BBSW: Difference between revisions

Latest revision as of 04:08, 2 February 2024

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).

References

(1) ASX Bank BBSW Conventions and BBSW Methodology - Effective 10th February 2020

(2) ASX Benchmark Rates

(3) Interest Rate Benchmark Reform in Australia - RBA

(4) “The End of Libor and the Australian Market”, ISDA Benchmark Strategies Forum Asia Pacific, Online, March 2021 - speech by Christopher Kent, Assistant Governor (Financial Markets) RBA

(5) Debt Capital Markets Summit, Sydney, 19 March 2019 - speech by Christopher Kent, Assistant Governor (Financial Markets) RBA

(6) Use of interest rate benchmarks in Australia - IBOR Transformation Australian Working Group - 4 April 2022

(7) Fallbacks for BBSW - RBA - 16 June 2022

(8) Corium Treasury

@@ Line 1: / Line 1: @@
-''Australia''
+''Interest rates - reference rates - Australia.''
-Bank Bill Swap Reference Rate (from: B(ank) B(ill) SW(ap)).
+'''Authors: [https://www.linkedin.com/in/james-leather-treasury/ James Leather FCT CGMA]''', Corium Treasury Limited & '''[https://www.linkedin.com/in/pieterbierkens/ Pieter Bierkens]''', Ex Head of Interest Benchmark Reform, Commonwealth Bank of Australia.
-BBSW is the interbank reference interest rate for Australia.
+'''BBSW : Definition, calculation and publication'''
+Bank Bill Swap Reference Rate (from: B(ank) B(ill) SW(ap)).
-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.
+BBSW is a key interest rate benchmark for Australia.  The other being AONIA (also known as the “cash rate”).
-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 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.
-'''BBSW calculation'''
+See [[BBSW calculation methodology]] for mechanics and evolution (1).
-BBSW is a mid rate and its calculation methodology has evolved over the years.
+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).
-It is calculated and published daily (at 10.15am Australian Eastern Time zone) and is available for the tenors of 1, 2, 3, 4, 5 & 6 months.
+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).
-BBSY (Bank Bill Swap bid rate) is calculated from the BBSW rate +/- 5 basis points, which derives the BID and ASK rates.
-Both rates are available on Reuters under these acronyms.
+'''BBSW and Interest Rate Benchmark Reform'''
-Being the inter-bank rate, BBSW does contain bank credit risk.
+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).
-'''Calculation methodology evolution'''
+'''BBSW Outlook'''
-'''''1. Pre 2013'''''
+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).
-Pre 2013, the BBSW calculation methodology 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.  But, it was suspected this was being abused and panel banks became unwilling to provide submissions any longer.
+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).
-Investigations were undertaken and in the cases of international banks RBS, UBS and BNP, the banks themselves found that 'rigging' may have been undertaken, so made voluntary donations to ASIC (between A$1m & A$1.6m each).
+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).
-In June 2016, ASIC announced it was suing Australian financial institutions ANZ, Westpac and NAB over rate rigging pre 2013 - and shortly after, a US class action ensued against these and several other banks (see Notes below).
-Pre 2013:
+'''Fallback Provisions'''
-* the annual re-election of Prime Banks was also instigated;
+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 collation and publication of 9 & 12-month BBSW rates was discontinued due to consistency challenges; and
+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).
-* the BBSW Committee composition was revised to include buy-side and broker representation.
+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).
-'''''2. 2013 reforms'''''
-Thus, in 2013, the calculation methodology was reformed in line with International Organization of Securities Commissions (IOSCO) principles:
-*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).
-* The highest and lowest rates ignored and then an average taken to form the BBSW rate for that tenor.
-This process is known as NBBO - 'Nationally observed Best Bid and Offer rate'.
-'''''3. Further reforms'''''
-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.
-This was driven by a fall to significantly low levels in trading of Prime Bank eligible securities during the BBSW sampling window, which raised the risk that market participants might at some point be unwilling to use BBSW as a benchmark.
-Causes of this trend were:
-:a) a shift in NCD trading from banks to non-banks;
-:b) a reluctance by institutions to trade during the rate set window due to the conflict of interest caused by being part of a rate set process and then using the same rate in the derivatives market - and their uncertainty with how regulators would react;
