What Is the Bank Bill Swap Bid Rate – BBSY?
The Bank Bill Swap Bid Rate (BBSY) is an Australian benchmark interest rate quoted and dispersed by the data provider Thompson Reuters Information Service. The BBSY is typically used by financial institutions or corporations engaging in interest rate swaps and related transactions.
In Australia, the BBSY is the interest rate used in the financial markets for the pricing and valuation of Australian dollar securities and used by banks to borrow money and to determine short-term floating interest rates. The BBSY is managed by ASX Ltd, which operates Australia's primary national stock exchange and equity derivatives market.
The BBSY is published at 10:15 a.m. daily on Thomson Reuters and on Bloomberg LLP. The published rates are used by financial institutions nationally to calculate interest rates on financial contracts, making for a transparent and efficient process in the country’s financial system.
The BBSY is used as the base rate for debt financing. It is similar to the London Interbank Offer Rate (LIBOR) which is set daily by the British Banking Association (BBA) and which banks with high credit ratings charge each other for short-term debt financing. The BBSY is derived from the BBSW—Bank Bill Swap Rate—which is calculated as the average of the national best bid and best offer (NBBO), rounded to four decimal places.
This average mid-price is made available by independent authorities using a transparent algorithm based on information from numerous financial institutions. The BBSY is calculated and provided in a similar manner, except instead of mid-price, the average bid-price is used.
Real World Example of How to Use the BBSY
A good example of where the bank bill swap bid rate comes into play is in a plain vanilla interest rate swap agreement. An interest rate swap is a contract entered into by two counterparties who agree to swap streams of interest payments with each other for a predetermined period of time. One party swaps fixed-interest payments and receives floating interest payments that are dependent on the movement of the BBSY.
In order to decide what interest rate is used to determine the payment amounts in the agreement, the BBSY is agreed upon at the inception of the agreement as the reference rate. The floating rate used in interest rate swaps is BBSY plus (or minus) a margin, e.g. BBSY + 35 basis points.
Consider two companies who enter into an interest rate swap in which company XYZ pays fixed payments to and receives floating payments from company ABC. The semi-annual fixed interest rate is 2%, and the floating rate is BBSY + 0.35% to be paid on a semi-annual basis. Payments are to be swapped on a notional principal amount of $1 million. On the day the payment amount is calculated XYZ will pay ½ x 2% x $1 million = $10,000 to ABC. Assuming the BBSY is 1.90%, ABC will remit ½ x (1.90% + 0.35%) x $1 million = $11,250 to XYZ.