Early this year the Australian Financial Markets Association announced that the ASX had been appointed as the new bank bill swap (BBSW) benchmark rate administrator. Following a transition period, the ASX has now taken over full responsibility for calculating the BBSW which is a key interest rate benchmark.
The BBSW is the primary short-term rate used in the financial markets for the pricing and valuation of derivatives and debt securities such as floating rate bonds, and as a lending reference rate in Australia.
As part of the transition, a new calculation methodology is being finalised and will be introduced. This new methodology is aimed to align with international best practice and the International Organisation of Securities’ Commission (IOSCO) Principles for financial benchmarks.
Commenting on the proposed methodology, Terry Toohey from Atchison Consultants is pleased with the outcome of the review and the proposed methodology, “We believe that this new methodology meets the local market requirements and introduces best principles for benchmark construction of the BBSW. Previously, the BBSW was calculated by aggregating bids from AFMA members (including the big four banks) with high and low extremes discarded to find an average rate. The previous methodology presented some challenges and concerns, in particular the robustness and integrity of the bid prices being collected.”
The proposed changes to the methodology followed revelations of a conspiracy among a group of Wall Street financial firms (mostly based in Japan and London) to manipulate the price of London interbank offered rates (LIBOR). These activities generated big trading gains for the firms, big bonuses for staff and alleged associated corrupt activities. LIBOR is the interest rate that big banks charge one another to borrow money. Refer to our previous article on the manipulation of the BBSW here.
Similar to the BBSW, LIBOR is the benchmark base short-term interest rate used to set the price of loans around the world, including corporate loans, car loans, credit card loans and mortgages. Lenders add a margin above LIBOR to reflect credit risk. The manipulation of LIBOR meant that borrowers incurred higher borrowing costs.