Featured Product

    HKMA Publishes Results of Survey on Interest Rate Benchmark Reforms

    April 23, 2020

    HKMA published the results of a survey intended to assess progress of banking sector in preparing for the transition to alternative reference rates. The survey on the interest rate benchmark reforms in Hong Kong was launched in November 2019. Results of the survey show that nearly one-third of London Interbank Offered Rate (LIBOR)-linked assets and liabilities and almost half of the derivatives contracts referencing LIBOR would mature after the end of 2021 and do not have adequate fallback provisions. Overall, the derivatives contracts referencing LIBOR amounted to HKD 35 trillion in notional value at the end of September 2019.

    The survey indicates that new issuance and trading volume of products referencing alternative reference rates continued to increase. In Hong Kong, the working group on alternative reference rates, formed under the Treasury Markets Association, has been following up on issues that need to be addressed locally. The Treasury Markets Association also developed a dedicated web page containing a collection of useful information on benchmark reform and transition to alternative reference rates. HKMA, in consultation with the Treasury Markets Association, will consider providing more assistance to the banking industry in overcoming the following identified challenges: 

    • No standard and consistent fallback language existed in the industry for adoption by authorized institutions and other market participants in their existing contracts referencing LIBOR.
    • The liquidity for products referencing alternative reference rates was found to be comparatively low.
    • No well-established term structure was available for alternative reference rates.
    • Limited guidance was available to assist smaller institutions in preparing for the transition.
    • Authorized institutions needed to implement significant changes to their information technology systems, internal models, and processes within a short timeframe to cater for the transition to alternative reference rates.
    • Certain types of financial contracts referencing LIBOR were difficult, if not impossible, for authorized institutions to renegotiate with their customers or counterparties.
    • Authorized Institutions might face conduct risk when dealing with their customers along the transition to alternative reference rates.
    • Awareness of the benchmark reform and the need for transition to alternative reference rates were comparatively low among non-authorized institutions customers and counterparties.
    • It was unclear whether and, if so, how the transition to alternative reference rates would affect authorized institutions in respect of taxation, accounting, and regulatory framework.
    • The status of Hong Kong Interbank Offered Rate (HIBOR) vis-à-vis Hong Kong Dollar Overnight Index Average (HONIA) as the local interest rate benchmark over a longer term was uncertain.

    Outside of Hong Kong, FCA had issued a statement, in March, highlighting that the central assumption that firms cannot rely on LIBOR being published after the end of 2021 did not change, notwithstanding the COVID-19 outbreak. Certain organizations leading the transition to alternative reference rates, including the Working Group on Sterling Risk-Free Reference Rates in UK and the Alternative Reference Rates Committee in US, published their work plans and expected milestones for 2020 to facilitate preparation by the market participants. The Alternative Reference Rates Committee in US is developing a set of best practices for the industry to help support the transition away from LIBOR, in addition to a practical implementation checklist for the adoption of secured overnight financing rate. In parallel, these organizations as well as other industry bodies such as ISDA are working toward developing fallback provisions for different types of products and market conventions in using alternative reference rates.

     

    Keywords: Asia Pacific, Hong Kong, Banking, Alternative Reference Rates, Interest Rate Benchmarks, LIBOR, COVID-19, Fallback Provisions, Risk-Free Rates, HIBOR, Benchmark Reforms, HKMA

    Featured Experts
    Related Articles
    News

    EC to Defer Application of SFDR Standards Till July 2022

    The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.

    July 23, 2021 WebPage Regulatory News
    News

    BoE Consults on Approach to Setting MREL, Publishes Bail-In Guidance

    The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.

    July 22, 2021 WebPage Regulatory News
    News

    EBA Seeks Views on Proportionality Assessment Methodology

    The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.

    July 22, 2021 WebPage Regulatory News
    News

    US Agencies Propose Changes to Call Reports and Instructions

    Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.

    July 22, 2021 WebPage Regulatory News
    News

    PRA Finalizes Rulebook Definition of Higher Paid Material Risk-Taker

    The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.

    July 21, 2021 WebPage Regulatory News
    News

    EBA Examines Asset Encumbrance in Banking Sector

    The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.

    July 21, 2021 WebPage Regulatory News
    News

    EBA Publishes Methodological Guide to Mystery Shopping

    The European Banking Authority (EBA) published a methodological guide to mystery shopping.

    July 21, 2021 WebPage Regulatory News
    News

    APRA Issues Update on Capital Reform Policy Settings for Banks

    The Australian Prudential Regulation Authority (APRA) released a letter to authorized deposit-taking institutions to provide an update on key policy settings for the capital framework reforms, which will come into effect from January 01, 2023.

    July 21, 2021 WebPage Regulatory News
    News

    CPMI-IOSCO Assess Continuity Planning of Market Infrastructures

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report that assesses the business continuity planning activities of financial market infrastructures or FMIs.

    July 21, 2021 WebPage Regulatory News
    News

    ESMA Responds to Proposal Related to Sustainability Standards Board

    The European Securities and Markets Authority (ESMA) has responded to the IFRS consultation on targeted amendments to the IFRS Foundation constitution to accommodate an International Sustainability Standards Board (ISSB) to set IFRS Sustainability Standards.

    July 21, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7283