The ASX has begun calculating the bank bill swap rate (BBSW) using a new methodology that puts a greater emphasis on trade activity.
The ASX, which has been administering the BBSW since 1 January 2017, has added a volume weighted average price (VWAP) component to its calculation of the key benchmark.
The BBSW is a key measure of the rate Australia's 'Prime Banks' (currently the four major banks) lend to each other. It is used to to provide reference interest rates for Australian dollar derivatives and securities.
Unlike other countries, the Australian BBSW rate is not directly tied to mortgage rates.
All four of the major banks have been taken to court for manipulation of the BBSW in the past year. ANZ, CBA and NAB have agreed to settlements with the regulator, while Westpac chose to contest the allegations and is awaiting judgement from the Federal Court.
The government announced on 3 April 2018 it was increasing the maximum penalty for BBSW manipulation to 10 years jail for individuals and a $10 million fine for corporations.
The new BBSW methodology will bring Australia into line with international best practice and the International Organisation of Securities' Commission (IOSCO) Principles for Financial Benchmarks.
The new methodology will use a 'waterfall' that will include three stages: the VWAP calculation, the national best bid and offer (NBBO), and a fall-back waterfall.
One of the key changes is the VWAP calculation methodology, which will be performed over all eligible transactions observed within the rate set window. In addition, a rolling maturity pool will be used to determine the transactions used for calculations at each tenor.
ASIC and the RBA welcomed the new BBSW calculations in a joint statement on Monday.
RBA deputy governor Guy Debelle said: "The new methodology strengthens BBSW by anchoring the benchmark to a greater number of transactions. This should help to ensure that BBSW remains robust."
ASIC commissioner Cathie Armour said: "A transaction-based BBSW supports the market’s trust in the robustness and reliability of BBSW."
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