HKMA announced the publication of a report that studies the implications of financial benchmark reforms. This report by the Executives’ Meeting of East Asia-Pacific Central Banks (EMEAP) provides a brief overview of the three areas of financial benchmark reforms—discontinuation of London Interbank Offered Rate (LIBOR), implementation of the EU Benchmarks Regulation, and reform of the local benchmarks in EMEAP markets. EMEAP comprises the central banks and monetary authorities of eleven countries in Asia Pacific: Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, and Thailand.
This report, which is based on a study conducted by the EMEAP Working Group on Financial Markets, assesses the extent to which EMEAP markets are affected, identifies the issues and challenges posed to EMEAP countries, and examines the readiness of EMEAP countries in dealing with such issues and challenges. The report provides a brief overview of the above-mentioned three areas of financial benchmark reforms, summarizes the results of the survey, and identifies risk scenarios while proposing policy recommendations for the consideration of EMEAP members.
In terms of LIBOR discontinuation, the report concludes that a more detailed information on financial exposures is necessary to complete the overall risk assessment. LIBOR discontinuation may be more problematic for corporate bonds, syndicated loans, and other cash products rather than for derivatives. In the area of the EU Benchmarks Regulation, the potential impact is expected to be moderate, particularly with the extension of transition deadline to January 01, 2022. Additionally, the potential impact on the functioning of regional markets appears to be contained, according to the results of the study. The following are the key policy recommendations of the working group in each area:
- LIBOR discontinuation. One policy recommendation is for the central banks or banking supervisors to require banks to perform risk assessment and impact analysis of their LIBOR exposures under different scenarios to develop their governance such as the identification of key senior managers and provide transition plans toward alternative reference rates (ARRs), in particular in terms of migrating legacy contracts. Encouraging the launch and trading of new ARR-based products such as bond issues, futures, and swaps, where appropriate, has also been recommended.
- EU Benchmarks Regulation. The recommendation is to prepare early and perform gap analysis toward the compliance of IOSCO principles and toward achieving equivalence with the EU Benchmarks Regulation, especially for the systematically important benchmarks. Another recommendations are to start early dialog with ESMA on cooperation arrangements as the process could take time and to keep in mind the interaction between EU Regulation and other benchmark reforms and LIBOR discontinuation.
- Local benchmark reforms. One of the policy recommendations is to encourage the launch and trading of new ARR-based products such as bond issues, futures, and swaps, where appropriate. When determining calculation methodologies of alternative risk-free reference rates (RFR) and term-RFRs, consider not only the correlation against existing benchmarks, but also the potential economic transfer, which may be crucial in encouraging adoption of ARRs. Finally, engage with the industry and market participants closely in determining the calculation methodology of alternative benchmarks and encourage market participants, especially banks, to be prepared for a scenario where they need to transition to alternative benchmarks; such a scenario could involve conducting regular review on the exposure to affected benchmarks, putting in place robust contractual fallbacks in the scenario that the local benchmarks were to cease, and formulating action plans to manage the associated risks or changes.
Keywords: Asia Pacific, Banking, Securities, Benchmark Reforms, LIBOR, Interest Rate Benchmarks, EMEAP, HKMA
Previous ArticleFASB Issues Update on Meeting of Advisory Council in September 2019
EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.
EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).
NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.
MAS published the guidelines on individual accountability and conduct at financial institutions.
APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.
SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.
FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.
ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.
OSFI published the key findings of a study on third-party risk management.
FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.