The Australian Securities Exchange is proposing to widen the maturity pool for eligible trades used for calculating the bank bill swap rate. Its aim is to increase the number of transactions used to form the rate and increase the frequency with which the rate will be set.
ASX Benchmarks, the BBSW administrator, has issued a consultation paper on proposed enhancements to the existing bank bill swap rate calculation methodology. The ASX wants to increase the frequency with which BBSW rates are calculated using transaction data.
The proposed enhancements relate to the transaction layer of the BBSW calculation waterfall. ASX is looking to implement the changes in November.
BBSW is the equivalent of interbank offer rates (IBOR) used in overseas market, which are being phased out in favour of alternative reference rates, also called term risk free rates. The United Kingdom market is moving from UK LIBOR to sterling overnight index average (SONIA).
BBSW will continue to be available into 2021 and beyond, when most other IBORs are expected to be phased out. The ASX is working to improve the robustness and longevity of BBSW.
BBSW is Australia’s most widely used reference rate, used for pricing Australian dollar derivatives, loans and securities contracts.
Rates are based on either transaction data or live executable prices using a calculation waterfall methodology. The primary layer of the waterfall is the volume weighted average price methodology which uses transactions in prime bank paper.
Where a BBSW rate cannot be calculated under the VWAP methodology for one or more tenors, the national best bid and offer is used.
The VWAP methodology is based on eligible trades executed during the rate set window.
Where VWAP or NBBO cannot be used there are several fallback methodologies. Since the ASX took over administration of BBSW in 2017 it has not had to use any of the fallback options.
The consultation paper says: “While the VWAP methodology works well, ASX Benchmarks would like to increase the frequency with which transactions are used to calculate BBSW, from the current 48 per cent.
“There is a significant amount of transaction data that cannot be used to form the benchmark rate because it falls outside the current eligible maturity pool.”
Currently, eligible trades consist of trades that mature within five business days either side of the maturity date for that tenor.
Maturity dates greater than five business days are excluded because it is considered that they would introduce too much variance.
ASX’s analysis of historical data revealed that widening the maturity pool to 10 business days would increase the frequency of setting the rate using transaction data but would also increase the variability of the rate to an extent that could undermine the integrity of the benchmark.
ASX is proposing to widen the maturity pool but at the same time adjust the weighted average of the transactions by maturity date. The approach, called weighted least square regression, would reduce variability while widening the maturity pool.
One exception would be the one-month tenor, which would use an asymmetric maturity pool of -5/+10 business days.