For some time now, the Reserve Bank has been telling issuers in the capital markets that the one-month bank bill swap rate is not as robust or liquid as other BBSW tenors, and alternative benchmarks should be preferred. But no one seems to be listening.
Many, if not most, of the asset-backed securities, residential mortgage-backed securities, hybrids and floating rates note issues reported on by Banking Day over the past year have had their margins set using one-month BBSW as a benchmark.
Questions over the use of BBSW are part of a broader discussion about the move away from the use of LIBOR and other “IBORs” as benchmarks in the global capital markets, in favour of more robust reference rates.
BBSW is Australia’s equivalent of LIBOR, although it is a special case.
Earlier this month, Ice Benchmark Administration, which administers and publishes LIBOR, confirmed that it will publish most LIBOR rates for the last time on December 31 this year.
By then different markets will have moved to new reference rates. In the United Kingdom, for example, UK LIBOR will be replaced by the Sterling Overnight Index Average (SONIA).
AONIA (effectively the overnight cash rate) is the officially sanctioned alternative reference rate for Australian dollar-based transactions.
However, what makes Australia different is that the old benchmark, BBSW, will continue to be used.
Last November, RBA deputy head of domestic markets, Andrea Brischetto, told delegates at a FINSIA webinar on LIBOR transition that regulators will leave it up to market participants to decide what local reference rates they use in future.
Brischetto said: “BBSW does remain robust, although not all BBSW tenors are as robust as others. The one-month is less liquid.
“We are asking people to consider using alternative benchmarks to one-month BBSW but in general we are not dictating what rate market participants use.”
RBA assistant governor financial market, Christopher Kent, reiterated this message at an ISDA forum last week, saying: “In some cases, referencing the cash rate will make sense, Floating rate notes issued by governments, non-financial corporations and securitisation trusts are possible examples.
“But in other cases a credit-based benchmark like BBSW will continue to make sense. Floating rate notes and corporate loans issued by banks are examples of this.
“But not all BBSW tenors are as robust as others. In particular, the one-month BBSW is largely a buyback market. Users of one-month BBSW should give careful consideration to using alternative benchmarks, given the lack of liquidity in this market.”
Kent also said the RBA will be looking to issuers referencing BBSW in future to include fallbacks, which are replacement rates that apply to trades referencing a particular benchmark if the benchmark becomes unavailable.
Last year, ISDA announced that the fallback rate in Australia will be an adjusted version of AONIA. The adjustments are to ensure contracts negotiated to reference IBOR continue to meet the original objectives of the counterparties to the maximum extent possible.