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    HKMA Updates Transition Milestone for Benchmark Rate Reforms

    March 25, 2021

    HKMA issued guidelines updating the transition milestone for benchmark rate reforms for authorized institutions in Hong Kong. A number of international banks have indicated to HKMA that they have encountered difficulties in offering products referencing alternate reference rates because client awareness in the region has yet to be raised and some term alternative reference rates remain unavailable. Thus, the banks are concerned that restricting the issuance of LIBOR-linked contracts prematurely may result in a fragmentation of markets. After considering the industry feedback, HKMA and the Treasury Markets Association, or TMA, agreed that it instead of the end-June timeline, the authorized institutions should cease to issue new LIBOR-linked contracts by the end of 2021.

    In consultation with the Treasury Markets Association, in July 2020, HKMA had developed the following transition milestones for authorized institutions:

    • 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.
    • Institutions should cease to issue new LIBOR-linked products that will mature after 2021 by June 30, 2021.

    The latest HKMA survey indicates that the vast majority of authorized institutions have substantially achieved the first two transition milestones. Most of them are now in a position to offer financial products referencing Secured Overnight Financing Rate (SOFR) or Sterling Overnight Index Average (SONIA) and nearly all of them have signed up to the ISDA IBOR Fallbacks Protocol. Regarding the third transition milestone, the UK FCA confirmed earlier this month that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021 in the case of all GBP, EUR, CHF, and JPY settings as well as in the case of the one-week and two-month USD settings; these settings will also cease to be provided by any administrator or no longer representative immediately after June 30, 2023 in the case of the remaining USD settings. 

    Following the FCA announcement, other authorities including the U.S. FED have publicly indicated that financial institutions should cease entering into new LIBOR contracts as soon as practicable and in any event by December 31, 2021. HKMA and the Treasury Markets Association have also agreed that it is no longer appropriate to stick to the earlier timeline of ceasing to issue new LIBOR-linked products by the end of June. Authorized institutions should continue to press ahead with their transition preparations and should cease to issue new LIBOR-linked contracts by the end of this year. Meanwhile, HKMA will continue to engage the industry proactively to ensure a smooth transition away from LIBOR.


    Keywords: Asia Pacific, Hong Kong, Banking, Alternative Reference Rates, Interest Rate Risk, Benchmark Reforms, Basel, LIBOR, HKMA

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