The Bank Bill Swap Rate, commonly known as BBSW, is simply the short term swap rate. In Australia, BBSW is the term used for interest rate swaps of six months or less, anything dated longer than six months is simply referred to as a swap rate.
While BBSW has many uses, for fixed income investors its main relevance is as a benchmark upon which we can evaluate floating rate bonds or investments.
An interest rate swap is a financial instrument where one entity swaps a stream of floating interest payments for another entity’s fixed interest payments. In practice, they do not make two payments. Rather, a single net payment is made.
As of 1 January 2017, AFMA handed over responsibility for calculating BBSW to the Australian Stock Exchange. The process has been evolving and in May 2018 was confirmed in a paper ASX BBSW Trade and Trade Reporting Guidelines.
In an ASIC media release dated Monday 21 May 2018, they commented:
The bank bill swap rate (BBSW) rate is a major interest rate benchmark for the Australian dollar and is widely referenced in many financial contracts. Previously, BBSW was calculated from the best executable bids and offers for Prime Bank securities. A major concern over recent years has been the low trading volumes during the rate-set window, the period over which the BBSW is measured.
The new BBSW methodology calculates the benchmark directly from market transactions during a longer rate-set window and involves a larger number of participants. This means that the benchmark is anchored to real transactions at traded prices. ASX, the administrator of BBSW, has consulted market participants on this new methodology. In addition, the ASX has recently conducted a successful parallel run of the new methodology against the existing method.
BA 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.’