ISDA BBSW Fallback Spread Calculation and Term Fixing Technical Group (the “BBSW Technical Group”)
Minutes for BBSW Technical Group call held on 15 March 2018
ISDA: Ann Battle, Jing Gu
Attendees: ANZ, ASX, Bank of America Merrill Lynch, Mizuho, National Australia Bank, Westpac
Counsel: Linklaters LLP
ISDA read the anti-trust competition reminder to all participants on the call.
Purpose of the call and the BBSW Technical Group
ISDA explained that the purpose of the BBSW Technical Group is to consider issues relating to the calculation of the credit spread which will be applied to the cash rate as part of the fallback for the Bank Bill Swap Rate (“BBSW”). The purpose of the call is to outline the work ISDA is doing in relation to the proposed credit spread methodologies and to seek feedback regarding this work.
Materials circulated ahead of the call
ISDA noted that it is currently working on a market consultation which will seek feedback from market participants on the preferred credit spread methodology and, to the extent necessary, term fixing solution. Prior to the call, ISDA circulated a draft outline of the market consultation on credit spread methodologies and term fixings (the “Draft Consultation Paper”).
ISDA also circulated the most recent letter to the Financial Stability Board’s Official Sector Steering Group Subgroup on Contractual Robustness with the January version of the working draft note included at Annex 2 (the “Draft Note”). ISDA informed the group that descriptions of the credit spread methodologies are set out in Section 5 of the Draft Note and issues relating to term fixings are set out in Section 6 of the Draft Note.
Credit spread methodologies
ISDA explained that it plans to include the ‘forward rate approach’, the ‘historical mean approach’ and the ‘spot-spread approach’ in the Draft Consultation Paper. ISDA also noted that it will include the ‘contingent approach’, which involves an official sector committee or working group selecting the preferred credit spread methodology based on prevailing circumstances at the time at which the relevant interbank offered rate (“IBOR”) is permanently discontinued, in the Draft Consultation Paper despite feasibility issues surrounding the composition of a committee.
ISDA noted that the ‘spot spread approach’ and the ‘historical mean approach’ both make use of the historic spread between the relevant IBOR and overnight index swaps (“OIS”) referencing the alternative risk-free rate (“RFR”). If the ‘spot spread approach’ is used, the credit spread would be calculated by reference to the IBOR-OIS spread on the day before the public announcement which triggers the fallback provisions or by reference to an average of the IBOR-OIS spread over the previous few days or months. By contrast, if the ‘historical mean approach’ is used, the credit spread would be calculated by reference to the average IBOR-OIS spread over a significant lookback period such as five years. ISDA explained that the ‘historical mean approach’ also involves a transitional period of one year. During this period, the credit spread would be calculated using linear interpolation between the spot IBOR-OIS spread at the time the fallback is triggered and the average IBOR-OIS spread over the lookback period. Following the transitional period, the average IBOR-OIS spread over the lookback period would apply. ISDA explained that the ‘forward rate approach’ is a different approach which is based on observed market prices for the forward IBOR-OIS spread (in this case, the forward spread between BBSW and OIS referencing the cash rate).
ISDA informed the group that it is working on the Draft Consultation Paper, which will include example calculations in respect of each of the methodologies for each relevant IBOR. ISDA explained that the objectives of the BBSW Technical Group are to (i) review the example calculations and information included in the Draft Consultation Paper in relation to BBSW and (ii) after the consultation period (which will last between four and eight weeks), consider the feedback received from market participants relating to the fallback for BBSW. ISDA noted that the market consultation will hopefully result in a consensus regarding the preferred credit spread methodology which can then be implemented as part of the fallbacks.
ISDA explained that the consultation will ask market participants to provide feedback in relation to each relevant IBOR and therefore, at this stage, it is not clear whether the same credit spread methodology will be applied for each of the IBORs. ISDA noted that the credit spread which is applied to the cash rate as part of the fallback for BBSW will be calculated using the most appropriate methodology for BBSW, even if such methodology differs from that which is selected as the preferred methodology for the other IBORs.
ISDA explained that, once the preferred credit spread methodology has been identified, a third party vendor will be responsible for (i) obtaining the data required to calculate the spread, (ii) calculating the spread and (iii) publishing the spread on a screen. ISDA noted that, in parallel with the market consultation, it will run a formal request for proposal (“RFP”) process for potential third party vendors.
Questions from participants
ISDA asked whether participants had any questions on the objectives of the BBSW Technical Group, the credit spread methodologies or the fallback for BBSW more generally.
One participant asked whether the credit spread methodologies for BBSW are based on the methodologies which the broader ISDA APAC, US Dollar, Euro, Sterling, Swiss Franc and Japanese Yen Benchmark Working Groups (the “ISDA IR Benchmark Working Groups”) are considering. ISDA confirmed that the credit spread methodologies which will be included in the Draft Consultation Paper are consistent across all relevant IBORs. ISDA noted that if the proposed credit spread methodologies are not suitable for BBSW then the BBSW Technical Group will need to come up with alternative methodologies for calculating the credit spread to be applied to the cash rate as part of the fallback for BBSW.
ISDA reminded the group that descriptions of the credit spread methodologies are included in Section 5 of the Draft Note and suggested that participants focus on the ‘spot spread approach’, the ‘historical mean approach’, the ‘forward rate approach’ and the ‘contingent approach’ as these are the methodologies which will be included in the Draft Consultation Paper. ISDA also noted that, in addition to the ‘historical mean approach’, a ‘historical median approach’ may be included in the Draft Consultation Paper. ISDA asked participants to provide feedback on whether (i) these methodologies are suitable for BBSW and (ii) any other methodologies should be included in the Draft Consultation Paper for BBSW.
Next steps and housekeeping
ISDA explained that it intends to launch the market consultation by 23 April 2018 and noted that it would circulate an updated version of the Draft Consultation Paper, complete with example calculations, to the group in the next few weeks.
ISDA suggested that the next BBSW Technical Group call should take place in two or three weeks, once the updated version of the Draft Consultation Paper has been circulated.
In the meantime, ISDA asked participants to contact ISDA if they have any queries on the Draft Consultation Paper or on any of the matters discussed during the call.