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Australian regulator to sever its swaps benchmark relationship
[SYDNEY] The Australian Financial Markets Association (AFMA) plans to sever its three-decade relationship with the bank bill swap rate (BBSW) amid ongoing rigging allegations and an increasingly complex benchmark setting process.
The announcement on Tuesday came as the country's financial watchdog pushes ahead with litigation against two of the country's major banks over alleged benchmark rigging.
The decision to exit the benchmark-setting process reflects a global shift towards more robust and objective benchmarks that have stronger defences against manipulation.
AFMA, which said it intended to instead focus on its "core activities", declined to comment on whether the alleged misconduct involving benchmark rigging had influenced its decision to step aside from its role.
AFMA has administered the BBSW benchmark since its inception.
"Our key objective is that the benchmark continues to operate in a reliable way," David Lynch, chief executive of AFMA, said. "Benchmark administration is becoming quite a specialised area of operation." AFMA said it expects a commercial operator to take over the role.
The British Bankers' Association handed over the operation of the London Interbank Offered Rate (Libor) in 2014 following the benchmark rigging scandals in that market. ICE Benchmark Administration now administers Libor after winning a government tender process.
In Australia, the BBSW credit benchmark has been progressively overhauled in recent years.
AFMA moved away from a panel-setting methodology in 2013 following an exodus of banks from its panel of participating money market institutions.
The BBSW is now calculated using an automated process that extracts live and executable bids and offers from the approved trading venues at around 10am each trading day, calculates the rate and then publishes it to the market.
Australia will move to a new process by the end of this year for setting the credit market reference rate. The Council of Financial Regulators has proposed moving to a volume-weighted average price (VWAP) methodology as the primary calculation mechanism. This will require the new administrator to develop a trade repository capability.
Regulators from around the world have been reforming rate-setting practices after Barclays Plc, UBS AG, RBS and others were fined billions of dollars for benchmark rigging.
The Australian Securities and Investments Commission (ASIC) has also begun litigation against Australia and New Zealand Banking Group and Westpac Banking Corporation for alleged benchmark manipulation.