HKMA Outlines Transition Milestones for Interest Rate Benchmark Reform

The latest results of the survey showed that the amount of LIBOR-linked exposures maturing beyond 2021 and having no adequate fallback provisions had grown in the six months ending March 31, 2020. This suggests that the risks associated with the benchmark reform continue to build up in the banking system. Nonetheless, authorized institutions have made further progress in their preparation for the transition. By the end of March 2020, the proportion of authorized institutions that had developed a bank-wide transition plan increased by 23% to 61%. All except a few smaller institutions have already come up with a transition plan, based on the most recent information collected by HKMA.

Notwithstanding the outbreak of COVID-19, financial authorities worldwide remain committed to the original transition timeline. FSB issued a statement on July 01, 2020, reaffirming its view that firms across all jurisdictions should continue to remove remaining dependencies on LIBOR by the end of 2021. The Working Group on Sterling Risk-Free Reference Rates in the UK and the Alternative Reference Rates Committee in the US have issued further statements to supplement their earlier work plans with detailed transition milestones. These include clear timelines for financial institutions to offer non-LIBOR linked products and to cease issuing products referencing LIBOR. With regard to the developments in other financial markets, HKMA has, in consultation with the Treasury Markets Association or TMA, developed the following transition milestones that authorized institutions are expected to achieve:

• Authorized institutions should be in a position to offer products referencing the alternative reference rates to LIBOR from January 01, 2021.
• Adequate fallback provisions should be included in all newly issued LIBOR-linked contracts that will mature after 2021 from January 01, 2021.
• Authorized institutions should cease to issue new LIBOR-linked products that will mature after 2021 by June 30, 2021.

HKMA expects authorized institutions to endeavor to achieve the above transition milestones and put in place a detailed work plan (by products and by business lines) for this purpose. HKMA advises that authorized institutions having difficulties to meet this timeline should discuss with HKMA as soon as they are aware of their inability to comply with this industry standard. To assist authorized institutions to prepare for the transition, the Asia Securities Industry and Financial Markets Association (ASIFMA), at the request of HKMA, has agreed to develop a transition guide. HKMA is also working with the the Treasury Markets Association to develop a self-explanatory note about the benchmark reform, which authorized institutions can distribute to their corporate customers to impress on them the need to make early preparations. Separately, HKMA, along with the Treasury Markets Association, is evaluating the need for suitable fallback provisions for HIBOR contracts, although as pointed out in previous communications there is no intention to discontinue the local benchmark. 

Keywords: Asia Pacific, Hong Kong, Banking, Securities, Benchmark Reforms, IBOR, HIBOR, Fallback Provisions, LIBOR, Transition Measures, Derivatives, HKMA