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.
As at 19 March 2019, confidence still exists in the various BBSW tenor rates, apart from 1 month BBSW, which is abnormally volatile due to a lack of underlying transactions. The Reserve Bank of Australia (RBA) recommends that market participants find alternatives for this rate ‘in a timely manner’ (see Notes below), suggesting that 3 month BBSW or the cash rate are used and that participants do not wait for the development of a term risk-free rate.
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 Australian Securities Exchange (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 - see BBSW calculation methodology for mechanics and evolution.
BBSW Outlook, fallback provisions, risk free rates and term risk-free rates
As at March 2019, 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), is in general decline as regulatory liquidity standards drive bank funding away from short term sources such as bank bills so the existence of a bank bill market of sufficient size to support BBSW shouldn’t be taken for granted. Thus the RBA have been working with the International Swaps and Derivatives Association (ISDA) to design fallback provisions for BBSW, as well as LIBOR. For BBSW, this involves using the cash rate (administered by the RBA and calculated directly from transactions in the interbank overnight cash market and considered as the risk free rate for the AUD) - as the fall-back, with an adjustment for the historical spread between BBSW and the cash rate.
Secondly, there is expected to be a migration away from BBSW towards the cash rate, driven by the transition from LIBOR to risk free rates internationally, especially for financial products.
Thirdly, there is also demand from investors for term risk-free rates with similar tenors to BBSW (and LIBOR), with some users valuing having more certainty about their cash flows, since such a rate would be known at the start of the relevant interest period, rather than being calculated at the end of the period by compounding the cash rate. It could be possible to generate this term rate using the overnight indexed swap market or the repo market, which the private sector is trying to achieve. However, whilst supporting these activities, the RBA warn that there will need to be significant effort to develop the appropriate market infrastructure and practices before such term rates could be considered robust benchmarks. They therefore encourage market participants to consider using the cash rate for this purpose, rather than waiting for the development of a term risk-free rate.
(see Notes below for source)
- Australian Financial Regulation
- BBSW calculation methodology
- International Organization of Securities Commissions
- Prime bank
- Reference rate
Debt Capital Markets Summit, Sydney, 19 March 2019 - speech by Christopher Kent, Assistant Governor (Financial Markets) Reserve Bank of Australia