Australia central bank: repo collateral will require fallbacks

Isda AGM: Debt instruments will need the provisions to be eligible for Reserve Bank of Australia repo programme

Guy Debelle, Reserve Bank of Australia: "Rather than just encourage, we can ensure it picks up"

Reserve Bank of Australia

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Australia’s central bank will require certain debt instruments referencing the local credit-based benchmark to include fallback provisions to be eligible for its repo facility.

The requirement is among the first by a regulator globally to make it compulsory to include fallback language in new contracts. Authorities had so far indicated it would be up to counterparties to include such provisions.

“We will impose as a requirement the securities that will be eligible in our market operations going forward to have the fallback provisions,” Guy Debelle, deputy governor of the Reserve Bank of Australia, said today (April 11). Under its market operations, the RBA buys and sells securities in the open market almost every day to maintain its cash rate close to the target. The cash rate is the rate at which banks can borrow from each other overnight on an unsecured basis.

“That’s one avenue that’s available, at least in our jurisdiction. Rather than just encourage, we can ensure it picks up,” he said.

Debelle was speaking via a video conference link at the International Swaps and Derivatives Association’s annual general meeting in Hong Kong.

While Australia is planning a multi-rate benchmark future, where a reformed version of the existing credit-based bank bill swap rate (BBSW) would co-exist with the risk-free RBA cash rate, the move to include fallback provisions in new contracts is seen as a bulwark against the decline in BBSW usage in the years to come. The fallback language allows a product to move off BBSW and onto the cash rate if the former was to cease, for example.

Isda released a near-final version of the fallback framework for the Australian dollar derivatives market late last year. In a speech on March 19, RBA assistant governor Christopher Kent said he expected “all users of BBSW” to adopt the Isda fallbacks where possible.

Once finalised, they will need to be embedded in new floating rate notes (FRNs) issued by banks, securitisation trusts and Australian state government paper that reference BBSW, if they want to participate in the central bank’s repo programme.

As of December 31, the total volume of securitisations held under the RBA’s market operations stood at A$35 billion ($25 billion), state government securities including FRNs and fixed interest bonds was at A$8 billion, and bank-issued securities including FRNs and fixed interest bonds amounted to A$10 billion, according to RBA data. The securities affected by the fallback requirement forms only a small part of all those that are eligible for the RBA’s open market operations programme.

Australia has revamped the BBSW to ensure its integrity and continuity. Last year a new methodology was put in place to calculate the rate. It is now sourced directly from transactions in the bank bill market between banks and wholesale investors.

In his March speech, the RBA’s Kent said that while the bank bill market is expected to have a secure future, bank bills’ share in managed funds assets and major bank liabilities has been declining as lenders reduce their reliance on short-term funding. As a result, it isn’t certain the bank bill market will always be large enough to sustain the BBSW rates as viable benchmarks.

Under such a scenario, existing fallback provisions in contracts would be cumbersome to apply and could generate significant market disruption, he said.