This week the ASX began calculating the Bank Bill Swap Rate (BBSW) using real transactions at traded prices. This is an important benchmark used in pricing and revaluing a wide range of financial instruments including mortgages, corporate bonds and derivativesJust a few weeks ago CBA was fined $5m for rigging BBSW, it rounded out the top four banks, with all now charged with interest rate rigging. Changes to BBSW have been progressing over the last few years to strengthen the calculation to “ensure BBSW remains a trusted, reliable and robust benchmark”.
As of 1 January 2017, AFMA handed over responsibility for calculating BBSW to the Australian Stock Exchange. The process has been evolving and last Monday was confirmed in a new paper ASX BBSW Trade and Trade Reporting Guidelines.
In an ASIC media release dated Monday 21 May, they commented:
The bank bill swap rate (BBSW) rate is a major interest rate benchmark for the Australian dollar and is widely referenced in many financial contracts. Previously, BBSW was calculated from the best executable bids and offers for Prime Bank securities. A major concern over recent years has been the low trading volumes during the rate-set window, the period over which the BBSW is measured.
The new BBSW methodology calculates the benchmark directly from market transactions during a longer rate-set window and involves a larger number of participants. This means that the benchmark is anchored to real transactions at traded prices. ASX, the administrator of BBSW, has consulted market participants on this new methodology. In addition, the ASX has recently conducted a successful parallel run of the new methodology against the existing method.
RBA Deputy Governor Guy Debelle said, ‘The new methodology strengthens BBSW by anchoring the benchmark to a greater number of transactions. This should help to ensure that BBSW remains robust.’
Key points to note
For more information, see ASX and ASIC websites.