24 July 2020
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The Hong Kong Monetary Authority (HKMA) has issued a circular to announce the key milestones that authorised institutions (AIs) should endeavour to achieve in the transition from LIBOR to alternative reference rates (ARRs). This follows a statement by the Financial Stability Board (FSB) on 1 July 2020 in which it maintained its long-held view that “firms across all jurisdictions should continue their efforts in making wider use of risk-free rates in order to reduce reliance on IBORs where appropriate and in particular to remove remaining dependencies on LIBOR by the end of 2021”, notwithstanding the Covid-19 outbreak. As advised by the HKMA, AIs should implement a detailed work plan (by product and by business line) to achieve the milestones. If they anticipate difficulties in achieving the milestones, they should reach out to the HKMA as soon as possible. This e-bulletin provides an overview of the milestones, as well as recent developments in Hong Kong and internationally. Among other things, the HKMA issued a circular on 23 July 2020 to provide guidance to AIs on the frequently asked questions published by the Basel Committee on Banking Supervision (BCBS) on prudential issues relating to the benchmark reforms. |
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The milestones have been developed by the HKMA in consultation with the Treasury Markets Association (TMA): ·AIs should be in a position to offer products referencing the LIBOR ARRs from 1 January 2021; ·From 1 January 2021, adequate fall-back provisions should be included in all newly issued LIBOR-linked contracts that will mature after 2021; and ·AIs should cease to issue new LIBOR-linked products that will mature after 2021 by 30 June 2021. The following documents have been made available on the TMA’s dedicated webpage for LIBOR transition to assist AIs:
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The HKMA and the TMA are evaluating the need for suitable fall-back provisions for HIBOR contracts, although there is no plan to discontinue the local benchmark. The TMA has previously identified the Hong Kong Dollar Overnight Index Average (HONIA) as the ARR for HIBOR. In December 2019, it concluded its consultation on proposed technical refinements to HONIA. The HKMA has since last year encouraged market participants to start exploring how to incorporate HONIA into their businesses, to help reduce market impact in the event HIBOR has to discontinue due to changes in market circumstances. |
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The HKMA circular attaches the results of its regular survey on reform of interest rate benchmarks. The results indicate (among other things) that the amount of LIBOR-linked exposures maturing beyond 2021 and having no adequate fall-back provisions had grown in the six months ending 31 March 2020, but that AIs had made further progress in their preparation for the transition. For example: ·a large majority (85%) of AIs have established a steering committee or appointed a senior executive for overseeing the preparation for transition; ·more than half of AIs have developed a bank-wide transition plan, and put in place measures for quantifying and monitoring LIBOR exposures and for assessing impact across businesses and functions. |
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The HKMA circular also provides a summary of the latest international developments relating to benchmark reform, including (among others): ·the FSB and BCBS's report on supervisory issues associated with benchmark transition published on 9 July 2020, which includes insights on remaining challenges to transition based on earlier surveys undertaken by the FSB, the BCBS and the International Association of Insurance Supervisors (see our briefing of 17 July 2020 for further details); ·clarifications of the Basel framework by the BCBS via frequently asked questions on 5 June 2020, on issues including the definition of capital, market risk, counterparty credit risk, liquidity and operational risk (the HKMA issued a circular on 23 July 2020 to provide guidance to AIs in relation to these issues in the Hong Kong context); and ·developments in the US, the UK and Switzerland. Separately, we note that Bloomberg and the International Swaps and Derivatives Association, Inc (ISDA) announced on 21 July 2020 that Bloomberg Index Services Limited has begun calculating and publishing fall-backs that ISDA intends to implement for certain key IBORs. ISDA will shortly publish amendments to its standard interest rate derivatives definitions to incorporate these new fall-backs, which are adjusted versions of various risk-free rates. In Singapore, there has been broad industry agreement on a proposed transition roadmap to adopt the Singapore Overnight Rate Average (SORA) as the interest rate benchmark for Singapore Dollar (SGD) interest rate derivatives, in place of (or as an alternative to) the Singapore Dollar Swap Offer Rate (SOR), which uses USD LIBOR in its computation. The SGD cash markets (eg, loans, bonds, retail products), which also widely use SOR, can use multiple reference rates as is the case today, where various interest rates (eg, SORA, SIBOR, banks’ internal funding rates) would coexist as reference rates. The Monetary Authority of Singapore has been consulting with the industry on the transition away from LIBOR itself, including through surveys, although no public circulars have been issued to date. |
For further information, please contact:
William Hallat, Herbert Smith Freehills
william.hallatt@hsf.com
