(This article originally appeared in IFR Magazine issue 1946,
August 11 2012)
By John Weavers
SYDNEY, Aug 13 (IFR) - European policymakers are studying
New Zealand's trade-based interbank rate as regulators around
the world look for ways to restore confidence in their
benchmarks in the wake of the Libor scandal.
Members of the European Central Bank's technical staff have
recently discussed the merits of New Zealand's bank bill
benchmark (or BKBM) system with Paul Atmore, CEO of the New
Zealand Financial Markets Association, the body responsible for
The ECB has no direct role in overseeing Europe's interbank
lending rates, but the attention of one of the world's most
powerful central banks comes amid calls for a shift to a system
based on real trades rather than theoretical quotes.
Atmore is due to visit the Bank of England in the next few
weeks, where he is expected to talk up the BKBM rate with bank
Evidence of manipulation has shaken confidence in Libor,
Euribor and other benchmarks that underpin trillions of dollars
in financial agreements from residential mortgages to complex
New Zealand's and Australia's bank bill rates - known as
BKBM and BBSW, respectively - are considered more transparent
than the Libor system overseen by the British Banking
BKBM and BBSW are backed by trades institutions make in the
bank bill market - where cash actually changes hands between two
parties. That, proponents believe, makes the rates less
susceptible to manipulation than Libor, which relies on
hypothetical quotes from a rate-setting panel of banks.
Because the banks do not have to make trades at the Libor
rates they quote, the incentive to base quotes on actual
tradable levels is low.
The Australian Financial Markets Association regulates the
BBSW. It has a 14-member panel that includes Prime Banks:
Australia and New Zealand Banking Group, Commonwealth Bank of
Australia, National Bank of Australia and Westpac.
All panelists are obliged to contribute mid-rates for prime
bank bill paper for maturities of one to six months by 10:05am
in Sydney each business day. The highest and lowest rates are
eliminated for each maturity until there is a maximum of eight
When there are between five and eight contributions
remaining, the highest and lowest are removed, and the average
of the remaining three to six mid-rate contributions are
displayed on Reuters page BBSW. Under normal circumstances, the
bid/offer spread is 5bp either side of the mid-rate.
If there are fewer than five contributions, none are
displayed and no calculation is performed for that tenor,
according to the AFMA. That raises questions over whether
markets would still be able to function in times of extreme
stress, although Sydney sources stress that trades were executed
every day during the global financial crisis of 2008.
"The banks needed liquidity during the financial crisis and
got this by selling bills, so the market continued to operate
albeit with an obvious elevation in spreads," a money market
New Zealand takes the virtue of transparency a step further
than Australia: NZFMA publishes a daily list of all the deals
that are used to establish the BKBM rates. All buyers and
sellers are listed alongside the size and yield of the trade.
One criticism levelled Down Under is that, unlike Libor,
neither of the Antipodean systems asks panel banks at what
levels they can raise funds, merely where they see the mid-rate
for prime name bank bill paper.
(Reporting By John Weavers)