RBA Update: Fallbacks for BBSW securities

In its June 2022 Bulletin, the Reserve Bank of Australia (RBA) provided a further update on BBSW and the need for adequate fallbacks. Key points:

• BBSW is perceived as a robust benchmark based on a liquid market and in part because its methodology has been progressively strengthened by the ASX since 2018.
• It is possible that at some point in the future BBSW might no longer be robust. In particular, the one-month BBSW is largely a buy-back market and so it is less liquid than other tenors.
• The RBA has “suggested” that users of one-month BBSW should consider alternative benchmarks given the lower liquidity in this market.
• Market participants need to prepare for the possibility that all or some tenors may no longer be published . As such, participants must include at least one ‘robust’ and ‘reasonable and fair’ fallback for BBSW to another interest rate in their financial contracts in the event that BBSW or a tenor of BBSW permanently ceases to exist. 
• The fallback must also specify a clear and unambiguous trigger event after which the fallback would apply. 
• To promote this, the RBA will only accept securities (FRNs and ABS) referencing BBSW issued after 1 December 2022 as collateral in its domestic market operations for repurchase if those securities include such a fallback.
• The RBA is adopting a principles-based approach to requiring fallbacks for repo eligibility and is open to industry associations including ASF developing guidance fallback language for use in BBSW linked securities. 
• The ASF guidance language is currently being reviewed by ASF members who are market participants and it is expected that this will be finalised in the near future.
• All self-securitisations, regardless of the date of issue, will also be required to include at least one robust and reasonable and fair fallback in order to be eligible.
• The RBA will engage with self-securitisation issuers and give at least 12 months' notice before enforcing this requirement. FRNs and marketed asset-backed securities issued before 1 December 2022 will not be subject to this requirement for eligibility.
• Unlike BBSW, global LIBOR equivalents were not considered robust as they were not supported by a sufficient volume of transactions in wholesale ST funding markets. Consequently, LIBOR jurisdictions have transitioned (or are in the process of transitioning) to referencing overnight (near) risk-free rates.