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28 Mar, 2013 10:58

Australia to ditch interbank rate-setting panel over Libor scandal

Australia to ditch interbank rate-setting panel over Libor scandal

Australia is disbanding the panel setting its interbank lending rates over manipulation fears. The move was prompted by the major international banks' exodus from the Libor panel in the wake of rate-rigging scandal. 

The Australian Financial Markets Association suggests turning to an electronic system. This will allow the AFMA which oversees Australia's bank bill swap reference rate (BBSW) to bypass the panel and extract the rates directly from brokers and electronic markets. 

Calculating rates electronically will eliminate "compliance and ancillary costs" incurred by banks, the association said. 

"Building on the advantage of [bank bill swap rate] being based on a traded market AFMA proposes to bypass the panel requirement by adopting a process to extract these rates directly from trading venues," Executive Director David Lynch said in a statement on Wednesday. "This proposal has the support of market participants."

The new rate-setting practice may be introduced in the next few months. 

The decision comes after HSBC Australia and Citibank said they will leave the rate-setting panel at the end of March. Earlier this year JP Morgan and UBS announced they would quit, hence leaving only ten banks on the panel. 

"By scrapping the panel AFMA is indirectly allowing all market participants who trade prime bank paper to participate in the rate-set process. The decrease in the panel size could theoretically pose problems as it reduces the size of the quotes available for the elimination and average procedure," Westpac interest-rate strategist Timothy Jung told Fox Business.

Australia’s decision follows the rate rigging scandal with Libor. After Barclays, UBS and Royal Bank of Scotland Group were fined billions of dollars over fixing the London Interbank Offered Rate prompting several major banks’ exodus from the discredited structure.

Australia's bank bill swap rate model is regarded as a more transparent rate-setting practice than the international model. 

Australian banks report rates from actual trades and not just their own borrowing rates which leaves much less room for rigging and fixing. While LIBOR, for example, is set by a selection of banks on the London money market, and determines their borrowing and lending costs, leaving these banks a chance to manipulate the rates in their own interests.

AFMA represents around 130 Australian and international banks, brokers and fund managers. The country's "prime" banks are Australia and New Zealand Banking Group, Westpac Banking Corporation, National Australia Bank and Commonwealth Bank of Australia.