BBSW
Australia and BBSW
Bank Bill Swap Reference Rate (from: B(ank) B(ill) SW(ap)).
BBSW is the interbank reference interest rate for Australia.
It is Australia's equivalent of LIBOR or SIBOR, in that it is a reference rate that is referred to in many loan and derivative contracts, for which it will act as the base interest rate, before a margin is applied.
Given its wide usage, BBSW has been identified by the Australian Securities and Investments Commission (ASIC) as a financial benchmark of systemic importance to Australian financial markets and it is therefore important to anyone with an exposure to Australia, that there is ongoing confidence in it.
BBSW calculation
BBSW is a mid rate. It is calculated and published daily (at 10.30am Australian Eastern Time zone) and is available for the tenors of 1, 2, 3, 4, 5 & 6 months. BBSY (Bank Bill Swap bid rate) is calculated from the BBSW rate, which derives the BID and ASK rates ( +/- 5 basis points) Since 1 January 2017, the ASX has administrated and published the rates Both rates are also available on Reuters under these acronyms. Being the inter-bank rate, BBSW does contain bank credit risk.
The methodology used to calculate BBSW has evolved over the years - pre-2013 it involved asking a panel of banks to submit their assessment of where the market was trading in Prime Bank Paper at a particular time of the day. Due to concerns with the integrity of the process (rigging), a new methodology (in line with IOSCO principles) was adopted in 2013 - this is known as NBBO (Nationally observed Best Bid and Offer rate) and involved taking live, executable inter-bank rates for 'Prime Bank eligible securities' sampled at three random intervals during a daily trading window at or around 10am at Approved Trading Venues (ATVs) and ignoring the highest and lowest rates ignored before taking an average to derive the BBSW rate for that tenor. Between 2013 and 2015, trading of Prime Bank eligible securities during the BBSW sampling window fell to significantly low levels, which raised the risk that market participants might at some point be unwilling to use BBSW as a benchmark. Thus in October 2015, the Council of Financial Regulators (CFR), initiated a consultation process that invited responses to a proposed evolution of the BBSW calculation methodology, to ensure it remained a trusted and relevant benchmark. The new methodology that was accepted is known as VWAP (Volume Weighted Average Price) with NBBO to be used as a back up method. VWAP broadens the underlying eligible securities to include those traded by non-banks, extends the rate set window, deploys interpolation and uses a mix of telephonic and electronic trading prices. The transition to VWAP is / has been a significant exercise as it requires / has required the development of new market infrastructure and a change in the way that a significant part of the market operates. Whilst AFMA own the methodology, the administration and publication of BBSW were passed to the Australian Securities Exchange (ASX), on 1 January 2017. The ASX have continued to use the NBBO methodology but have gradually transitioned to the VWAP methodology in 2018, with go-live of the new BBSW VWAP methodology being 18th May 2018, as long as a parallel run that started on 26th March 2018 is successful. In support of the new methodology, the ASX in consultation with regulators and market participants, has developed the BBSW Trade and Trade Reporting Guidelines. These are designed to provide clarity to participants on market practices to be followed when trading Bills and NCDs, to define trade reporting for the purpose of calculating a BBSW rate based on actual transactions and to meet regulatory requirements for Benchmark Administrators.
Glossary of BBSW terms
Prime Banks are those that meet eligibility criteria set by AFMA in early 2017, these were the four main banks of Australia: NAB, Westpac, ANZ and CBA - but a greater range of banks have constituted the Prime Bank panel in the past.
Eligible Securities are Negotiable Certificates of Deposit (NCDs) and Bank Accepted Bills (BABs) of Prime Banks.
In early 2017, NCDs formed about 85% of eligible securities, with BABs forming the balance.
They are seen as a homogenous asset class that promotes market liquidity and provides the basis for effective price discovery in the market.
NCDs and BABs form a key part of the range of instruments through which banks manage their liquidity.
Approved Trading Venues - where the trade in eligible securities occurs - ICAP, Tullett Prebon and Yieldbroker, as at early 2017.
See also
- ANZ
- ASX
- Australia
- Australian Financial Regulation
- International Organization of Securities Commissions
- LIBOR
- Prime bank
- Reference rate
- SIBOR
Notes
ASIC sues NAB, ANZ and Westpac
ASIC press release - 7 June 2016
ASIC press release - 5 April 2016
ASIC press release - 4 March 2016
US class action
