Wheatley correct to scrap A$ Libor

Author: Danielle Myles | Published: 28 Sep 2012
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Phasing out Australian dollar rates from the London Interbank Offered Rate (Libor) is the right decision, according to local lawyers.

Australia’s benchmark rate – the bank bill swap reference rate (BBSW) – is the dominant reference in the country’s financial contracts.

The Australian dollar is one of five base currencies being discontinued from Libor calculations, following the Wheatley Libor Review’s final report recommendations announced on Friday.

'I'm unsurprised the Wheatley report has recommended that A$ Libor no longer be reported,” said Sydney-based Baker & McKenzie partner Bryan Paisley.

In the wake of this year’s rate-rigging allegations, Wheatley has recommended Libor calculations be based on actual trades rather than banks’ estimates. The BBSW is based on actual trades and has survived the global crackdown on benchmark rates unscathed.

This method requires sufficient liquidity for a rate to be accurate. Of the 150 Libor rates published daily (under the existing regime) only 20 satisfy this test, meaning 130 of the Libor rates will be scrapped.

There was concern that stopping Libor calculations for certain currencies could lead to market disruption under existing contracts, and lack of a benchmark rate for future contracts.

This is not the case for Australia.

“BBSW is virtually unchallenged in the local market as a base rate and the statistical data in the report confirms that the London market doesn't use A$ Libor widely,” Paisley said.

Wheatley’s report notes that while the use of Libor among non-core currencies is minimal, there will be some outstanding contracts that will be impacted by discontinuing the rates. Therefore, the 130 rates will be phased out over a 12-month transition period to give market participants time to adapt to new benchmarks.

For the least used rates, these may be phased out over six months.

See also

‘Afma: what Libor can learn from Australia’s benchmark rate’ http://www.iflr.com/Article/3078027/Search/Results/What-TSC-Libor-report-means-for-Londons-reputation.html?PageId=201716&Keywords=libor&OrderType=0

‘Wheatley’s Libor Review: what will it achieve?” http://www.iflr.com/Article/3096046/Banking/Wheatleys-Libor-Review-what-will-it-achieve.html