 7.7 152 7.8144 0.1025 20672 * Weighted Average Overnight Rate ** Dealt Amount in Rs . Crore

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