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BBSW & BBSY

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<p>The Bank Bill Swap Rate (BBSW) is a pivotal figure for fixed income investments. First, we define what an interest rate swap is.</p>
<h2>Swap</h2>
<p>Suppose entity B owes floating interest rate payments to entity A. Entity B can ‘give’ these variable payments to entity C, and pay entity C fixed interest payments. Essentially, entity B has <em>swapped </em>its’ floating interest rate payments (to entity A) with fixed interest payments (to entity C).</p>
<p>Swaps can have different durations, depending on the duration of the payments owed. The rate used for swaps longer than 6 months is the swap rate. If the duration is less than 6 months, the rate is called the <strong>BBSW</strong>.</p>
<h2>How is BBSW calculated?</h2>
<p>The rate is calculated directly from market transactions from certain high credit-quality banks during a certain window. The BBSW is then reported at 10:30am.</p>
<h2>Why is the BBSW important?</h2>
<p>Many fixed interest products (e.g. term deposits) are offered at a fixed <em>margin</em> above (or below) the BBSW. Thus, the price of these products depend on the BBSW.</p>
<h2>BBSY</h2>
<p>The Bank Bill Swap Bid Rate (BBSY) is a benchmark interest rate typically used by financial institutions or corporations engaging in interest rate swaps and related transactions. BBSY is not an independent benchmark for interest rates. It is a bid rate reference and is usually 5 basis points higher than BBSW.</p>
