The 3-month or 6-month tenor is the better choice as a reference rate for financial products, the Reserve Bank of Australia said yesterday.Guy Debelle, deputy governor of the RBA, told an ISDA forum in Hong Kong that a parallel run of the planned new calculation process for the bank bill swap rate in Australia foreshadowed "a seamless transition to the new BBSW methodology".Monday week, the 21st of May, will be the first day under which the new Volume Weighted Average Price BBSW methodology will be effective, the Australian Securities Exchange said last week.The ASX will be the new custodian and publisher of BBSW rates.In a speech reflecting on the demise of Libor, Debelle surveyed the reform of the reference rate mechanism on his home turf."For several years, BBSW has been calculated from the best executable bids and offers for the bills issued by the major banks. This method is referred to as National Best Bid and Offer (NBBO). "Until recently, a significant concern had been the low trading volumes in the interbank market at the time of day that BBSW was being measured (around 10 am). While there are enough transactions over the course of the day, there were nowhere near enough occurring in the (small) rate set window. We consulted with market participants on why there was a lack of trading during the rate set, and they gave us a couple of reasons," Debelle said.He said these included "a potential conflict of interest when they participated in the market underpinning the benchmark and the derivatives market that references it. "They stated that they were uncertain about how regulators expected them to manage these conflicts.""Managers of investment funds were reluctant to trade at outright yields," Debelle said. "They preferred to transact at the yet-to-be-determined BBSW since this minimised tracking error against their performance benchmarks."The new methodology will involve calculating BBSW as the volume-weighted average price (VWAP) of bank bill transactions.The new methodology has broadened the BBSW rate set to include transactions outside the interbank market during a longer trading window, Debelle said. "This reflects that bank holdings of bills have declined over recent years to around a tenth of total issuance. Holdings by investment funds have increased to over half of total issuance. Previously, these investors had purchased bills outside the rate set, agreeing to the transaction at the yet-to-be-determined BBSW rate."Since late last year, banks and investors have been expected to trade bills at outright yields during the rate set window, he said. Debelle said this change in market practice had been "successfully implemented, enabling these transactions to be used to calculate BBSW. "The new arrangements are also improving the infrastructure in the bank bill market, encouraging more electronic trading and straight-through processing of transactions."The ASX has been conducting a parallel run of the new VWAP methodology over recent weeks and the results are promising. "On average, there are around A$1.5 billion in transactions during the rate set each day, with a wide range of institutions participating. On most days,