Australia plans to scrap the panel that sets its benchmark interbank borrowing rate, becoming the first major developed economy to replace its rate-setting regime following the global LIBOR-rigging scandal.
The nation’s bank bill swap rate will be compiled directly using prices from brokers and electronic markets instead of asking a panel of banks, the Australian Financial Markets Association (AFMA), which publishes the benchmark, said in an e-mailed statement yesterday.
HSBC Holdings PLC and Citigroup Inc will stop contributing to the rate from the end of this month, the AFMA said.
Their exit will reduce the panel to 10 members after UBS AG left last month and JPMorgan Chase & Co said it would leave by today. Banks are quitting rate-setting panels worldwide, under tougher scrutiny and rising compliance costs following scandals that cost Barclays PLC, UBS and Royal Bank of Scotland Group PLC about US$2.5 billion in fines.
“While there weren’t any real concerns with the existing process, this announcement will put some additional safeguards in place,” said Rick Moscati, treasurer at Melbourne-based Australia & New Zealand Banking Group Ltd, the country’s third-biggest lender by market value. “That can only be viewed as a positive step that we broadly support.”
AFMA’s proposal is subject to meeting technical requirements, it said yesterday. The group, which represents 130 brokers, banks and fund managers in Australia, plans to start the new system “within a period of months,” it said.
“This is the first time that I know of where an existing system based on a panel of banks will be changed to an externally observed one,” said Sean Keane, an Auckland-based analyst at Triple T Consulting and the former head of Asia-Pacific rates trading at Credit Suisse Group AG.
“The change is likely to be very well-received around the world by most of the regulators that are pushing for just this sort of observable system,” he said.
Global regulators are overhauling financial benchmarks after the rate-rigging scandal spurred debate over whether they should be based on submissions from banks or market transactions.
The UK government is searching for a group to set the London interbank offered rate (LIBOR) instead of the British Bankers’ Association, after banks paid penalties for manipulating the benchmark. Approximately US$350 trillion of notional swaps and US$10 trillion of loans are indexed to LIBOR, according to the US Commodity Futures Trading Commission.
At least A$350 billion (US$366 billion) of Australian syndicated loans and floating-rate bonds are priced off BBSW, according to data compiled by Bloomberg. Trading of swaps, forward rate agreements and options tied to BBSW was worth more than A$8.7 trillion in the 2009 financial year, according to an AFMA letter to global banking regulators in 2010.
“The plan eliminates the need for a panel and the compliance cost for banks,” David Lynch, Sydney-based executive director of AFMA, said in a telephone interview. “This is in the developmental stage.”
Australia’s bank bill swap rate is now calculated by asking panelists daily for the actual rates they observe in the brokered market at around 10am. The highest and lowest bids are then sequentially eliminated until six remain.