AUSTRALIAN RATE FIXES – Hedge Settlement Rate

The Australian Foreign Exchange Committee (AFXC), ACI Australia and the Australian Financial Markets Association (AFMA) have been considering the issue of the setting of an appropriate reference rate for the Australian market.

1. Background

When the ‘hedge’ market (non-deliverable forward) began in Australia in the mid 1970s it was necessary to establish a daily reference rate against which transactions could be measured for settlement of differences in Australian dollars. Calculation of a ‘Hedge Settlement Rate’ was established and published electronically each morning with the rate capture focusing on 9.45 am. Over the 1980s and 1990s the rate was calculated by taking readings from a number of banks around this time, topping and tailing them and calculating the mean of the remainder.

There were various refinements to this process over the years, the most recent of which was to have the rate calculated based on the mean of all live updates on the Reuters D3 deal matching system, between 9.43 am and 9.45 am. The calculation is only for the Australian dollar against the US dollar and only a mid-rate is produced.

2. Proposed New Arrangements

The proposed approach is to accept an offer from the WM Company, in conjuction with Reuters, to provide three daily reference rates with its established methodology for calculation. WM Company, having just opened in Australia, now provides hourly readings of a wide range of rates on a 24 hour basis and is a recognised service for reference rates globally. The offer is for calculation and publication electronically of thrice daily rates for AUD/USD and NZD/USD. After discussions with the New Zealand Financial Markets Association, the proposed times for publication are 10.00 am, 2.00 pm and 4.00 pm.  This service would be provided free of charge. Institutions wanting to take advantage of the full range of rates available from WM/Reuters could pay for the additional service to compliment the AUD and NZD fixes.

It is proposed that the new rates are renamed the ‘WM/Reuters Australian Fixes’. Bid and Offer rates as well as a Mid will be published at each time.

3. Recommendations for Implementation

The AFXC, ACI Australia and AFMA are not aware of how extensively the existing Hedge Settlement Rate is used. Consequently, this proposal is being made public to allow interested parties to provide input. It is proposed that the new system commence from the first business day in February 2008.

Submissions can be made by e-mail to afxc-secretariat@rba.gov.au

17 December 2007