Market Operations Resources – Interest Rate Benchmark Reform in Australia (2024)

Interest rate benchmarks are widely relied upon in global financial markets. They are referencedin contracts for derivatives, loans and securities. They are also used by market participants tovalue financial instruments, and by investment funds as benchmarks for assessing theirperformance. In response to the weaknesses identified in the setting of financial benchmarkssuch as the London Interbank Offered Rates (LIBOR), the global regulatory community has beeninvolved in a program to strengthen financial benchmarks (for further information, refer to Financial Stability Board – Libor and Other Benchmarks). For the Australian dollar, the key interest ratebenchmarks are the bank bill swap rates (BBSW) and the cash rate. Reforms have also beenundertaken to enhance the robustness of these benchmarks.

Bank Bill Swap Rates (BBSW)

BBSW are credit-based interest rate benchmarks which measure the cost for highly rated banks inAustralia to issue short-term bank paper for each monthly tenor between one month and sixmonths. BBSW was administered by the Australian Financial Markets Association (AFMA) until this responsibility was transferred to theAustralian Securities Exchange (ASX) in 2017. Australia has an active bank bill market, wherethe major banks issue bills as a regular source of funding, and a wide range of wholesaleinvestors purchase bills as a liquid cash management product. The Australian financialregulators have been working closely with the ASX and market participants to ensure that BBSWremains robust. For further information about the reforms undertaken to strengthen BBSW, referto ASX Benchmark Administration.

Cash Rate

The (near) risk-free benchmark rate (RFR) for the Australian dollar is the cash rate. It is administered by theReserve Bank and calculated as the weighted average interest rate on unsecured overnight loansbetween banks. The cash rate is best known as the Reserve Bank Board's operational targetfor monetary policy. The cash rate is also known by the acronym AONIA (AUD Overnight IndexAverage) in financial markets. The RBA also publishes a cash rate total return index (TRI) since May 2016as a complementary backward-looking benchmark, based on the cash rate. For further informationabout the cash rate, refer to CashRate Methodology.

Regulatory Framework for Financial Benchmarks

In April 2018, the Australian Government implemented a new regulatory framework for financialbenchmarks. For further information on the financial benchmarks deemed significant by ASIC,refer to ASICFinancial Benchmarks.

Committees Working on Benchmark Reform

The Australian financial regulators have been working closely with industry working groups toensure that key interest rate benchmarks for the Australian dollar remain robust. Key workinggroups involved in interest rate benchmark reform in Australia are:

• ASX BBSW Advisory Committee – ASX, in consultation with the BBSW AdvisoryCommittee, has primary oversight of the governance of the BBSW benchmark. The BBSW AdvisoryCommittee has broad industry representation. For further information on the BBSW benchmark,refer to ASX Benchmark Administration.
• Australian Financial Markets Association (AFMA) – AFMA's Market GovernanceCommittee promotes industry dialogue and facilitates informationsharing among market participants, including on benchmark reform issues, to assistefficiency and professionalism in the operation of the financial markets. AFMA alsohosts the IBOR Transformation Australian Working Group, which is Australia's nationalworking group for considering the strategic issues facing Australia in relation to IBORtransition and benchmark reform, and leading work on domestic responses to the change.For more information, refer to AFMA.
• Australian Securitisation Forum (ASF) – the ASF has established a workinggroup to consider the implications of benchmark reform for the Australian securitisationmarket. For more information, refer to ASF.

Robust Contractual Fallbacks

Fallbacks provide important insurance when using any benchmark. ISDA's 2020 IBOR FallbacksProtocol and associated Supplement to the 2006 ISDA Definitions came into effect in early 2021,implementing robust fall-back provisions for derivative contracts referencing key interbankoffered rates (IBORs), including LIBOR and BBSW. If a particular IBOR was to become unavailable,these fallback provisions provide for it to be replaced with the relevant risk-free rate plus afixed spread. For more information, refer to ISDA. Australian regulators have stronglyencouraged financial institutions and corporations that use derivatives contracts referencingLIBOR to review and, wherever practical, adhere to the ISDA protocol as a key element of theorderly transition away from LIBOR. In addition, in September 2021, the Reserve Bank publishednew repo eligibility criteria requiring robust fallback provisions for securities referencingBBSW. In order to be eligible as collateral in the Reserve Bank’s market operations, allfloating rate notes (FRNs) and marketed asset-backed securities issued on or after 1December2022that reference BBSW must include robust fallback provisions. For more information, refer toMedia Release.

