The scandal that led to the setting of Libor being moved from London to New York is raising questions here in Australia where the equivalent of Libor is the Bank Bill Swap rate (BBSW) that serves as a benchmark rate in the banking and finance system. It is administered by AFMA.
The main difference between the setting of Libor and BBSW is that with BBSW 14 market participants are asked about the actual rates they see in the market for prime bank paper while setting Libor was more about subjective opinions on interbank borrowing rates.
In Australia, data is taken from 14 market participants (the Big Four banks plus 10 others) at 10am each trading day – reporting the average mid-rate pricing that they are observing for prime bank paper with standard maturities of one to six months.AFMA analyses the data and removes the four highest and four lowest rates from the data set – making it tough for a single institution to manipulate the data.
It should be noted that Libor involved a similar process and it was still corrupted. Cynics also point out that some of the banks on the BBSW panel are owned by banks that have been implicated in the Libor scandal.
In Australia, quotes relate to bank paper traded as a group while Libor contributions were for each bank in respect of its own paper.
The BBSW setting process is also subject to oversight from AFMA’s Market Governance Committee which looks after OTC markets. The committee is also responsible for approving any changes to the OTC market conventions that support the BBSW process. The Committee also reviews the quality of panellist data to ensure that each panellists reporting accurately.