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

By Narayanan Somasundaram 

Australia plans to disband the panel that sets its benchmark interbank borrowing rate as international lenders withdraw in the wake of a global rate- rigging scandal.

The nation’s bank bill swap rate will be compiled directly using prices from brokers and electronic markets instead of asking panelists, the Australian Financial Markets Association, which publishes the benchmark, said in an e-mailed statement today. HSBC Holdings Plc (HSBA) and Citigroup Inc. (C) 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 (UBSN) left last month andJPMorgan Chase & Co. (JPM) 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.

“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.”

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

Global Overhaul

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.

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.

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 -- Australia & New Zealand Banking Group Ltd. (ANZ),Commonwealth Bank of Australia, National Australia Bank Ltd. (NAB) and Westpac Banking Corp. Those banks had A$180 billion ($188 billion) of bank bills and certificates of deposit outstanding as of December, according to AFMA data.

The benchmark is used to set interest payments for Australian-dollar syndicated loans and floating-rate notes. 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 the quarterly bank bill swap rate plus eight basis points.

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.

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.

To contact the reporter on this story: Narayanan Somasundaram in Sydney atnsomasundara@bloomberg.net

source

please give me comments thanks