guy debelle : interest rate benchmarks speech by mr guy debelle, assistant governor ( financial markets ) of the reserve bank of australia, at the kanganews debt capital markets summit 2016, sydney, 22 february 2016. * * * i would like to thank ellis connolly for assistance in the preparation of these remarks. today i am going to talk again about interest rate benchmarks, as there have been some important recent developments. 1 these benchmarks are very much at the heart of the plumbing of the financial system. they are widely referenced in financial contracts. for example, the interest rate on a corporate loan is often a spread to an interest rate benchmark. many classes of derivative contracts generally are based on them, as are most asset - backed securities. in light of the issues around london inter - bank offered rate ( libor ) and other interest rate benchmarks, there has been a global reform effort under the aegis of the financial stability board ( fsb ) and the international organization of securities commissions ( iosco ) to improve the functioning of interest rate benchmarks. 2 i will focus on domestic reforms around the principal interest rate benchmark in australia, the bank bill swap rate ( bbsw ). i will also mention plans underway to introduce a “ risk - free ” interest rate for the domestic market, as a complement to bbsw. i will not talk about the investigations that asic is currently undertaking into conduct around bbsw. reforms to the bbsw methodology as you may be aware, in recent months, the council of financial regulators ( cfr ) has been conducting a consultation on possible reforms to the bbsw methodology. 3 i will run through the motivation for doing so, outline the key issues that have been raised in the consultation, and put forward some proposed reforms for market participants to consider. given its wide usage, bbsw has been identified by asic as a financial benchmark of systemic importance in our market. 4 it is important there is ongoing confidence in it. without that, we have a serious problem, given its integral role in the infrastructure of domestic financial markets. as you may know, bbsw was calculated for a number of years by, each day, asking a panel of banks to submit their assessment of where the market was trading in prime bank paper at a particular time of the day. while it was a calculation based on submissions, it differed from libor in that bbsw submitters were asked about where the market for generic prime bank paper was trading

market operations system. the key aspect is that a wide range of counterparties deal with the reserve bank on a regular basis as part of our daily liquidity operations. hence banks are accustomed to dealing with us and have a well - established relationship with us. to recap, there is an important role for a central bank to play in a fractional reserve banking system as the lender of last resort. this is particularly the case in dealing with liquidity events where the central bank's provision of liquidity can be regarded as a public good. 6 as noted, the central bank does not provide the liquidity insurance for free ; it is at a penal rate. moreover, the institution must hold an adequate amount of collateral that is of acceptable quality to the central bank to lend against. such collateral may well deliver a lower rate of see again the governor ’ s melville lecture as well as charles goodhart in “ myths about the lender of last resort ”, in c goodhart and g illing ( eds ) ( 2002 ), financial crises, contagion, and the lender of last resort : a reader, oxford university press, oxford, pp 227 – 248. to be clear, i am not talking about the proposed liquidity facility that will form part of the australian approach to the basel liquidity rules discussed below. rba ( reserve bank of australia ) ( 2010 ), annual report 2010. see kearns j and p lowe ( 2008 ), “ promoting liquidity : why and how? ”, in p bloxham and c kent ( eds ), lessons from the financial turmoil of 2007 and 2008, proceedings of a conference, reserve bank of australia, sydney. bis central bankers ’ speeches return than other assets the bank might otherwise hold ( although not necessarily so on an appropriately risk - adjusted measure ). in that regard, i will now turn briefly to the basel liquidity standards. the aim of those standards is to reduce the frequency with which banks might need to seek assistance from the central bank in a liquidity event to a very small number. it does so by making the size of the liquidity buffer banks are required to hold dependent on the structure and maturity of funding. thus, while the central bank can ultimately liquefy part of the balance sheet of a solvent institution in times of liquidity stress, in expectation, this would be a rare event. an institution should not be careless about its funding structure on the presumption of that support.