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:

• 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. 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.

Apart from its accuracy, such a reference rate needs to have other qualities. The methodology of collation and computation should be scientific, should eliminate noise, and resist manipulation. It should be from an unbiased source, be representative of the market, transparent, reliable and continuously available. Moreover, it should find applicability across a wide range of products. A reference rate, which embodies all these qualities, would be widely acceptable to the market as the benchmark rate.