The Financial Markets Authority has issued guidance around trading in bank bills in an attempt to keep current market participants and encourage former traders back into the market.
The bank bill benchmark rate (BKBM) is New Zealand's main interest rate benchmark, used to calculate the amount payable under financial instruments such as corporate loans. It is calculated based on bank bill trade information obtained from a daily two-minute trading window, with operating rules to stop traders significantly moving the rate over that time and to ensure liquidity in the market. Those rates came under scrutiny after major global banks were fined for fixing benchmarks such as the London Interbank Offered Rate (LIBOR).
Currently, Bank of New Zealand, ANZ Bank New Zealand, ASB Bank, Westpac New Zealand, Kiwibank and Citibank trade in the market used to calculate the BKBM, and the FMA hopes today's guidance will encourage other institutional participants return to trading in bank bills markets.
"By clarifying our expectations of conduct and controls we're aiming to reduce regulatory uncertainty and encourage participation in these benchmarks," Garth Stanish, FMA director of capital markets, said in a statement. "Some banks have stopped participating in recent years and with that comes an increased risk that benchmarks won't be robust."
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The regulator said the recent High Court judgment against former fund manager Mark Warminger clarified the law around trade-based market manipulation, and although that case concerned listed securities, similar reasoning would apply to trading in bank bills in that trades solely or primarily aimed to set or maintain the market price were not for a legitimate commercial purpose and were illegal.
"If we find evidence of trading undertaken for the purpose of moving the BKBM rate, or another benchmark rate set, we will take appropriate and proportionate action," the FMA said. "We will also apply similar reasoning to any wholesale trading in securities, even where a benchmark or closing rate is not affected."
The FMA said it expects banks to think about how they can record contextual evidence that will show what the purpose of any trading activity was, at the time it took place. It says banks should have a clear trading strategy and should record its explanations for varying from that strategy. The regulator may conduct spot checks
"Trading that causes a large price or rate movement will not necessarily signal non-legitimate trading, but we would expect market participants to take a risk-based approach to checking that transactions have a legitimate purpose," it said. "This may involve greater review of transactions that have caused a large price or rate movement, or where a small change has led to a significant benefit for the participant or individual trader."
Legitimate purposes for trading in the bank bills market include price or volume discovery, obtaining funding, managing a cash position by investing in banks bills, and hedging interest rate risk, it said.