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NSE MIBOR

What is NSE MIBOR

MIBOR- Stands for Mumbai Inter Bank Offered Rate and is closely modeled on the LIBOR. Currently
there are 2 calculating agents for the benchmark-Reuters and the National Stock Exchange (NSE). The
NSE MIBOR benchmark is the more popular of the two and is based on rates polled by NSE from a
representative panel of 31 banks/institutions/primary dealers.

What it is

NSE MIBOR is a reference rate. 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.

In particular, a call money reference rate can find the following applications:

1. Traders can make many decisions as offsets compared with the prevailing reference rate.
2. Derivatives require a clearly defined reference rate as a foundation, off which the pay-off from
the derivative is defined.
3. A variety of contracts can be structured as offsets from the future levels of a reference rate. The
simplest example may be a floating rate bond that uses an interest rate which is a given 'n' offsets
above a given reference rate.

How it is calculated

A high powered committee suggested setting up Inter Bank rates on the lines of New York and London
and thus came into existence MIBOR and MIBID for the overnight market.

The MIBOR is calculated by FIMMDA-NSE in two stages:

1. Stage I: Polling and collection of data from the panel member banks
2. Stage II: Adjustment of the data for the isolation of Noise in data.

Let us understand all these:

Stage I: Polling (Delphic oracle)

Method is used for obtaining reference rates by polling a panel members banks and summarizing the
prices they report. The procedure involves querying bid and offer prices. The names of the banks with the
rates quoted are displayed to bring the transparency and to generate pressure to report fair prices.

Stage II: Identifying and isolating noise in data

After collecting data, one has to devise methods to identify and isolate the noise in data so as to minimise
the impact of the extreme values on the final result, i.e. the reference rate. The methods used for this
purpose are discussed hereunder:
Traded mean or Trimmed Mean

 The reference rate is computed as the trimmed mean after deleting "n" highest and lowest
observations. For example, at CME Eurodollar, the two highest and two lowest quotes are
rejected and the rest of the quotes averaged to get a reference rate..

Bootstrapping

 The bootstrap technique is a non-parametric method for computing the test statistics
 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.

Panel Banks

Following are the panel members of FIMMDA – NSE for calculating MIBOR

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

As discussed above, the "Polling" with "Bootstrapping" scores over the other alternatives to collect data
in a limited data set and to isolate the extreme values. FIMMDA-NSE MIBID/MIBOR therefore, uses
polling to collect data from the market participants. While the quotes for the overnight money are polled
between 0940- 0945 hours, quotes for the other terms are polled between 1130- 1140 hours to capture the
market sentiment in a short interval of time. Thereafter, the data so collected is subjected to bootstrapping
to identify the extreme values.

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.
Advantages

 Unbiased: The National Stock Exchange of India (NSEIL) has been trusted by the securities
markets for its unbiased independence and professionalism.

 Market Representation: panel of 30 banks/ primary dealers

 Transparent: The reference rate is released to all the market participants simultaneously

 Reliable: The high level of co-relation between actual deals and the reference rate

 Scientifically Computed: The methodology of "Polling" with "Bootstrapping" is scientific and the
values are generated through a system that has been extensively tested.

 Elimination of Noise: 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 1215 (IST) for 14 day, 1 month and 3 month rates.

Disadvantages

 It is hard to design an incentive structure whereby the respondent does participate, and produces
an accurate information.
 Degree of public visibility might deter some players from participating.
 Trimming procedure are vulnerability to market manipulation of the rates and the amount of
sampling noise.
 Excessive trimming or too little trimming

Comparison with LIBOR

 The LIBOR is based on the quotes by 16 panel members bank of BBA. The BBA weeds out the
best four and the worst 4, calculates the average of the remaining 8 and the value is published as
LIBOR. But MIBOR comprise of panel of 30 banks/ primary dealers and has better market
representation.

 Bootstrapping is available only in MIBOR and hence more scientific and reliable than LIBOR.

Suggestions for MIBOR

 Presently it is available only in INR, it should be available to more number of currencies to make
it more liquid and to increase its acceplibility as a benchmark.