Bank Bill Swap Rate (BBSW)
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 utilized as a benchmark for the pricing of Australian dollar derivatives and securities — most eminently, floating rate bonds.
What Does the BBSW Tell You?
The BBSW is an independent reference rate that is utilized for pricing securities. Fixed income investors use BBSW since it's the benchmark to price floating rate bonds and different securities. The BBSW is an average of the bank bill rates supplied by banks for different maturities. At the end of the day, it's the midpoint rate for different bank-eligible securities and is the rate that banks loan to one another in Australia.
How Is the BBSW Calculated?
The BBSW is calculated and distributed by the Australian Securities Exchange (ASX), which keeps up with this rate. The bank bill swap rate is Australia's equivalent of London Interbank Offered Rate (LIBOR) and is utilized as a reference rate similarly on an institutional level.
For survey, LIBOR is an average value of interest-rates, which is calculated from gauges presented by the leading global banks consistently. It fills in as the most important phase in working out interest rates on different loans all through the world.
The Intercontinental Exchange, the authority responsible for LIBOR, will stop distributing one-week and two-month USD LIBOR after Dec. 31, 2021. Any remaining LIBOR will be discontinued after June 30, 2023.
For example, a variable floating rate might quote 100 basis points over LIBOR, though in Australia, they might utilize 100 basis points over the BBSW. As stated before, the BBSW is an average of the bank bill rates supplied by banks for different maturities.
As per the ASX, the BBSW isn't as straightforwardly linked to the home loan or other retail lending indexes just like the LIBOR and other comparable benchmarks. Its impact in these areas is accordingly negligible and limited to its general effects on interest rate levels.
There is a risk premium added to the BBSW to make up for the risk of the securities as compared to the risk-free rate, which is commonly founded on government bonds. For instance, in the U.S., the risk-free rate is commonly the U.S. Treasury since it's backed by the U.S. government.
The credit premium added to the BBSW is commonly small, for example, five to ten basis points. In any case, it has surpassed more than 300 basis points during the financial crisis of 2008 and the months following.
Prime Banks and Prime Bank Eligible Securities
A prime bank is one of several approved financial institutions and incorporates Australia's four biggest banks. The ASX surveys the individuals from this group every year. Enrollment requirements, as listed on the ASX, include:
- Being an authorized store taking institution (ADI) as defined by the Australian Prudential Regulation Authority (APRA)
- Fulfilling a credit rating benchmark, explicitly Standard and Poor's short-term rating of A1+ and long-term rating for the senior unsecured debt of basically AA
- Having securities eligible for use by the Reserve Bank of Australia (RBA) in open market operations and standing liquidity offices
Illustration of the Bank Bill Swap Rate (BBSW)
Suppose that interest rates for bank bills was 4% for the initial six months of the year while rates leaped to 5% and stayed at 5% for the final part of the year. The average for the year would be 4.5% plus any risk premium. In the event that the risk premium was 15 basis points, the BBSW would be 4.65%, including the average of bank bill rates and with the risk premium added.
Of course, in reality, there are in excess of two interest rates to average out in computing the BBSW, however it's normally viewed as a midpoint of those rates.
The Difference Between SIBOR and BBSW
The Singapore Interbank Offered Rate, known by its contraction SIBOR, is the benchmark interest rate, stated in Singapore dollars, for lending between banks inside the Asian market. The SIBOR is a reference rate for lenders and borrowers that take part straightforwardly or by implication in the Asian economy.
The terms of the loans change from overnight to one year. Strikingly, the U.K. variant, LIBOR, is like the SIBOR while the BBSW is the Australian rendition of LIBOR and SIBOR.
Limitations of Using the BBSW
Likewise with any reference rate, the BBSW could not genuinely mirror the credit risk that exists in the market. Financial benchmarks didn't anticipate the financial crisis of 2008 and the Great Recession that followed. Thus, the risk premium may not necessarily in all cases mirror the total market risk and may act as a lagging indicator.
- There is a risk premium added to the BBSW to make up for the risk of the securities, as compared with the risk-free rate, which is regularly founded on government bonds.
- The Bank Bill Swap Rate (BBSW) is a short-term interest rate utilized as a benchmark for the pricing of Australian dollar derivatives and securities, most eminently floating rate bonds.
- The BBSW is an independent reference rate that is utilized for pricing securities. Fixed income investors use BBSW since it's the benchmark to price floating rate bonds and different securities.