The Reserve Bank has confirmed that Australia is a special case when it comes to the move away from the use of interbank offer rates in financial markets for the pricing and valuation of financial instruments.
The Reserve Bank’s 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.
“The risk-free rate we have chosen is our overnight cash rate, which has a robust waterfall.
“We expect market participants to use a robust reference rate that makes most sense for the particular product.”
However, Brischetto made it clear that local regulators and the central bank have a clear timeline for LIBOR transition. The first deadline is at the end of this year, when firms should be in a position to offer non-LIBOR linked loans to their customers.
By the middle of next year firms should have formalised plans to amend legacy contracts, where this can be done, to replace LIBOR references with the appropriate risk-free rate.
Where that cannot be done, because of the number of counterparties and the complexity of the contract for example, a fallback protocol should be in place.
Last month, the International Swaps and Derivatives Association launched its LIBOR fallback protocol, which provides replacement rates that apply to trades referencing a particular benchmark and which take effect if the benchmark becomes unavailable while market participants have exposure to that rate.
Local regulators have told Australian institutions to adhere to the protocol.
And by the end of next year firms should no longer be using LIBORs.
Brischetto said: “Institutions that continue using LIBOR beyond the end of next year face considerable reputational, operational and legal risks.
“When LIBOR ends, firms with contracts referencing LIBOR will be facing contractual disputes with the potential to flow through to operational disruptions. At a system level, these firms risk disrupting financial markets more generally.”
BBSW was included in ISDA’s fallback protocol. The fallback rate in Australia will be an adjusted version of the AUD overnight index average (AONIA), which is the published screen rate for the Reserve Bank cash rate.
Brischetto said that in future the RBA will be requiring contracts that reference BBSW to include the relevant ISDA fallback provisions in order to be eligible collateral in its market operations.
However, it is still working on the timing of this change.
Another speaker at the webinar, ANZ senior capability consultant David Doyle, said system upgrades are a significant piece of work.
Doyle said: “We have to think about what new products we are going to offer because our products have built up market conventions over the past 30 years.
“Large US and European banks have yet to come up with what the new methodology will be. The conventions are