This is despite the RBA’s ongoing confidence in the overall robustness of Australia’s bank-bill swap rate (BBSW). The exception is a lingering question mark over the suitability of one-month BBSW as a market benchmark.

Australian market participants that have any engagement with international interbank offered rates (IBORs) need to prepare for coming change, Kent advised – in particular by being aware of new provisions the International Swaps and Derivatives Association (ISDA) is expected to publish by the end of 2019.

“We strongly encourage all users of LIBOR in the Australian market to be ready to adopt these new fallback provisions in their contracts,” Kent said.

The expected demise of IBORs is the product of thin underlying markets. With little or no traded volume in bank bills in many global jurisdictions, IBORs have become reliant on prices submitted by banks – often reluctantly, in the wake of rate-setting scandals earlier this decade. Regulators will not compel banks to submit prices after 2021, and the widespread expectation is that this will be the death knell for the rates themselves.

The situation is different in Australia. Kent explained: “The bank-bill market is considerably larger as a share of the Australian major banks’ balance sheets than equivalent markets in the US and Europe. As a result, unlike for LIBOR, there are enough transactions in the Australian bank-bill market to support a benchmark.”

The exception is one-month BBSW. One-month tenor no longer has any value as a bank funding tool. As a result, there is virtually no issuance of this paper and the transactions that do occur are mainly banks buying back outstanding notes to retire them. One-month BBSW is therefore less reliably calculated and more volatile, Kent said.

He added: “Given these issues, users of one-month BBSW should be preparing to use alternative benchmarks. One option would be for issuers to instead reference three-month BBSW. Another is to reference the cash rate.”

The RBA is also cautious about predicting a long-term future for BBSW. While Kent reiterated that it is currently a robust benchmark based on solid transaction volume, he also made clear that the market “shouldn’t take this for granted”.

While cash funds continue to grow in Australia, their allocations to bank bills – and banks’ desire to issue short-term paper – has fallen. “This is why we have been working with ISDA to strengthen the contractual fallbacks for BBSW at the same time as LIBOR,” Kent explained. “This will involve using the cash rate – which is the risk-free rate for the Australian dollar – as the fallback, with an adjustment for the historical spread between BBSW and the cash rate.”

Kent said the RBA is supportive of private-sector efforts to develop an Australian term risk-free rate based on the overnight-indexed-swap or repo markets as well as or instead of one based on a retrospective compounding of the cash rate.

However, he added: “There would need to be significant effort to develop the appropriate market infrastructure and practices before these could be considered robust benchmarks. Given this, we encourage market participants to consider using the cash rate rather than waiting for the development of a term rate.”