Aus­tralia to scrap bank-rate panel as HSBC, Cit­i­group exit

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Aus­tralia plans to scrap the panel that sets its bench­mark in­ter­bank bor­row­ing rate, be­com­ing the first ma­jor devel­oped econ­omy to re­place its rate-set­ting regime fol­low­ing the global Li­bor-rig­ging scan­dal.

The na­tion’s bank bill swap rate will be com­piled di­rectly us­ing prices from bro­kers and elec­tronic mar­kets in­stead of ask­ing a panel of banks, the Aus­tralian Fi­nan­cial Mar­kets As­so­ci­a­tion, which pub­lishes the bench­mark, said in a state­ment to­day. HSBC Hold­ings Plc and Cit­i­group Inc will stop con­tribut­ing to the rate from the end of this month, AFMA said.

Their exit will re­duce the panel to 10 mem­bers af­ter UBS left last month and JPMor­gan Chase & Co said it will leave by to­mor­row. Banks are quit­ting rate-set­ting pan­els world­wide, un­der tougher scru­tiny and ris­ing com­pli­ance costs fol­low­ing scan- dals that cost Bar­clays Plc, UBS and Royal Bank of Scot­land Group Plc about $2.5 bil­lion in fines. “While there weren’t any real con­cerns with the ex­ist­ing process, this an­nounce­ment will put some ad­di­tional safe­guards in place,” said Rick Moscati, trea­surer at Mel­bourne-based Aus­tralia & New Zealand Bank­ing Group Ltd. (ANZ), the coun­try’s third- big­gest lender by mar­ket value. “That can only be viewed as a pos­i­tive step that we broadly sup­port.” AFMA’s pro­posal is sub­ject to meet­ing tech­ni­cal re­quire­ments, it said to­day. The group, which rep­re­sents 130 bro­kers, banks and fund man­agers in Aus­tralia, plans to start the new sys­tem “within a pe­riod of months,” it said.

HSBC de­clined to com­ment on its par­tic­i­pa­tion in BBSW, ac­cord­ing to Tala Ja­hangiri, a Syd­ney-based spokes­woman. Judy Hitchen, a Syd­ney-based spokes­woman for Cit­i­group, didn’t im­me­di­ately re­spond to voice­mails left seek­ing com­ment.

“This is the first time that I know of where an ex­ist­ing sys­tem based on a panel of banks will be changed to an ex­ter­nally ob­served one,” said Sean Keane, an Auck­land-based an­a­lyst at Triple T Con­sult­ing and the former head of Asi­aPa­cific rates trad­ing at Credit Suisse Group AG. “The change is likely to be very well re­ceived around the world by most of the reg­u­la­tors that are push­ing for just this sort of ob­serv­able sys­tem.” Global reg­u­la­tors are over­haul­ing fi­nan­cial bench­marks af­ter the rate-rig­ging scan­dal spurred de­bate over whether they should be based on sub­mis­sions from banks or mar­ket trans­ac­tions.

The UK government is search­ing for a group to set the Lon­don in­ter­bank of­fered rate in­stead of the Bri­tish Bankers’ As­so­ci­a­tion, af­ter banks paid penal­ties for ma­nip­u­lat­ing the bench­mark. Ap­prox­i­mately $350 tril­lion of no­tional swaps and $10 tril­lion of loans are in­dexed to Li­bor, ac­cord­ing to the U.S. Com­mod­ity Fu­tures Trad­ing Com­mis­sion.

At least A$350 bil­lion ($366 bil­lion) of Aus­tralian syn­di­cated loans and float­in­grate bonds are priced off BBSW, ac­cord­ing to data com­piled by Bloomberg. Trad­ing of swaps, for­ward rate agree­ments and op­tions tied to BBSW was worth more than A$8.7 tril­lion in the 2009 fi­nan­cial year, ac­cord­ing to an AFMA let­ter to global bank­ing reg­u­la­tors in 2010.

“The plan elim­i­nates the need for a panel and the com­pli­ance cost for banks,” David Lynch, Syd­ney-based ex­ec­u­tive di­rec­tor of AFMA, said in a tele­phone in­ter­view. “This is in the devel­op­men­tal stage.” Aus­tralia’s bank bill swap rate is now cal­cu­lated by ask­ing pan­elists daily for the ac­tual rates they ob­serve in the bro­kered mar­ket at around 10 a.m. Syd­ney time. The high­est and low­est bids are then se­quen­tially elim­i­nated un­til six re­main.

The rate is set based on ob­ser­va­tions of yields for se­cu­ri­ties ma­tur­ing in one to six months is­sued by the coun­try’s four main lenders — ANZ (ANZ), Com­mon­wealth Bank of Aus­tralia, Na­tional Aus­tralia Bank Ltd. (NAB) and West­pac Bank­ing Corp. Those banks had A$180 bil­lion of bank bills and cer­tifi­cates of de­posit out­stand­ing as of De­cem­ber, ac­cord­ing to AFMA data.

New South Wales raised A$2.5 bil­lion yes­ter­day in the big­gest-ever sale of float­ing-rate se­cu­ri­ties by an Aus­tralian state. The debt pays in­ter­est equal to quar­terly BBSW plus eight ba­sis points. That rate was at 3.10 per­cent to­day, based on the AFMA fix­ing, from 3.07 per­cent at the end of last year. The Re­serve Bank of Aus­tralia has held its overnight cash-rate tar­get at 3 per­cent since De­cem­ber.

An In­ter­na­tional


of Se­cu­ri­ties Com­mis­sions task force plans to pub­lish a fi­nal doc­u­ment on prin­ci­ples for im­prov­ing over­sight of bench­marks in­clud­ing Li­bor.

South Korea last year adopted a rate for bank loans based on a bas­ket of lend­ing in­stru­ments af­ter an­titrust au­thor­i­ties probed fi­nan­cial in­sti­tu­tions for sus­pected ma­nip­u­la­tion of the pre­vi­ous bench­mark.

In ad­di­tion to elim­i­nat­ing the panel, the AFMA also plans to col­lect mar­ket trad­ing data from in­vest­ment man­agers and traders to mon­i­tor the ef­fi­ciency of the rate set­ting process and pro­vide more trans­parency, Lynch said. The changes fol­low UBS’s find­ings in its own in­ves­ti­ga­tion that traders at the bank at­tempted to ma­nip­u­late bench­marks in­clud­ing the Aus­tralian bank bill swap rate, ac­cord­ing to a foot­note in a Dec. 19 or­der by the Washington-based CFTC im­pos­ing sanc­tions against the Zurich­based bank.

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