PBC Discusses Progress Toward Interest Rate Benchmark Reform in China

The paper highlights that PBC has actively participated in international interest rate benchmark reform and guided the Self-Regulatory Mechanism for Market Rate Pricing in setting up a special working group as well as carrying out a series of research. By now, it has become clear that international interest rate benchmark transitions, including LIBOR, in domestic market will follow the general idea of mainly referring to international consensus and best practices and will actively promote the application of new benchmark interest rates. PBC has instructed the development of the roadmap and the timetable with respect to the benchmark transitions in domestic market, organized in-depth research, and instructed relevant banks to initiate preparation for benchmark transitions as soon as possible.

These preparations include participating in the design and application of new benchmark interest rates, promoting benchmark transitions of new contracts, and exploring the benchmark transition arrangements for the legacy contracts. After the benchmark transition plan for new contract have been determined and finalized, PBC will instruct the LIBOR Working Group to publish the recommended fallback languages, providing guidance to financial institutions to formulate their own customized transition plans accordingly. PBC will instruct the LIBOR Working Group, with reference to international experiences, to provide clarifications on elements of fallback arrangements including triggers, benchmark transition dates, alternative interest rate benchmarks, spread adjustment, interest accruing method and relevant market conventions. PBC will also urge National Association of Financial Market Institutional Investors (NAFMII) to revise relevant derivatives agreements and definitions as soon as possible. 

The paper adds that China has cultivated a series of benchmark interest rates based on actual transactions since the establishment of domestic interbank market, which provides first-mover advantages. Depository-Institutions Repo Rate (DR), government bond yield, and Loan Prime Rate (LPR) have played a significant role as benchmark interest rates in corresponding financial market, providing relatively good reference in observing market operation and guiding financial product pricing. Overall, the benchmark interest rates of China based on actual transactions have been in operation for a long time and China possesses full-scale market transaction data with transparency and availability. PBC has conducted in-depth research and proposed ideas and plans to improve benchmark interest rates of China and the market-based interest rate system, with focus on Depository-Institutions Repo Rate. The next development priority of interbank benchmark interest rate system of China is to promote a wide application of various benchmark interest rates. Efforts will be made in innovating and broadening the application of Depository-Institutions Repo Rate in financial products, including floating-rate bonds and floating-rate interbank certificate of deposits, so as to make the Depository-Institutions Repo Rate a key reference indicator for monetary policy management and financial market pricing in China.

Keywords: Asia Pacific, China, Banking, Securities, Interest Rate Benchmarks, Benchmark Reforms, LIBOR, Depository Institutions Repo Rate, PBC