The Hong Kong Monetary Authority (HKMA) issued a circular updating authorized institutions on the recent developments related to the reform of interest rate benchmarks. Riding on the latest recommendation of US Alternative Reference Rates Committee (ARRC) on July 29, authorized institutions are expected to step up their efforts to encourage customers to transition to Secured Overnight Financing Rate Data (SOFR). To ensure a smooth transition away from LIBOR, HKMA will step up its surveillance of authorized institution's preparation from now on until the end of 2021. In this connection, the frequency of the survey on reform of interest rate benchmarks will be increased from quarterly to monthly during the fourth quarter, starting from the position of end-September 2021. To reduce the reporting burden on authorized institutions, HKMA will simplify the reporting template, which will be distributed to authorized institutions shortly.
Consistent with the guidance provided by banking regulators worldwide, HKMA is requiring authorized institutions to cease to enter into new LIBOR-linked contracts after 2021. As certain USD LIBOR settings will continue to be published for an additional 18 months after 2021, it is recognized that there may be a need for authorized institutions to issue new USD LIBOR-linked contracts under exceptional circumstances, until June 2023, to manage risks associated with the pre-existing USD LIBOR-linked contracts. HKMA notes that banking regulators in several jurisdictions have specified the exceptional circumstances under which the supervised banks are permitted to issue new USD LIBOR-linked contracts after 2021. Having consulted the Treasury Markets Association and other relevant industry bodies, HKMA is also setting out the circumstances under which authorized institutions are permitted to issue new USD LIBOR-linked contracts after 2021:
- Transactions that reduce or hedge an authorized institutions or its clients’ USD LIBOR exposures connected with contracts entered into before January 01, 2022
- Market making in support of client activities related to USD LIBOR transactions executed before January 01, 2022
- Novations of USD LIBOR transactions executed before January 01, 2022
- Transactions executed for purposes of required participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting USD LIBOR exposure
If authorized institutions come across other exceptional circumstances necessitating the issuance of new USD LIBOR-linked contracts after 2021 for risk management purposes, they should approach HKMA to discuss how these cases should be handled. HKMA will continue to monitor market developments and update the aforementioned list of exceptional circumstances, as appropriate.
Keywords: Asia Pacific, Hong Kong, Banking, Benchmark Reforms, Interest Rate Benchmarks ARRC, LIBOR, SOFR, Risk Free Rates, HKMA
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