Australia to Shut Bank-Rate Panel as HSBC, Citigroup Exit

Australia plans to scrap the panel that sets its benchmark interbank borrowing rate, becoming the first major developed economy to replace its rate-setting regime following the global Libor-rigging scandal.

The nation’s bank bill swap rate will be compiled directly using prices from brokers and electronic markets instead of asking a panel of banks, the Australian Financial Markets Association, which publishes the benchmark, said in an e-mailed statement today. HSBC Holdings Plc and Citigroup Inc. will stop contributing to the rate from the end of this month, AFMA said.

Their exit will reduce the panel to 10 members after UBS AG left last month and JPMorgan Chase & Co. said it will leave by tomorrow. Banks are quitting rate-setting panels worldwide, under tougher scrutiny and rising compliance costs following scandals that cost Barclays Plc, UBS and Royal Bank of Scotland Group Plc about $2.5 billion in fines.

“While there weren’t any real concerns with the existing process, this announcement will put some additional safeguards in place,” said Rick Moscati, treasurer at Melbourne-based Australia & New Zealand Banking Group Ltd., the country’s third-biggest lender by market value. “That can only be viewed as a positive step that we broadly support.”

AFMA’s proposal is subject to meeting technical requirements, it said today. The group, which represents 130 brokers, banks and fund managers in Australia, plans to start the new system “within a period of months,” it said.

HSBC declined to comment on its participation in BBSW, according to Tala Jahangiri, a Sydney-based spokeswoman. Judy Hitchen, a Sydney-based spokeswoman for Citigroup, didn’t immediately respond to voicemails left seeking comment.

Change Welcome

“This is the first time that I know of where an existing system based on a panel of banks will be changed to an externally observed one,” said Sean Keane, an Auckland-based analyst at Triple T Consulting and the former head of Asia-Pacific rates trading at Credit Suisse Group AG. “The change is likely to be very well received around the world by most of the regulators that are pushing for just this sort of observable system.”

Global regulators are overhauling financial benchmarks after the rate-rigging scandal spurred debate over whether they should be based on submissions from banks or market transactions.

Global Overhaul

The U.K. government is searching for a group to set the London interbank offered rate instead of the British Bankers’ Association, after banks paid penalties for manipulating the benchmark. Approximately $350 trillion of notional swaps and $10 trillion of loans are indexed to Libor, according to the U.S. Commodity Futures Trading Commission.

At least A$350 billion ($366 billion) of Australian syndicated loans and floating-rate bonds are priced off BBSW, according to data compiled by Bloomberg. Trading of swaps, forward rate agreements and options tied to BBSW was worth more than A$8.7 trillion in the 2009 financial year, according to an AFMA letter to global banking regulators in 2010.

“The plan eliminates the need for a panel and the compliance cost for banks,” David Lynch, Sydney-based executive director of AFMA, said in a telephone interview. “This is in the developmental stage.”

Australia’s bank bill swap rate is now calculated by asking panelists daily for the actual rates they observe in the brokered market at around 10 a.m. Sydney time. The highest and lowest bids are then sequentially eliminated until six remain.

Benchmark Rate

The rate is set based on observations of yields for securities maturing in one to six months issued by the country’s four main lenders -- ANZ, Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. Those banks had A$180 billion of bank bills and certificates of deposit outstanding as of December, according to AFMA data.

New South Wales raised A$2.5 billion yesterday in the biggest-ever sale of floating-rate securities by an Australian state. The debt pays interest equal to quarterly BBSW plus eight basis points.

That rate was at 3.10 percent today, based on the AFMA fixing, from 3.07 percent at the end of last year. The Reserve Bank of Australia has held its overnight cash-rate target at 3 percent since December.

An International Organization of Securities Commissions task force plans to publish a final document on principles for improving oversight of benchmarks including Libor.

South Korea last year adopted a rate for bank loans based on a basket of lending instruments after antitrust authorities probed financial institutions for suspected manipulation of the previous benchmark.

UBS Investigation

In addition to eliminating the panel, the AFMA also plans to collect market trading data from investment managers and traders to monitor the efficiency of the rate setting process and provide more transparency, Lynch said.

The changes follow UBS’s findings in its own investigation that traders at the bank attempted to manipulate benchmarks including the Australian bank bill swap rate, according to a footnote in a Dec. 19 order by the Washington-based CFTC imposing sanctions against the Zurich-based bank.

“BBSW was trusted by the market -- with some questions on how easy it was to manipulate -- and the UBS report shows that it has been tried,” said Mat McCrum, investment director at Omega Global Investors Pty, which manages A$3.2 billion. “The panelists are basically saying they don’t want the liability.”