LIBOR / BBSW Concept
LIBOR (London Interbank Offered Rate) was the dominant global floating benchmark for decades. USD LIBOR ceased on 30 June 2023 and was replaced by SOFR, an overnight collateralised rate. In Australia, BBSW (Bank Bill Swap Rate) remains the primary floating reference and is administered by the ASX since 2017. BBSW is now calculated daily from actual transactions in bank-accepted bills and negotiable certificates of deposit, with tenors from one to six months.
Why it matters
Floating-rate instruments need a public benchmark that everyone agrees on. The benchmark represents the wholesale cost of bank funding for a given tenor. When you borrow at "BBSW + 1.75%", the lender passes through its own funding cost (BBSW) and charges a margin for credit risk. LIBOR played that role globally until rate-rigging scandals and shrinking interbank lending pushed regulators to retire it in favour of overnight risk-free rates anchored in real transactions.
Formulas
Worked examples
Australian SME loan priced at $3\text{M BBSW} + 1.75\%$. Current 3-month BBSW = $4.25\%$.
Current loan rate . After next reset, suppose 3-month BBSW prints at $4.75\%$. New loan rate . The credit spread stays constant. Only the BBSW component moves. By contrast, a USD-denominated loan made before 2023 referencing USD LIBOR has been migrated to a SOFR-based reset, often with a small credit spread adjustment to compensate for the methodology change.
Common mistakes
- ✗LIBOR is still the dominant global benchmark. USD LIBOR was retired on 30 June 2023 and replaced by SOFR. Sterling LIBOR, EUR LIBOR, and most other panels ceased between 2021 and 2024. The world's floating-rate plumbing now runs on overnight risk-free rates (SOFR, €STR, SONIA, TONA).
- ✗BBSW is the same kind of rate as SOFR. They are different by design. BBSW is a forward-looking, term, credit-sensitive rate. SOFR is a backward-looking, overnight, collateralised risk-free rate. Both serve floating-rate markets but with different mechanics, and BBSW survived the LIBOR reform because it is transaction-based.
- ✗BBSW is set by a survey of bank quotes. Since 2018 it is calculated from observed transactions in the Australian bank bill market during a daily rate-set window, administered by ASX. The pre-2018 quote-based methodology was retired.
Revision bullets
- •LIBOR retired: USD LIBOR ended 30 June 2023
- •SOFR is the USD replacement, overnight, collateralised
- •BBSW remains the Australian floating benchmark
- •ASX administers BBSW since 2017, transaction-based since 2018
- •Tenors typically 1, 3, 6 months
- •Drives coupons on floating-rate notes and IRS legs
Quick check
BBSW is best described as:
Connected topics
In learning paths
Sources
- Australian Securities Exchange. BBSW benchmark rate methodology. ASX, current version.Primary reference for BBSW calculation rules, eligible securities, and tenors. Confirms ASX as administrator since 2017 and transaction-based methodology since 2018.
- Reserve Bank of Australia. Interest Rate Benchmark Reform in Australia. RBA Market Operations, updated 2024.Outlines Australian regulators' position on BBSW reform and the global LIBOR transition, including the role of AONIA as an alternative risk-free rate.
- Federal Reserve Bank of New York. Alternative Reference Rates Committee: Transition from LIBOR. NY Fed, 2023.Documents the 30 June 2023 cessation of USD LIBOR panel settings and the selection of SOFR as the recommended alternative.
- Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.Discusses LIBOR-style benchmarks, the post-2021 transition to overnight risk-free rates, and the role of these rates in swap pricing.