BBSW
Australia and BBSW
Bank Bill Swap Reference Rate (from: B(ank) B(ill) SW(ap)).
BBSW is Australia’s local credit-based benchmark, which measures the cost for highly rated banks in Australia to issue short-term bank paper for each monthly tenor between one and six months.
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.
As at December 2021, BBSW remains robust (with the exception of 1 month BBSW – see below), with a lot of work having gone into strengthening the methodology underlying its calculation and the supporting infrastructure and market practices.
Thus, unlike for LIBOR, Australian regulators aren’t advocating a wholesale transition to referencing the risk-free rate, which in Australia’s case, is the cash rate, also known as AONIA.
Instead, they are promoting a “multiple-rate” approach, whereby market participants are expected to choose robust reference rates that best suit each of their products and situations.
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 from the live traded prices of the Negotiable Certificates of Deposit and the Bank Accepted Bills (both ‘Eligible Securities’) of Australian Prime Banks (currently NAB, Westpac, CBA and ANZ) and thus contains bank credit risk.
It is 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 Australian Securities Exchange (ASX) has administrated and published the rates.
Both rates are also available on Reuters under these acronyms.
See BBSW calculation methodology for mechanics and evolution.
BBSW outlook and fallback provisions
As at December 2021, the future existence of BBSW is not assured for several reasons.
Firstly, the bank bill swap market, from which BBSW rates are derived (see BBSW calculation methodology above), is in general decline as regulatory liquidity standards drive bank funding away from short term sources such as bank bills, meaning that a bank bill market of sufficient size to support BBSW might not exist in the future.
Thus, not all BBSW tenors are as robust as others, with the 1-month BBSW recognised as being largely a "buy-back” market and thus less liquid than other tenors, with potential users of the rate being advised to give careful consideration to using alternative benchmarks.
Secondly, there is expected to be a migration away from BBSW towards AONIA, driven by the transition from LIBOR to risk free rates internationally, especially for financial products.
Regardless of the robustness of BBSW, Australia can expect to see a shift towards referencing risk-free rates for some products if that is the trend adopted offshore/internationally.
For these reasons, the RBA has been working with the International Swaps and Derivatives Association (ISDA) to design fallback provisions for BBSW, as well as LIBOR, for inclusion in the Supplement, as well as the Protocol.
For BBSW, this involves using AONIA (administered by the RBA and calculated directly from transactions in the interbank overnight cash market) - as the fall-back, with an adjustment for the historical spread between BBSW and the cash rate.
The use of fallbacks will be reinforced by the RBA requiring that BBSW referencing securities must include robust fallback provisions in order to be eligible as collateral in their market operations – starting with floating rate and marketed asset-backed securities issued on or after 1st December 2022.
Other BBSW referencing securities will follow.
Fallbacks are thus a key element in Australia’s multi-rate approach, providing valuable insurance.
(Analysis and summary by James Leather CGMA FCT CertBALM, Corium Treasury, see Notes below for sources)
See also
- AFMA
- AONIA
- ANZ
- ASX
- Australia
- Australian Financial Regulation
- Benchmark
- Bill
- BBSW calculation methodology
- Fallback
- Insurance
- International Organization of Securities Commissions
- International Swaps and Derivatives Association (ISDA)
- LIBOR
- Liquid
- Mid rate
- Prime bank
- Reference rate
- Reserve Bank of Australia (RBA)
- Swap
- Tenor
