the bbsw methodology, taking into account the feedback provided through the consultation process. in putting forward this proposal, the key objectives are to ensure that : • bbsw is anchored to observable arm ’ s length transactions in an active underlying market ; • the bbsw calculation mechanism is robust to changing market conditions ; • the fundamental properties of bbsw are maintained to ensure a seamless transition for financial contracts as the methodology evolves. while most participants are in favour of some changes to the methodology, there are many features of the existing methodology where there is consensus that they should be retained. in particular, there was broad support that the securities underlying bbsw continue to be the ncds and bank bills of the prime banks, as they are relatively homogeneous and liquid. as a result, we don ’ t need to go down the path of calculating bbsw as a broader measure of banks ’ short - term wholesale funding, as is being considered for libor and euro interbank offered rate ( euribor ). this avoids the risk of there being a significant change in the characteristics of bbsw which could lead to contract frustration. to boost activity during the rate set, most submissions supported broadening the definition of the underlying market beyond the interbank market to include transactions with a wider range of counterparties, such as investment funds and the treasury corporations. these submissions highlighted that there is much more activity in the market prior to the rate set than during the rate set. this activity prior to the rate set has the potential to underpin bbsw, assuming market participants agree to transact at directly negotiated rates rather than at bbsw. given the much larger role that non - banks play in the market, we agree that it is time to widen the underlying market beyond the interbank market to include such counterparties. there is a risk that activity in the interbank market alone will not be sufficient to support the calculation of bbsw, and the credibility of the benchmark would be enhanced by the participation of counterparties that come from outside the banking sector. the key change to the methodology proposed by many of these submissions was to calculate bbsw directly from market transactions, rather than using the nbbo method. that is, calculating bbsw as the volume - weighted average price ( vwap ) of market transactions during the rate set window. given the objective is to better anchor bbsw to transactions in the underlying market, we support moving the calculation methodology to the vwap. bis central bankers ’

the prime banks has increased since 2013 to around $ 140 billion ( graph 1 ), trading activity during the daily bbsw rate set has declined over recent years to very low levels ( graphs 2 and 3 ). there are quite a number of days where there is no turnover at all at the rate set. the low turnover in the interbank market raises the risk that market participants may at some point be less willing to use bbsw as a benchmark. this is the motivation for the cfr ’ s consultation to ensure that bbsw remains a trusted, reliable and robust financial benchmark. graph 1 see international organization of securities commissions ( 2013 ), ‘ principles for financial benchmarks ’, final report, july. available at < https : / / www. iosco. org / library / pubdocs / pdf / ioscopd415. pdf >. afma ’ s assessment of its processes against these principles can be found at < http : / / www. afma. com. au / data / iosco - principles >. bis central bankers ’ speeches graph 2 graph 3 there is considerably more activity in the ncd market than is being measured at the rate set, with the activity mainly occurring outside the interbank market. given the size of the market and the short maturity of the securities, on average over $ 1 billion in ncds are issued each day. some preliminary data collected from the four major australian banks indicate that bis central bankers ’ speeches this issuance is regular, with at least $ 100 million in ncds bought or sold on almost all business days at the one, three and six - month tenors. however, the non - bank participants that buy and sell ncds tend to transact bilaterally with the issuing bank, with the price struck at the ( yet to be determined ) bbsw rate, rather than at a directly negotiated rate. if these participants could be encouraged to buy and sell ncds at outright yields, then these transactions would have the potential to make the bbsw benchmark more robust. consistent with there being a shift in ncd trading activity to outside the interbank market, banks ’ holdings of ncds as a share of total issuance has declined over recent years to below 20 per cent ( graph 4 ). over the same period, there has been a steady increase in holdings by super and other investment funds, with their share of ncd issuance rising to almost half recently. graph 4 as part of the consultation, the