BBSW methodology change

The Australian Financial Markets Association (AFMA) has announced its proposed bank bill swap rate (BBSW) methodology change in response to The Council of Financial Regulators’ Discussion Paper Evolution of the BBSW Methodology.

The methodology change will place primary reliance on a volume weighted average price calculation.

The principal feature of the BBSW methodology change is the establishment of a sequentially staged calculation waterfall:
Stage 1. Volume Weighted Average Price (VWAP) of primary issuance and secondary trading of Eligible Securities within a trading window defined as 9:00am – 10:10am;
Stage 2. National Best Bid and Offer (NBBO) – the current methodology, which uses live executable bids and offers to calculate BBSW, will operate only if Stage 1 fails to form BBSW;
Stage 3. Algorithmic calculation – this would draw on relevant market pricing information that is available only in the circumstance where both Stage 1 and Stage 2 fail to form BBSW.

Transitional steps to facilitate a VWAP methodology will begin in the third quarter of 2016 and the go-live date for Stage 1 will be determined during the test phase for the new operating infrastructure. Stage 2 is currently operational and Stage 3 will be put in place by end-August 2016.

The 2-month BBSW tenor will continue to the published, along with the 1, 3 and 6 month tenors. However, the 4 and 5 month BBSW tenors will be phased out at the time Stage 1 goes live.

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