Das calls on FEDAI to play a critical role in the evolving market
Foreign portfolio investment in Indian debt markets has been expanded within calibrated macro-prudential norms as limits under the Medium-Term Framework for investment by Foreign Portfolio Investors (FPIs) have been gradually increased and procedures rationalized.
This update was given by Shaktikanta Das, Governor, Reserve Bank of India on 26 November 2020 at the 4th Annual Day of Foreign Exchange Dealers’ Association of India (FEDAI).
A Voluntary Retention Route (VRR) has been introduced, which provides relaxations from macroprudential controls but subject to a minimum retention period, he said.
“In a major step towards greater internationalisation, the Fully Accessible Route (FAR) was introduced under which non-residents can invest in specified government securities without any restriction,” said Das.
Capital account convertibility will continue to be approached as a process rather than an event, taking cognizance of prevalent macroeconomic conditions.
“A long-term vision with short- and medium-term goals is the way ahead,” he stressed.
As a major milestone towards the opening-up of markets, banks in India have been permitted to deal in the offshore rupee derivative markets.
The measure is expected to reduce the segmentation between onshore and offshore markets, apart from reducing volatility and the cost of hedging.
“Banks have also been permitted to undertake foreign exchange transactions beyond the usual onshore market hours, thus fostering real-time market activity.
“In a complementary measure, exchanges and banking units in the GIFT City have been permitted to undertake Over the Counter (OTC) and exchange-traded Rupee derivatives,” said the Governor.
Safeguarding the interests of the users – the “buy” side of financial markets – is imperative especially in the context of liberalised markets and the introduction of newer and more sophisticated products. A number of initiatives have been taken in this regard.
With a view to providing greater protection to less sophisticated users, a User Classification Framework segregating users into ‘retail’ and ‘non-retail’ has been introduced for OTC foreign exchange and interest rate derivative transactions, he elaborated.
Retail users can be offered only non-complex derivative products while product innovation has been permitted for non-retail users as per their business needs.
The issue of fair and transparent pricing of foreign exchange products, especially for MSMEs and other smaller users, has been occupying our attention.
Market-makers are now mandated to separately disclose fees and or charges when dealing with retail users. Also, an anonymous order matching electronic trading platform, called FX-Retail, has been launched by the Clearing Corporation of India (CCIL), at the behest of the RBI.
This platform allows users with small transaction sizes to undertake transactions at best available market rates.
These measures are expected to ensure greater transparency and protection of the retail user.
“Concerted efforts by banks will be needed if the benefits of transparent and competitive pricing are to reach every user of the foreign exchange markets,” said Das.
As derivative markets are liberalized, market conduct needs to be strengthened through robust assessment of product suitability and user appropriateness.
Regulatory requirements in this regard are being reviewed in consonance with the overall changes to the regulatory approach, he disclosed.
The financial market infrastructure in India has remained resilient even during various financial crises. Learning from international episodes of market failure, several further initiatives have been taken to ensure continued resilience, Das shared at the gathering.
“Fair market conduct is critical to ensure efficient functioning and preserving trust in the financial ecosystem. Hitherto, conduct codes prescribed by market bodies like FIMMDA and FEDAI guided participants in the financial markets.
“To supplement and strengthen these, a regulatory framework for market abuse has been put in place,” he said.
The Reserve Bank has been taking measures to implement the G20 over-the-counter (OTC) derivatives market reforms.
In line with global trends, electronic trading platforms (ETPs) have been brought under regulatory purview to ensure the efficiency of operations and address systemic risks.
A draft framework for variation margin for OTC derivatives aimed at reducing counterparty risks from non-centrally cleared derivatives has been recently issued.
Global efforts are underway to put in place a Legal Entity Identifier (LEI) which uniquely identifies financial market participants and enables aggregation of risks, Ds continued elaborating on efforts by RBI.
Reserve Bank has also mandated the use of the Legal Entity Identifier (LEI) for participants in the markets it regulates.
“In fact, we are one of the few countries that have implemented LEI beyond derivative markets to cover transactions in government securities and money markets as well as the credit market (large loans),” he said.
A key issue which has been engaging global attention is the transition from the LIBOR to alternate reference rates.
In India, several measures have been taken to make financial benchmark processes more transparent and robust.
Most recently, the administrators of significant financial benchmarks were brought under regulation to ensure robust governance frameworks and process controls.
These reforms will stand us in good stead as we prepare ourselves for the LIBOR transition.
The Indian Banks’ Association has been working closely with market participants to facilitate the transition to alternate benchmarks and create customer awareness.
Achieving a smooth transition from a benchmark entrenched in the financial system will require significant efforts from all stakeholders.
The recent changes are aimed at enabling financial markets to enhance allocational efficiency in the use of resources and thereby contribute to economic development. With this freedom comes responsibility, he underlined.
The achievement of desired outcomes is contingent on financial institutions and market participants taking forward the reform agenda so that we have vibrant financial markets and efficient financial intermediation.
The simplification and flexibility provided in the regulations must reach the end-user.
“In designing new products and new market segments, risk management systems and responsible market conduct should evolve in tandem as we open up to global players.
“Market participants and their associations including FEDAI will have to play a critical role in this,” said Das. #banking #economy #regulations #investments /fiinews.com
