BBSW

Interest rates - reference rates - Australia.

Authors: James Leather FCT CGMA, Corium Treasury Limited & Pieter Bierkens, Ex Head of Interest Benchmark Reform, Commonwealth Bank of Australia.

BBSW : Definition, calculation and publication

Bank Bill Swap Reference Rate (from: B(ank) B(ill) SW(ap)).

BBSW is a key interest rate benchmark for Australia. The other being AONIA (also known as the “cash rate”).

BBSW is a mid-rate. It is calculated for the tenors of 1, 2, 3, 4, 5 & 6 months from the live traded prices of the Eligible Securities of Prime Banks between 8.30am and 10am on a Sydney business day and is published daily at 10.30am Australian Eastern Time zone.

See BBSW calculation methodology for mechanics and evolution (1).

As such, BBSW is an interest rate which includes a credit premium representing the market assessment of the premium payable by the Prime Banks relative to a comparable risk-free interest rate (RFR). BBSW is used in many financial contracts (mainly lending and interest rate derivative products), for which it will act as the base interest rate, typically before a margin is applied (2).

The BBSW ‘bid’ and ‘ask’ rates are known as ‘BBSY’ and are +/- 5 basis points to BBSW. BBSY is published on Refinitiv page ‘BBSY’ and on Bloomberg (1).

BBSW and Interest Rate Benchmark Reform

In response to the weaknesses identified in the setting of financial benchmarks such as the London Interbank Offered Rate (LIBOR), the global regulatory community has, since 2013, been involved in a programme to strengthen financial benchmarks. For Australia, the key interest rate benchmarks were identified as BBSW and AONIA (also known as the “cash rate”) for which reforms were undertaken to enhance their robustness (3). Unlike LIBOR, the local market generates enough transactions to statistically support the BBSW benchmark. This, along with the recent reforms, has meant that BBSW has remained sufficiently robust for Australian regulators to retain BBSW and to promote a “multiple-rate” approach, whereby market participants are expected to choose robust reference rates (e.g., BBSW or AONIA) that best suit each of their products and situations (4).

BBSW Outlook

With the exception of 1-month BBSW, as at September 2022, the view of the RBA (Reserve Bank of Australia) remains that BBSW is a robust benchmark (4) and expected to have a secure future, since the assets of managed funds, which are among the main investors of bank bills, continue to grow, supported by superannuation (pension) contributions (5).

However, the RBA has commented that BBSW’s status as a robust benchmark should not be taken for granted (5). It has pointed out that, although growing, the bank bill market from which BBSW rates are derived (see BBSW calculation methodology), is declining both as a share of managed funds’ assets and major banks’ liabilities. This is partly due to the liquidity standards introduced over recent years (e.g. Basel 3), which reduced the value that banks place on short-term wholesale funding (5). This has especially been evident in the 1-month BBSW tenor, with potential users of the rate being advised to give careful consideration to using alternative benchmarks, such as 3-month BBSW or AONIA (the Australian cash rate) (5).

In addition, regardless of the robustness of BBSW, there is expected to be a natural migration away from using BBSW in some products, where it might have been used historically, towards AONIA. This applies in particular, to financial products that contain reference to a risk-free rate in another currency. Such products may include: cross-currency swaps (where certain IBORs have been replaced by the respective RFRs); and multi-currency lending facilities and other financial contracts (to align RFR usage across currencies) (6).

Fallback Provisions

A key element of Australia’s multiple-rate approach are fallbacks, which provide valuable insurance when using any benchmark (3). With respect to BBSW, the RBA have adopted a ‘principles-based’ approach, requesting that market participants include a ‘robust, reasonable and fair’ fallback to another interest rate in their financial contracts (7).

The RBA have said that the BBSW derivative fallbacks (primarily AONIA compounded in arrears plus an adjustment for the historical spread to BBSW) set out in ISDA’s IBOR Fallbacks Supplement and Protocol are just one example of a fallback that meets their ‘robust, reasonable and fair’ criteria. However, they see it as practical and more efficient for market participants to work together to develop market conventions that specify the specific fallback rates and language to be used in prospectuses and other legal documents. The Australian Financial Markets Association (AFMA) and the Australian Securitisation Forum (ASF) are cited as examples of industry groups who are developing their own template fallback language for use in BBSW-linked securities (AFMA 2021; ASF 2021) (7).

To promote appropriate use of fallbacks, the RBA will only accept securities referencing BBSW issued after 1 December 2022 as collateral in its domestic market operations if those securities include a fallback that meets its criteria (7).