Australia is scrapping the panel that sets its interbank lending rates after an exodus of banks from the panel, the first major market to dismantle the tarnished structure in the wake of the Libor rate-rigging scandal.
Australia instead plans to base its reference rates on actual market transactions, in line with recommendations earlier this month by a group of global central bankers, and could set the pace for moves in other markets.
Regulators are seeking to reform rate-setting practices after Barclays Plc , UBS AG and Royal Bank of Scotland Group Plc were hit with fines totaling billions of dollars for rigging the London Interbank Offered Rate, known as Libor.
The Australian Financial Markets Association (AFMA), which administers Australia's bank bill swap (BBSW) reference rate, said it planned to bypass the panel and derive the rates directly from brokers and electronic markets.
"An advantage of this enhancement is that it will remove the need for a BBSW Panel, which will eliminate the associated compliance and ancillary costs which otherwise exist for panelist banks," the association said in a statement issued late on Wednesday.
"This change is subject to technical requirements being satisfied, but it is hoped that this solution will be achievable within a period of months."
Banks around the world are reviewing their involvement in interest rate-setting panels in the aftermath of the Libor scandal, which was sparked by findings on manipulation of rates used to price home loans, credit cards and other financial products worth trillions of dollars.
While British regulators have stopped rate fixings on some less-used currencies and tenors, this would mark the first time the panel for a market's main interbank lending benchmark has been disbanded.
AFMA said HSBC and Citibank were pulling out of the BBSW panel, joining the departures of JP Morgan Chase & Co and UBS announced earlier this year.
JP Morgan, Citi and HSBC are also withdrawing from the panel on the New Zealand equivalent, the head of the New Zealand Financial Markets Association, Paul Atmore, said.
Atmore told Reuters that the association was reviewing its rate setting process, which uses bank contributions based on trades made in a daily two-minute trading window and would look at pricing rates directly from the market.
Australia's BBSW rates had been viewed as a more transparent model than the widely used Libor for setting interbank rates.
While banks submit self-determined estimates of their borrowing and lending costs to calculate Libor, the BBSW rates, with tenors ranging from one to six months, are based on where the paper is actually trading in the market.
Submissions to the BBSW process report the prevailing prices for a single type of clearly defined and homogeneously traded paper from Australia's four "prime banks" - Australia and New Zealand Banking Group , Westpac Banking Corp , National Australia Bank and Commonwealth Bank of Australia .
The Bank for International Settlements this month called for greater use of actual transaction data to produce a range of reference interest rates for different purposes.
While scrapping the Australia panel will link reference rates more directly to actual market rates, some market participants voiced concern that they could still be manipulated by banks entering the cash market with big orders before the fix.
UBS's withdrawal from the BBSW panel follows the publication of a U.S. Commodity Futures Trading Commission report into its manipulation of Libor and the Japanese yen equivalent.
The CFTC findings also noted evidence of attempted manipulation by UBS traders in the BBSW, among other rates.
UBS has declined to comment on its findings.
(Editing by Edmund Klamann)