Duncan Fairweather, executive director, Australian Financial Markets Association, writes:The Banking Day article 'Bank bills fix in need of a remedy' contains comments that appear to be based on a flawed understanding of the BBSW rate-setting process. The BBSW rate produced daily by the Australian Financial Markets Association is a critical rate for the efficient operation of Australia's A$3.6 trillion bank bill/NCD market and is widely used as a reference rate for other transactions within the broader economy. The article refers to a decision by ASX24 last week to reduce from five to four the number of banks whose bills will be eligible for delivery against interest rate futures contracts.  The article contains a comment that "all BBSW [bank bill swap] fixing rates are now entirely set by the local banks". This is not correct. First, the BBSW rate is set in relation to paper issued by six AFMA prime banks (ANZ, BNP, CBA, JPM, NAB and WBC), not just the major domestic banks - see AFMA media release on 26 September 2011).  While ASX24 has reduced the number of banks whose bills are acceptable under the terms of its futures contract, the number of AFMA prime banks remains unchanged at six and their paper is actively traded every day in the inter-bank bill market.Second, the BBSW rate set involves daily input by 14 panellists and is designed to ensure that no one contributor can influence the rate set through its contribution. The panellists include the six AFMA prime banks as well as Citi, Deutsche, HSBC, Lloyds, Macquarie, RBC, RBS and UBS. These 14 panellists provide rates reflecting their view of the mid-rate for AFMA prime bank paper at 10 am each day. These are then topped and tailed to remove outliers and an average of the remaining six is calculated and published as the BBSW rate set.  The AFMA's BBSW rate-set process is fully described in Bank Bill Swap Reference Rate Procedures on the AFMA's website. To say that BBSW is prone to inexplicable changes from day to day seems to presume that market forces do not play a role in the daily movement of rates. BBSW rates reflect the trading level of AFMA prime bank paper within banded maturities at 10am daily.AFMA places high importance on the integrity of the BBSW rate-setting process, which is monitored each day and is subject to regular review.  The BBSW process is overseen by an AFMA committee comprising of 16 elected representatives of Australian and global banks, inter-dealer brokers and buy-side funds.  Reports are also provided regularly to AFMA's Market Governance Committee.  Because the BBSW rate is set by reference to actual market transactions, we believe it is superior in design and practice to the Libor rate-setting process, which has been subject to significant public criticism and legal action during the global financial crisis.  The Australian market has been free of these concerns.