The Bank Bill Swap Rate (BBSW)
is a short-term interest rate used as a benchmark for Australian dollar (AUD) securities. It is commonly used as a benchmark for bonds and floating rate securities on the Australian market. BBSW is designed to measure the price at which eligible Prime Bank securities are traded on the open market between 8:30 and 10:00 on a Sydney business day.
The BBSW is related to the payment of the coupon of the variable rate security: this can be 1 month, 3 months, 6 months depending on the payment frequency. It represents an average of the bank rates provided by Australian banks for various maturities: it is the average rate at which banks lend money to each other in Australia over a given period of time.
The BBSW is calculated, supervised and published by the ASX
and is the equivalent of the EURIBOR and LIBOR for the respective currencies. However, it has some differences with the two previous benchmarks: in fact, according to the ASX, the BBSW is not directly linked to mortgages or other retail loan indexes as the EURIBOR and LIBOR are.
A limitation of the BBSW, like any other benchmark rate, is that it may not represent the actual credit risk that exists in the market; consequently the risk premium (used to offset the risk of the securities in proportion to the risk-free rates) may not reflect the overall market risk.
An example of a bond with a 3-month BBSW can be Macquarie Bank, FRN 22dec2022, AUDAU3FN0065546