-:c) money market funds wanting to trade at BBSW (as their performance is benchmarked to this) and not to be part of the rate set process;
-:d) foreign bank branches having less demand for NCDs and BABs than in the past since they are not considered high-quality liquid assets under the Liquidity Coverage Ratio (part of Basel 3).
-Having received numerous responses, the Australian Financial Markets Association (AFMA) issued a discussion paper in 2016, with proposed possible methodology changes.
-These included a 'Volume Weighted Average Price' method (VWAP) with NBBO as a back up method.
-The discussion paper also proposed:
-*Broadening the underlying eligible securities to include those traded by non-banks (e.g. Investment Funds and Treasury Corporations) - however, they would still be the NCDs and BABs of Prime Banks;
-*Interpolating 2, 4 and 5-month maturities from 1, 3 & 6-month rates;
-*Using a mix of telephonic and electronic trading prices; and
-*Extending the rate set window to cover 9am to 10.10am.
-The transition to the VWAP methodology is a significant exercise as it requires the development of new market infrastructure and a change in the way that a significant part of the market operates.
-The exact new methodology and its 'go-live' date were scheduled for publication in 2017.
-Whilst AFMA own the methodology, the administration and publication of BBSW were passed to the Australian Securities Exchange (ASX), on 1 January 2017, after a tender process, with a transition window to June 2017.
-Going forward, AFMA supported the future evolution of BBSW by working with the ASX, market participants and the Council of Financial Regulators to promote the market infrastructure and practices required to support widespread trading at outright prices in the underlying market.
-'''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==
+* [[AFMA]]
+* [[AONIA]]
+* [[ANZ]]
+* [[Ask]]
 * [[ASX]]
 * [[Australia]]
 * [[Australian Financial Regulation]]
+* [[Australian Securitisation Forum]]  (ASF)
+* [[Basel III]]
+* [[Basis point]]
+* [[Benchmark]]
+* [[Bid]]
+* [[Bill]]
+* [[BBSW calculation methodology]]
+* [[Collateral]]
+* [[Eligible security]]
+* [[Fallback]]
+* [[IBOR]]
+* [[IBOR Transformation Australian Working Group]]
+* [[Insurance]]
+* [[Interest rate]]
 * [[International Organization of Securities Commissions]]
+* [[International Swaps and Derivatives Association]]  (ISDA)
 * [[LIBOR]]
+* [[Liquid]]
+* [[Mid rate]]
+* [[Migration]]
+* [[Premium]]
 * [[Prime bank]]
 * [[Reference rate]]
+* [[Reserve Bank of Australia]]  (RBA)
+* [[Risk-free rates]]  (RFR)
+* [[Swap]]
+* [[Tenor]]
+==References==
+(1) [https://www2.asx.com.au/content/asx/search.html?q=bbsy ASX Bank BBSW Conventions and BBSW Methodology -  Effective 10th February 2020]
+(2) [https://www2.asx.com.au/connectivity-and-data/information-services/benchmarks/benchmark-data/bbsw ASX Benchmark Rates]
+(3)  [https://www.rba.gov.au/mkt-operations/resources/interest-rate-benchmark-reform.html Interest Rate Benchmark Reform in Australia - RBA]
-==Notes==
+(4)  [https://www.bis.org/review/r210318b.pdf “The End of Libor and the Australian Market”, ISDA Benchmark Strategies Forum Asia Pacific, Online, March 2021 - speech by Christopher Kent, Assistant Governor (Financial Markets) RBA]
-'''ASIC sues NAB, ANZ and Westpac'''
-[http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-183mr-asic-commences-civil-penalty-proceedings-against-national-australia-bank-for-bbsw-conduct/ ASIC press release - 7 June 2016]
+(5)  [https://www.rba.gov.au/speeches/2019/sp-ag-2019-03-19.html Debt Capital Markets Summit, Sydney, 19 March 2019 - speech by Christopher Kent, Assistant Governor (Financial Markets) RBA]
-[http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-110mr-asic-commences-civil-penalty-proceedings-against-westpac-for-bbsw-conduct/ ASIC press release - 5 April 2016]
-[http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-060mr-asic-commences-civil-penalty-proceedings-against-anz-for-bbsw-conduct/ ASIC press release - 4 March 2016]
+(6)  [https://afma.com.au/getattachment/Policy/topics/Benchmarks-Ibor-Transition/Sections/Content/20220404-ITAWG-Market-Statement-Publication.pdf?lang=en-AU Use of interest rate benchmarks in Australia - IBOR Transformation Australian Working Group - 4 April 2022]
+(7)  [https://www.rba.gov.au/publications/bulletin/2022/jun/fallbacks-for-bbsw-securities.html Fallbacks for BBSW - RBA - 16 June 2022]
-'''US class action'''
-[https://www.msn.com/en-au/money/topstories/rate-rigging-anz-nab-confirm-us-class-action-over-alleged-bbsw-manipulation/ar-BBvKWSK  News report - 18 August 2016]
+(8)  [https://www.coriumtreasury.com/ Corium Treasury]
-[[Category:Technical_skills]]
+[[Category:Accounting,_tax_and_regulation]]
+[[Category:The_business_context]]

BBSW: Difference between revisions

Latest revision as of 04:08, 2 February 2024

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