Article 8.5 Australia to use market prices for Libor
By Neil Hume
Financial Times March 27, 2013
Australia will use prices displayed electronically by brokers and trading venues to set the price of the country's benchmark Interbank borrowing rate.
The Australian Financial Markets Association, which represents 130 Australian and international banks, brokers and fund managers, announced on Wednesday it would disband the panel used to set the bank bill swap rate.
‘Building on the advantage of BBSW being based on a traded market, AFMA proposes to bypass the panel requirement by adopting a process to extract these rates directly from trading venues - brokers and electronic markets. This proposal has the support of market participants,' it said in a statement.
The BBSW is the Australian equivalent of the scandal-plagued London InterBank Offered Rate (Libor) and is used to set interest payments on floating rate securities, derivatives and Australian dollar-denominated loans.
The decision to take rates directly from the market, rather than from submissions, comes after two more banks - Citigroup and HSBC - said they would no longer contribute to the BBSW panel. JPMorgan and UBS withdrew earlier this year.
Banks are quitting rate-setting panels around the world because of tougher scrutiny and a rise in compliance costs brought about by the Libor scandal.
Banks which contribute to the process in the UK will be required to corroborate their submissions and appoint a specific person to take charge of compliance with the new rules.
Australia's BBSW rate differs from Libor in that panellists are asked for the actual rates they observe in the market rather than an indicative quote.
Source: Hume, N. (2013) Australia to use market prices for Libor, Financial Times,
27 March.
Euribor and some other BORs
There are other rates similar to Libor in common use and many of these have also been caught up in the interbank rate-fixing scandal.
Euribor (Euro InterBank Offered Rate)
Euribor or EURIBOR is the rate at which euro interbank term deposits are offered by prime banks to other prime banks within the eurozone (not London) for periods of one week to one year. Euribor came into existence in 1999 with the adoption of the euro currency. It does not cover overnight lending - see Eonia below for that. Euribor is calculated as a weighted average of unsecured lending transactions undertaken within the euro area by a panel of 26 banks. They are mostly eurozone nationality banks, but there are some non-eurozone/international banks. The highest and lowest 15% of quotes received are eliminated and the remainder are averaged to three decimal places and published daily around 11am CET. The panel banks are those with the highest volume of business in the eurozone money markets: they have a first-class credit standing and high reputation.
There used to be nearer 40 banks contributing to the daily survey of rates, but many found themselves embarrassed and exposed to severe fines and legal action for manipulating Euribor and other rates, so they quit the panel to reduce further risk. Others, even though they had behaved well in the past, feared the risk of rogue employees bringing them down, even if it was a small risk - see Article 8.6.