Bank Bill Swap Rate (BBSW)

What is Bank Bill Swap Rate (BBSW)?

Definition

The bank swap rate, also known as Bank Reference Rate, is the rate banks charge to lend money to each other in Australia. In the happening of an unexpected overnight cash shortfall, a bank may be required to borrow money from another bank at a given interest rate.

Understanding the Bank Bill Swap Rate

The bank bill swap rate is mostly referenced in a derivative market considering that it is used to benchmark the pricing of Australian dollar derivatives and securities. It functions as an independent reference rate used in securities pricing. It also functions as a hedge for interest rate risk.  Bondholders use the bank bill swap rate to benchmark price floating rates for bonds and other securities.

Calculating the BBSW

The Australian Securities Exchange (ASX) is the official body responsible for calculating and publishing the BBSW. Australia makes use of the BBSW as an equivalent of the LIBOR – London Interbank Offered Rate (the average value of interest-rates that is calculated from the submitted estimates of large global banks daily).

The BBSW and the LIBOR may be similar, but they have quite a few dissimilarities such as a direct link to retail lending indexes. The BBSW is not so directly linked to retail lending indexes as much as the LIBOR. The BBSW also comes with a risk premium which serves as compensation for securities risk compared to the risk-free rates attached to government bonds.