is the main interest rate benchmark in New Zealand. It is designed to reflect the supply and demand for Bank Bills and is used by market participants to calculate the amounts payable under various financial instruments. It is also used in calculating the value of many financial instruments.
Changes in the BKBM rate will not usually have a direct effect on individual New Zealanders, although there can be an indirect effect. The rate of interest paid on most personal loans and mortgage loans is generally linked to a commercial rate set by the relevant bank. One factor affecting these rates is the bank’s own cost of borrowing, which in part may be directly affected by BKBM. In contrast, the interest payable on large corporate loans is often calculated by reference to the BKBM rate on a specified day for each interest period. This means any issues affecting BKBM can have a significant impact on the costs of that borrowing for corporate New Zealand.
The New Zealand Financial Markets Association (NZFMA)
acts as Benchmark Administrator for BKBM and many New Zealand closing rates. Thomson Reuters acts as the administrator of the WM/Reuters FX Benchmarks, which are the main FX rate benchmarks.
Current calculation methods
BKBM rates are currently calculated based on electronic capture of trade information, or executable bid and offer pricing in the absence of trades, during a daily two-minute trading window.
Rules and protections for BKBM
There are various protections around BKBM to help ensure market integrity. All NZFMA members who participate in the two-minute trading window must adhere to the NZFMA’s Reference Rate Operating Rules & Principles, which include:
• The no-gapping rule:
This rule requires participants to only move their bid or offer by one basis point (0.01%) at a time and give ‘sufficient time’ for the market to transact before entering a new bid or offer. This effectively limits the ability of members to significantly move the rate (whether intentionally or unintentionally) over the short two-minute trading window;
• The rules requiring participants to be able to offer/accept a minimum number of lines of prime Bank Bill paper.
Buyers must be able to accept Bank Bills issued by at least four different banks in order to bid on screen during the BKBM trading window. Sellers must be able to offer their own Bank Bills. Sellers that do not issue prime Bank Bills must be able to offer at least three lines of prime Bank Bills.
These rules help ensure a minimum liquidity during the rate-set trading window. This liquidity helps to ensure that the calculated rate reflects all the information available in the market and reduces the influence of any one trade on the final rate.
An example of a Corporate Bond with a yield linked to the BKBM rate is: Toyota Finance NZ, FRN 22oct2024, NZDNZTFSDT786C1