WHA T I S A SEL SEL F -REGULATORY -REGULATORY ORG ORGANI ANI ZATI ON? A self-regulatory organisation (SRO) is a voluntary body appointed by the industry participants to monitor the functioning of all players in the industry and bring in some degree of standardisation in industry practices.
WH Y SRO? SRO? Many countries rely on self-regulation because expansive resources are required to regulate the financial markets effectively, especially in large and complex markets. With the existence of an effective SRO, often referred to as frontline regulator, the statutory regulator (the Regulator) relies on the SRO to carry out supervision of operations and activities of the market participants. The supporters of the idea of self-regulation claim that it offers significant advantage over direct government/statutory regulation. This can be attributed to the fact that SROs have thorough domain knowledge of their respective area and regulatory framework within which they operate. Therefore, they are considerably more flexible, context-driven and are able to respond faster to the changes in market conditions. This also allows the Regulator to spare its resources more on identifying and responding to major systemic risks and to other priorities outside the ambit of self-regulation. It is believed that self-regulation self-regulation system works works effectively effectively because of the business business incentive incentive to operate in a fair, financially sound and competitive marketplace. SROs enable members to exercise self-discipline, make regulations more responsive to market demand and also promote innovation and development in a market based approach. This is critical for the development of the financial markets in order to make them competitive, regionally and globally, and improve standards of conduct by self-regulation. Source: http://rbi.org.in/Scripts/BS_S http://rbi.org.in/Scripts/BS_Speeches peechesView.aspx? View.aspx?Id=686 Id=686i
I NDI AN FOREI FOREI GN EXCH EXCH ANGE M ARKET:- ARKET:- The Indian foreign exchange market is a 3 tier market. Transactions in foreign currencies take place at all three levels. The RBI is the regulator of foreign exchange transactions as well as a custodian of foreign exchange reserves of the country. The RBI has delegated the responsibility of conducting foreign exchange transactions transactions to authorized dealers who are mostly SCBs of the country. The first tier consists of transactions between RBI and the Ads. The ADs may sell surplus foreign currencies to RBI or buy from RBI to meet their requirements. requirements. RBI may buy or sell foreign currencies to the ADs to intervene in the foreign exchange market market to stabilize exchange exchange rates. The second tier considers inter- bank market where the ADs transact business among themselves or with oversees banks. The ADs have formed FEDAI, to establish better coordination among the ADs in the conduct of foreign exchange transactions. transactions. (Kevin, 2009)
In the third tier the transactions take place between ADs and the customers who are the real users of foreign currencies which may be, tourists, business organizations, financial institutions etc. The customers can buy or sell the foreign currencies through the ADs to meet their requirements. Source: http://books.google.co.in/books?id=Ncazs6_ZaLcC&pg=PA170&lpg=PA170&dq=FEDAI+self+regu latory+organizations&source=bl&ots=8KgFgdpZEJ&sig=wilGPjTRTQRMk990GTjSWubSK08&hl= en&sa=X&ei=8usZU4jsIYazrgeb14H4Cg&ved=0CFgQ6AEwCA#v=onepage&q=FEDAI%20self%2 0regulatory%20organizations&f=false
FORM ATION OF FEDAI :In the early post-Independence years, under the Foreign Exchange Regulation Act (FERA), 1947, a few foreign banks, designated as Exchange Banks were permitted to transact foreign exchange business. The terms and conditions for undertaking such business were being laid down by the then Exchange Banks‟ Association. With the increase in India‟s foreign trade, several scheduled commercial banks were authorized by the Reserve Bank to deal in foreign exchange business. This led to the formation of FEDAI on August 16, 1958. Source: http://rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=686 FEDAI’S ROLE IN THE INDIAN FOREIGN EXCHANGE MARKET:-
The Foreign Exchange Dealer‟s Association of India (FEDAI) is a self - regulatory organization which plays a constructive role in the development of the foreign exchange market as it sets the ground rules for fixation of commission and other charges and also involves itself in matters of mutual interest of the ADs. It reviews the model code of conduct for foreign exchange transactions to bring it on a par with International best practices. Due to continuing integration of the global financial markets and increased pace of de-regulation, the role of self-regulatory organizations like FEDAI has also transformed. In such an environment, FEDAI plays a catalytic role for smooth functioning of the markets through closer co-ordination with the RBI, other organizations like FIMMDA (Fixed Income Money Market and Derivatives Association of India), the Forex Association of India and various market participants. FEDAI also maximizes the benefits derived from synergies of member banks through innovation in areas like new customized products, bench marking against international standards on accounting, market practices, risk management systems, etc. Source: http://www.fedai.org.in/AboutUs.html
Main functions are as follows:
Frame guidelines and rules for Foreign exchange Business.
