Tuesday 31 October 2017 by FIIG Securities rigging Education (advanced)

BBSW evolves as major banks are fined

This week, the big bank rate rigging case returns to court. Rate setting scandals have rocked global financial markets over the last few years. The setting of BBSW, one of the most important benchmark rates for Australian investors and borrowers, has been evolving to suit the times

ASIC’s federal court challenge against the nation’s largest banks has resumed. On Monday, ANZ and NAB admitted to unconscionable conduct and signed agreements with ASIC over its rate rigging case against them. Both were fined $50m. NAB will pay a $10m penalty and $20m in costs, with the remaining $20m to be donated to a consumer protection fund. Westpac remains the only institution left fighting allegations of interbank rate rigging with its trial beginning today.

The bank bill swap rate (BBSW) is one of the most important and widely referenced interest rates in the Australian market. It is the base rate used to calculate payments on hundreds of billions of dollars of securities, and billions more in loans from mortgages to credit cards to corporate loans.

Bank bills are short term debt traded between banks, which buy or sell the notes from each other depending on whether they need money or have excess funds. 

In 2012, ASIC began investigating major Australian banks and found evidence that traders had manipulated the BBSW to their benefit. This led to ASIC taking action against three banks – ANZ, NAB and Westpac – each sued for individually rigging the key interest benchmark between 2010 and 2012. The way the benchmark was calculated involved a panel of 14 banks submitting interest rates they were paying and receiving on bank bills. So, bank observed rates were sent to AFMA which relied on the figures.

To prevent future manipulation of the index, the BBSW has been evolving to reflect the traded market and last year, AFMA released its new and revised standards for calculating BBSW.

The principal feature of the AFMA revised BBSW methodology is the establishment of a sequentially staged calculation waterfall. The intent being that Stage 1 will be the most frequently used method and Stage 2 and Stage 3 can be employed if trading levels decline.

BBSW Waterfall

Source: AFMA

According to AFMA, “The waterfall arrangement will support production of the benchmark both under normal market conditions and in a stressed environment. The intention is that BBSW will generally calculate under Stage 1, with occasional use of Stage 2 on lighter trading days.

Given the level of trading in the market for Eligible Securities and the ongoing operation of the NBBO as the primary fall back, it is expected that Stage 3 would be rarely used in practice and then would be used for not more than two consecutive days. The introduction of Stage 3 will improve the capacity of the benchmark to withstand short periods of exceptional market stress, irrespective of the source.”

Effective on 1 January 2017, AFMA handed over the responsibility for BBSW benchmark administration to the ASX. The ASX is expected to introduce a new BBSW calculation methodology that includes an additional step which will calculate BBSW rates based on actual transactions in Bank Bills and Negotiable Certificates of Deposit. 

In May, the ASX issued proposed changes to the calculation waterfall outlined above. The key changes include:

  1. ASX will introduce a VWAP calculation as the primary method for calculating BBSW rates
  2. A set of minimum criteria will be introduced to control the transactions which can be used for the BBSW rate calculation, including a ten day rolling bucket for eligible maturities

In support of the new methodology, the ASX released the BBSW Trade and Trade Reporting Guidelines, on 10 October 2017, which is designed to provide clarity to participants on market practices. The full BBSW Guidelines and new calculation methodology will come into effect in early 2018.

For more information, please see the links:

AMFA – Evolution of the BBSW Methodology

AMFA – Evolution of the BBSW Methodology: Introduction of an Algorithmic Fall-back to the BBSW Calculation Methodology

ASX – Benchmark Administration

ASX – Proposed BBSW Calculation Methodology

ASX – access 24 hour delayed BBSW rates