Speeches

• Christopher Kent (2021), ‘The End of Libor and the Australian Market’, Keynote Address to ISDABenchmark Strategies Forum Asia Pacific, Online, 18 March.
• Christopher Kent (2020), ‘Benchmark Reforms’, Remarks to the Australian Securitisation ForumVirtualSymposium, Sydney, 17 November.
• Christopher Kent (2019), Panel participation at the Australian Securitisation Forum – Sydney, 19November.
  Audio 13.33MB
• Christopher Kent (2019), Panel participation at the International Swaps and Derivatives Association – Sydney, 23 October.
  Audio 8.05MB
• Guy Debelle, Cathie Armour, Andrew Bailey and Christopher Giancarlo, (2019), Panel discussion –The End of Libor and the Impact on Australian Financial Markets – Sydney, 13May.
  Audio34.21MB
• Guy Debelle (2019), ‘Progress on Benchmark Reform’,Keynote Address at ISDA 34th Annual General Meeting, Hong Kong, 11April.
• Christopher Kent (2019), ‘Bonds and Benchmarks’,Address to the KangaNews DCM Summit, 19March.
• Christopher Kent (2018), ‘Securitisation and the Housing Market’,Address to the Australian Securitisation Forum Conference, 26November.
• Guy Debelle (2018), ‘Interest Rate Benchmark Reform’, Keynote Address at ISDA(International Swaps and Derivatives Association) Forum (appearance via video link), Hong Kong, 15May.
• Guy Debelle (2017), ‘Interest Rate Benchmarks’,Speech at FINSIA Signature Event: The Regulators, Sydney, 8September.
• Guy Debelle (2016), ‘Interest Rate Benchmarks’,Speech at KangaNews Debt Capital Markets Summit 2016, 22February.
• Guy Debelle (2015), ‘Benchmarks’, Address to Bloomberg Summit, Sydney, 18 November.

Media Releases

• RBA (2021), ‘Robust Fallbacks Required for BBSW Securities’, Media Release No. 2021-20, 13September.
• RBA, ASIC and APRA (2021), ‘Regulators expect Australian institutions to cease theuse of LIBOR in new contracts before the end of 2021’, Media Release No. 2021-10, 4 June.
• RBA (2020), ‘Regulators urge Australian institutions to adhere to the ISDA IBOR Fallbacks Protocol and Supplement’, Media Release No. 2020-25, 13 October.
• RBA, ASIC and APRA (2020), ‘Regulators Release Feedback on Financial Institutions'Preparation for LIBOR Transition’, Media Release No. 2020-12, 8 April.
• RBA, ASIC and APRA (2019), ‘Regulators Urge Financial Institutionsto Plan for LIBOR Transition’, Media Release No. 2019-12, 9May.
• RBA and ASIC (2018), ‘ASIC and RBA Welcome the New BBSW Calculation Methodology’,Media Release No. 2018-13, 21May.
• RBA and ASIC (2017), ‘ASIC and RBA Welcome the Publication of ASX BBSW Tradeand Trade Reporting Guidelines’, Media Release No. 2017-22, 10October.

Publications

• Alim S and E Connolly (2018), ‘Interest Rate Benchmarks for the Australian Dollar’, RBA Bulletin, September.
• Hing A, G Kelly and D Olivan (2016), ‘The Cash Market’, RBA Bulletin, December.
• Council of Financial Regulators (2016), ‘Financial Benchmarks Regulatory Reform’, Consultation.
• Council of Financial Regulators (2015), ‘Evolution of the BBSW Methodology’, Consultation.