HKMA Publishes Results of Survey on Interest Rate Benchmark Reforms

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