RBA Debelle: Mkt Should Work To Enhance BBSW As Libor May Fade

--Urges Mkt to Look At Risk-Free Benchmark Like Cash Rate For Certain Contracts

By Sophia Rodrigues

     SYDNEY (MNI) - More work needs to be done to enhance the bank bill swap

rate (BBSW) benchmark as the longevity of Libor cannot be assumed, Reserve Bank

of Australia Deputy Governor Guy Debelle said Friday, even as he urged market

participants to look at the appropriateness of risk-free benchmarks like the

cash rate for certain contracts.

     In his prepared remarks at a FINSIA event in Sydney on Friday, Debelle said

"the longevity of Libor cannot be assumed, and you [market participants] should

start considering today what that might mean for any contracts you have that

reference Libor."

     He said the Council of Financial Regulators -- of which the RBA is one of

the regulators -- is working closely with the industry to ensure that BBSW,

Libor's equivalent interest rate benchmark for the Australian dollar, remains a

robust financial benchmark.

     "For the new BBSW methodology to be implemented successfully, the

institutions that participate in the bank bill market will need to start trading

bills at outright yields rather than the current practice of agreeing to the

transaction at the yet-to-be determined BBSW rate," Debelle said.

     This change of behavior needs to occur at the banks that issue the bank

bills, as well as those that buy them, including the investment funds and state

treasury corporations, he said.

     The RBA is also playing its part by agreeing to move its open-market

operations to an earlier time to support liquidity in the bank bill market

during the trading window, Debelle added.

     Debelle said that Australia is well advanced in changes to enhance the

longevity of BBSW. "While these changes entail some costs, the cost of not doing

so would be considerably larger."

     He went on to say that while BBSW remains a robust benchmark, it is also

important for market participants to ask if a risk-free rate instead of a

credit-based reference rate is a better benchmark for certain contracts.

     For instance, floating rate notes (FRNs) issued by governments,

non-financial corporations and securitization trusts, which are currently priced

at a spread to BBSW, could instead tie their coupon payments to the cash rate,

he suggested.

     For other products such as corporate loans, it makes sense to continue

referencing a credit-based benchmark that measures banks' short-term wholesale

funding costs, he added.

     He noted that the RBA's cash rate is the risk-free interest rate benchmark

for the Australian dollar even though the cash rate is not a perfect substitute

for BBSW, as it is an overnight rate rather than a term rate, and doesn't

incorporate a significant bank credit risk premium.

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

[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$,M$$FI$,MN$FI$,MN$FX$]