MNI POLICY:RBA:Some Move Fm BBSW To Cash Rate Benchmark Likely

By Sophia Rodrigues

     SYDNEY (MNI) - In a bulletin article published Thursday, the Reserve Bank

of Australia is making a case for wider use of the cash rate as a financial

benchmark for the Australian dollar. The article also said that the trading in

bank bill swap rate (BBSW) suggests banks have lengthened the tenor of their

wholesale funding.

     Below are the key points from the article.

     --The BBSW is an important and widely-used interest rate benchmark in

Australia but as market participants transition away from LIBOR to alternative

risk-free rates (RFR), there may be corresponding migration away from BBSW to

the cash rate which is the RFR for the Australian dollar, the article says.

     --Such a transition is likely to occur mainly in products that reference

interest rate benchmarks in multiple currencies, such as cross-currency swaps

and syndicated loans. Indeed, in a speech in May, RBA Deputy Governor Guy

Debelle urged users to consider whether risk-free benchmarks are more

appropriate for financial contracts than credit-based benchmarks. This message

is also reiterated in the article.

     --In any case, there is infrastructure in place for both BBSW and the cash

rate to coexist as the key interest rate benchmarks for the Australian dollar.

     --The article also contained information on the performance of the BBSW

under the new methodology that came into effect in May 2018. Some analysts

attributed a part of the rise in BBSW rate in recent months to the new

methodology but it's unclear if there's enough evidence to support this.

     --Since May, there has been an average of around A$1.8 billion in

transactions during the rate set window each day across all tenors, which is a

very sharp rise from just A$100 million previously. The increase in trading

during the rate set window has occurred not just in the most traded one, three

and six-month BBSW but also in others that were rarely traded previously.

     --The six and three-month BBSW are the most frequently traded, which

indicates banks have increased the tenor of their wholesale funding. One-month

trading is less frequent and hence its volume weighted average price is formed

about only half the time. Debelle has previously suggested users of products

referencing one-month BBSW should consider referencing six or three-month BBSW

in future.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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