Training of Bank Personnel in the areas of Foreign Exchange Business.
Accreditation of Foreign exchange Brokers and periodic review of their operations.
They also advise the RBI regarding licensing of new brokers.
Advising / Assisting member banks in settling i ssues / matters in their dealings.
They provide a standardized dispute settlement process for all market participants.
Represent member banks in discussions with Government / Reserve Bank of India /Other Bodies and provide a common platform for AD‟s to interact with the
Government and RBI.
Announcement of daily and periodical rates to member banks. At the end of each calendar month they provide a schedule of forward rates to be used by AD‟s for revaluating foreign currency denominated assets and liabilities.
Announcement of „spot date‟ at the start of each trading day to ensure uniformity in settlement between different market participants.
Circulate guidelines for quotation of rates, charging of commissions etc. by AD‟s to their customers and by brokers for interbank transactions.
Latest News:Benchmark panel seeks tweak in RBI Act Bats for greater central bank role in fixing benchmarks
The Reserve Bank of India (RBI)‟s panel on financial benchmarks has made several recommendati ons to bring in more transparency and improve the functioning of financial benchmarks.
The panel said in its draft report the methodology used to calculate these benchmarks should be based on observable transactions. “The benchmark calculation may be base d on observable transactions, wherever available, as the first layer of input subject to appropriate threshold criteria. The executable bids and offers, wherever available, subject to appropriate threshold and polled submissions, may be used as second and third layer of inputs respectively, in terms of hierarchy of inputs,” said the report.
Manipulation of several key global benchmark rates such as Libor, Euribor and Tibor led to the setting up of a committee to review the benchmark process.
The report was placed on RBI‟s website for public comments. The terms of reference of the committee formed under the chairmanship of P Vijaya Bhaskar, executive director, RBI, were to study all major financial benchmarks in India to assess the relevance, usage and fallback mechanisms in the event of a benchmark being rendered obsolete as well as suggest changes to the list of benchmarks.
According to the recommendations, Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers‟ Association of India (FEDAI) might be designated as administrators for rupee interest rate and foreign exchange benchmarks, respectively. http://www.business-standard.com/article/finance/benchmark-panel-seeks-tweak-in-rbi-act114010301100_1.html
FIMMDA The Fixed Income Money Market and Derivatives Association of India (FIMMDA), an association of Commercial Banks, Financial Institutions and Primary Dealers, was incorporated as a Company under section 25 of the Companies Act,1956 on June 3rd, 1998. FIMMDA is a voluntary market body for the bond, money and derivatives markets. FIMMDA has members representing all major institutional segments of the market. its membership includes Nationalized Banks such as State Bank of India, its associate banks and other nationalized banks; Private sector banks such as ICICI Bank, HDFC Bank, IDBI Bank; Foreign Banks such as Bank of America, ABN Amro, Citibank, Financial institutions such as IDFC, EXIM Bank, NABARD, Insurance Companies like Life Insurance Corporation of India (LIC), ICICI Prudential Life Insurance Company, Birla Sun Life Insurance Company and all Primary Dealers. OBJECTIVES:
To function as the principal interface with the regulators on various issues that impact the functioning of these markets.
To undertake developmental activities, such as, introduction of benchmark rates and new derivatives instruments.
To provide training and development support to dealers and support personnel at member institutions
To adopt/develop international standard practices and a code of conduct in the above fields of activity.
To devise standardized best market practices
To function as an arbitrator for disputes, if any, between member institutions.
Recent Devel opments i n SRO Self-Regulatory Organization (SRO) for NBFC-MFI
The SRO holding recognition from the Reserve Bank will have to adhere to a set of functions and responsibilities, such as formulating and administering a Code of Conduct recognized by the Bank, having a grievance and dispute redressal mechanism for the clients of NBFC-MFIs. Some of the criteria for the recognition for SRO are:
The SRO should have at least 1/3rd of the NBFC-MFIs registered as its members, at the time of recognition
It should have adequate capital to be able to discharge its functions without being overly dependent on subscription from members.
The Board should have adequate representation from both large and small NBFC-MFIs.
It should have adequate internal controls in pl ace.
Self-Regulatory Organization (SRO) for AMFI
Association of Mutual Funds in India (AMFI) is a grouping of all fund houses in India and is entrusted with the responsibility of distributor registrations. The SRO will assist Sebi and AMFI in regulating fund distributors and ensuring a cordial relationship with mutual fund houses. The decision to set up an SRO followed concerns about MF distributors not being regulated and rising complaints against them for miss-selling products.
Jessica Varma
