Readers will be familiar with headlines over the last couple of years concerning banks in Europe manipulating Libor. Recently the story has taken on a far more local flavour as ANZ revealed that seven traders caught up in investigations by the ASIC into possible manipulation of the Bank Bill Swap Rate had stepped down. ANZ told the ASX after the market had closed that it was “continuing to co-operate” with an ASIC investigation into historical trading in the BBSW market.
A statement from ANZ said, “We have been treating this matter very seriously and we are continuing to cooperate fully with ASIC. This is a complex issue and ASIC’s investigation and ANZ’s internal review may not be complete for some time. In light of this, we are taking the precaution of having seven staff involved in markets trading step down pending completion of the investigation into practices to 2013.”
This is the first time that one of the big four has been embroiled in a potential rate fixing scheme. Already RBS, UBS and BNP Paribas have paid fines for their role in manipulating BBSW and ASIC’s investigation into BBSW could result in both civil and criminal penalties.
BBSW and Libor setting
One question that could trouble Australian interest rate investors is whether BBSW is as liable to manipulation as Libor was?
The Libor scandal itself had far reaching implications and saw the setting of the benchmark rate shifting from London to New York. Naturally this raised questions here in Australia where the equivalent of Libor is BBSW that serves as a benchmark rate in the banking and finance system. It is administered by AFMA.
The main difference between the setting of Libor and BBSW is that with BBSW, 14 market participants are asked about the actual rates they see in the market for prime bank paper while the setting of Libor was more about subjective opinions on interbank borrowing rates.
In Australia, data is taken from 14 market participants, the fig four banks plus 10 others, at 10am each trading day. Each participant reports the average mid-rate pricing that they are observing for prime bank paper with standard maturities of one to six months. AFMA analyses the data and removes the four highest and four lowest rates from the data set – making it tough for a single institution to manipulate the data.
It might be worth noting that Libor involved a similar process and it was still corrupted. Cynics also point out that some of the banks on the BBSW panel are owned by banks that have been implicated in the Libor scandal. In Australia, quotes relate to bank paper traded as a group while Libor contributions were for each bank in respect of its own paper.
The BBSW setting process is also subject to oversight from AFMA’s Market Governance Committee which looks after OTC markets. The committee is also responsible for approving any changes to the OTC market conventions that support the BBSW process. The committee also reviews the quality of panellist data to ensure that each panellists reporting accurately.
ANZ in BBSW manipulation probe
ANZ suspended "seven staff involved in markets trading pending completion of the investigation into practices to 2013" and said it was "continuing to cooperate with an investigation by ASIC into historic trading practices in the Australian interbank market known as the Bank Bill Swap Rate market." According to the bank, ASIC has been investigating the 14 BBSW panel bank members since mid-2012 over their past involvement in the BBSW submission process.
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Paul McNamara is an editor and journalist with over 20 years’ experience. His career includes spells with the Financial Times, Euromoney, BRW Media, Asia-Inc and Banker Middle East. At present he is editor of YieldReport. YieldReport is a digital newsletter that carries comprehensive pricing and commentary on Australian interest rate securities in a monthly and weekly report. Each issue covers bank bills, cash accounts, term deposits, government bonds, semi-government and corporate bonds, hybrids, ETFs, managed funds and more. Click here for a free trial subscription. |
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