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BFCSA: BBSW enters new era after Westpac ruling

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BBSW enters new era after Westpac ruling

Australian Financial Review May 25 2018 11:00 PM

Jonathan Shapiro

 

The guardian of Australia's key benchmark bank bill swap rate says the new rate setting process, which went live just days before the Federal Court judged Westpac to have engaged in unconscionable conduct, is working as intended.

"There are multiples of transaction volumes we need. Market participants have worked really well to move to the new rate set window," the Australian Securities Exchange's Helen Lofthouse told AFR Weekend.

The official move to the new system that sets the bank bill swap rate (BBSW) for different maturities from overnight to six months based on a volume-weighted average price of trades from banks and other participants, such as fund managers, went live on Monday. It comes as regulators globally move to reform the way they set key interest rate benchmarks so they are less susceptible to manipulation.

The process includes a "failsafe'' in which banks can make submissions if there are insufficient volumes. The BBSW is the benchmark rate that is used as a reference to set rates for more than $5 trillion of debt contracts, including business loans, bonds and derivatives.

But Ms Lofthouse, who is responsible for over-the-counter markets and derivatives at the securities exchange, said there was enough trading volume in the main three and six-month BBSW contracts to rely on market transactions to set the rate.

That seems to have allayed fears over the regulator's pursuit of banks that had alleged the rate could have the unintended consequence of reducing trading activity and compromising the rate.

Ms Lofthouse said the court ruling removed uncertainty but that traders had become more comfortable once trading guidelines were issued last year. 

Australia's banks will pay less than a combined $150 million in settlements, after Westpac's expected $3.3 millon penalty and potential legal costs are added to a combined $125 million of settlements paid by ANZ Banking Group, Commonwealth Bank and National Australia Bank.

International banks paid more than $US9 billion ($11.9 billion) in settlements with regulators over rigging of the London Interbank Offered Rate (LIBOR), with some traders such as Thomas Hayes receiving lengthy jail terms.

Key difference

One of the key differences between the LIBOR and BBSW issues is that global banks colluded to set LIBOR.  There were no allegations that the Australian banks colluded to set BBSW. In fact, the banks aggressively jostled with each other to force the rate in their favoured direction.

Ms Lofthouse said Australia's financial markets were better placed than international markets to reform their interest rate benchmarks because the BBSW could be adapted to be set by market trading activity.

With the exception of overnight setting of LIBOR for US dollars and euros, less than half of the submission used to set the rate is derived or set using actual transactions, according to exchange operator ICE.

"The key difference is a lot of the LIBOR are based on submissions and there is a lack of short-term funding to base those trades on," said Ms Lofthouse.  

Australia had an advantage in that it could transition to a rate-setting process built around actual market transactions that would allow it to keep its current rate.  

"There is actually a bank bill market with enough depth and liquidity to do a transaction-based rate for BBSW. The pain of transitioning from LIBOR to a new rate is really substantial."

 


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