What is the ‘Bank Bill Swap Rate (BBSW)’
The Bank Bill Swap Rate (BBSW), or Bank Bill Swap Reference Rate, is a short-term interest rate used as a benchmark for the pricing of Australian dollar derivatives and securities, most notably floating rate bonds. It is similar in function to LIBOR and other short-term benchmarks as an interbank borrowing rate.
The BBSW is the midpoint of the Nationally Observed Best Bid and Offer (NBBO) for Prime Bank Eligible Securities. It samples the best bid and offer from approved trading institutions at three different times at and near 10:00 am Sydney time. The calculations for various maturities are based on real and executable bid and offer prices rather than peripheral observations of the market.
BREAKING DOWN ‘Bank Bill Swap Rate (BBSW)’
The BBSW was formerly published by the Australian Financial Markets Association (AFMA) through year-end 2016. Currently, the Australian Securities Exchange (ASX) calculates and maintains this rate.
The bank bill swap rate is Australia’s equivalent of LIBOR or SIBOR and is used as a reference rate in much the same way on an institutional level. For instance, a variable floating rate may quote 100 basis points over LIBOR, whereas in Australia they may use 100 basis points over the BBSW.
According to the ASX, the BBSW is not directly linked to mortgages or other retail lending as LIBOR and other similar benchmarks. Therefore, its impact in these areas is minimal and limited to its general effects on interest rate levels.
Prime Banks and Prime Bank Eligible Securities
A prime bank is one of several approved financial institutions and includes Australia’s four largest banks. The ASX reviews the members of this group annually. Membership requirements, as listed on the ASX, include:
- Being an authorized deposit taking institution (ADI) as defined by the Australian Prudential Regulation Authority (APRA)
- Satisfying a credit rating benchmark, specifically Standard & Poor’s short-term rating of A1+ and long-term rating for senior unsecured debt of at least AA
- Having securities eligible for use in by the Reserve Bank of Australia (RBA) in open market operations and standing liquidity facilities
The post Bank Bill Swap Rate (BBSW) appeared first on NewsWorld.