KENNEDY The calculation rate for AONIA is almost identical to the one that is being used and widely accepted for SONIA. It is not clear yet whether this will prove to be the ‘right’ risk-free rate in the long term, but AONIA is simply the daily compounded Reserve Bank of Australia (RBA) overnight cash rate. The question is whether the reserve bank believes the RBA-30 accurately reflects the official market rate.

I can’t speak for the central bank of course, but developments point to the likelihood that this is how the RBA is thinking. For example, in 2016 the reserve bank started publishing on its website the daily compounded rate of index data back to 2011.

This provides some comfort that we are using the most appropriate risk-free rate at this point in time. If markets determine there is a better methodology and move accordingly, we are not wedded to using the AONIA risk-free rate and can also evolve.

It has taken us considerable time to reach the position we have around the appropriate risk-free rate. We worked with a number of different stakeholders outside SAFA along the way, and this has been where we have landed. If the market moves, we will move with it, clearly.

KENNEDY It’s hard to comment on this beyond saying that we have engaged with a number of significant stakeholders throughout this process.

BLACKSTOCK There are benefits to AONIA and there is a reason it has been identified as an alternative rate. I am not looking to debate the rights and wrongs of each option, and ultimately as a borrower we want to issue where there is demand. If the market moves to a point where it thinks the repo rate, for instance, is the right way to go, this is something we could issue.

HUTCHISON The issue seems to be that the market is looking for liquidity to land on one option but until certain thresholds are reached we can’t know where that will be. The question is whether external forces can be brought to bear, for instance by regulators, to generate initial liquidity.

ALEXANDER I think it’s pretty clearly not – that’s the fundamental issue. The RBA has decided to let the repo rate find its own level independent of where the cash rate is. The result is that the number of transactions taking place at the official cash rate is extremely limited.

This is another challenge with transitioning to alternative rates. Once upon a time, the AONIA rate and indeed the BBSW rate used to be very stable – as did repo. This is no longer the case, and indeed we now have three indices all moving independently.

TRIGONA This certainly creates a lot more volatility in funding costs.

ALEXANDER That’s right. It’s not a problem in and of itself. But when we’re talking about making a transition to different indices it’s much harder to make the right decision when they are all moving independently.

WHETTON This goes back to the people of South Australia paying more for state debt. Well, the whole population of Australia is currently paying more for sovereign T-notes – by 45-50 basis points – because of the free-floating repo rate.

It would be worth considering the value of something that was managed a bit more by the reserve bank – where it had more balance sheet and took on more volume and encouraged the market by presenting a term curve.

A decade or so ago it would have been a sin for central banks to be involved in the market in this manner. But it’s now understood across major markets that this type of involvement is needed to ‘grease the wheels’. It’s odd, I think, that the RBA is happy to endorse BBSW but to let the market sort out repo.

ALEXANDER I find the RBA’s position on repo very surprising, I must admit. Other central banks have acted to keep the rate closer to the cash rate.

WHETTON We need to establish whether this market is big enough to support repo, AONIA, BBSW and OIS with various instruments priced off all of them. If so, we need to be fully supported by all the arms of regulation as well as borrowers and investors.

DONALDSON It’s definitely true that when we’re looking at an issue where liquidity is key it is very hard to know which way to head. This also applies to issuers – you wouldn’t want to issue against a benchmark that isn’t being used as a reference rate in two years’ time.

TRIGONA That’s right – and it’s also important that investors can be confident that what they are buying is going to be relevant on an ongoing basis. We don’t want to transition from one reference rate to another while investors are holding affected bonds.

BLACKSTOCK There are two parts to this. One is having fallback provisions in documentation, which should ideally future-proof an issuer and provide clear direction to investors on what would happen in any scenario. Within this, we want to stay in line with industry precedent and market developments rather than independently declaring a preference.

If we were to issue a five-year note linked to EURIBOR, for instance, we would include fallback language stating that the note will move to the alternative rate on the cessation of EURIBOR – without specifying what that is. This is in line with regulatory guidance.

The second issue is whether we would issue a five-year euro floating-rate note at all at the moment. We should be comfortable with our fallback language in place, but the transition is still something we know we will have to deal with in future. It probably reduces the marginal willingness to do that trade in the first place.