Guy Debelle, the Reserve Bank of Australia's assistant governor for financial markets, has outlined the domestic reforms on setting the principal interest rate benchmark in Australia, the bank bill swap rate. Speaking at a debt capital markets summit in Sydney yesterday, he also set out the progress towards a 'risk-free' interest rate for the domestic market, "as a complement to BBSW." Since 2013, the Australian Financial Markets Association has calculated BBSW benchmark rates as the midpoint of the (nationally) observed best bid and best offer for Prime Bank Eligible Securities, which are bank accepted bills and negotiable certificates of deposit. Currently, the Prime Banks are the four major Australian banks. The main worry with this system is not its lack of integrity - as has been the case in other markets. Rather, it's that "while the outstanding stock of bills and NCDs issued by the Prime Banks has increased since 2013 to around $140 billion … there are quite a number of days where there is no turnover at all … [which] raises the risk that market participants may at some point be less willing to use BBSW as a benchmark," Debelle explained. "This is the motivation for the Council of Financial Regulators' consultation on possible reforms to the BBSW methodology." One aspect following on from this analysis is that Prime Bank bills are increasingly traded by non-banks, as submissions to the CFR have pointed out. "To boost activity during the rate set, most submissions supported broadening the definition of the underlying market beyond the interbank market to include transactions with a wider range of counterparties, such as investment funds and the treasury corporations," said Debelle.The key change to the methodology proposed by many of the submissions on the question of how to tweak BBSW was to calculate BBSW directly from market transactions, rather than using the NBBO method, Debelle said. That is, calculating BBSW as the volume-weighted average price of market transactions during the rate set window (currently at around 10 am each morning)."Calculating the VWAP should be feasible for the one, three and six-month BBSW tenors, since these are the most liquid. The Prime Banks issue three and six-month NCDs on almost a daily basis, and there is an active market in buying back one month NCDs … however, there is unlikely to be sufficient liquidity in the underlying market at the two, four and five-month tenors to reliably calculate the VWAP, so we propose that these tenors be calculated by interpolation from the more liquid tenors," he said.Debelle also suggested other reference rates may be more appropriate for certain calculations, for instance, the floating rate notes issued by governments."FRN coupon payments are typically priced at a spread to BBSW. While referencing BBSW makes sense for FRNs issued by banks, it is less clear why governments should tie their coupon payments to a measure of bank funding costs," said Debelle.