Interest Rate Benchmark Reform in Australia

Interest rate benchmarks are widely relied upon in global financial markets. They are referenced in contracts for derivatives, loans and securities. They are also used by market participants to value financial instruments, and by investment funds as benchmarks for assessing their performance. In response to the weaknesses identified in the setting of financial benchmarks such as the London Interbank Offered Rates (LIBOR), the global regulatory community has been involved in a program to strengthen financial benchmarks (for further information, refer to Financial Stability Board – Financial Benchmarks). For the Australian dollar, the key interest rate benchmarks are the bank bill swap rates (BBSW) and the cash rate. Reforms have also been undertaken 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 in Australia to issue short-term bank paper for each monthly tenor between one month and six months. BBSW was administered by the Australian Financial Markets Association (AFMA) until this responsibility was transferred to the Australian Securities Exchange (ASX) in 2017. Australia has an active bank bill market, where the major banks issue bills as a regular source of funding, and a wide range of wholesale investors purchase bills as a liquid cash management product. The Australian financial regulators have been working closely with the ASX and market participants to ensure that BBSW remains robust. For further information about the reforms undertaken to strengthen BBSW, refer to ASX Benchmark Administration.

Cash Rate

The risk-free benchmark for the Australian dollar is the cash rate. It is administered by the Reserve Bank and calculated as the weighted average interest rate on unsecured overnight loans between banks. The cash rate is best known as the Reserve Bank Board's operational target for monetary policy. The cash rate is also known by the acronym AONIA (AUD Overnight Index Average) in financial markets. The RBA also publishes a cash rate total return index (TRI) since May 2016 as a complementary backward-looking benchmark, based on the cash rate. For further information about the cash rate, refer to Cash Rate Methodology.

Regulatory Framework for Financial Benchmarks

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

Committees Working on Benchmark Reform

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

  • ASX BBSW Advisory Committee – ASX, in consultation with the BBSW Advisory Committee, has primary oversight of the governance of the BBSW benchmark. The BBSW Advisory Committee has broad industry representation. For further information on the BBSW benchmark, refer to ASX Benchmark Administration.
  • Australian Financial Markets Association (AFMA) - AFMA's Market Governance Committee promotes industry dialogue and facilitates information sharing among market participants, including on benchmark reform issues, to assist efficiency and professionalism in the operation of the financial markets. For more information, refer to AFMA.
  • Australian Securitisation Forum (ASF) – the ASF has established a working group to consider the implications of benchmark reform for the Australian securitisation market. For more information, refer to ASF.

Work on Contractual Fallbacks

Australian market participants have been engaged in the Asia-Pacific Benchmark Working Group of the International Swaps and Derivatives Association (ISDA). This has culminated in BBSW being included in ISDA's Consultation on Benchmark Fallbacks, with the cash rate identified by the RBA and market participants as the fallback rate. The RBA asked the relevant market associations to encourage their members to participate in the consultation, and expects market participants to adopt more robust fallbacks for BBSW following this process. For more information, refer to ISDA.

Speeches and publications