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March 05, 2019

HKMA is requesting authorized institutions to make preparations for the transition associated with the interest rate benchmark reform being pursued under the auspices of FSB. HKMA considers it important that authorized institutions should start to make preparation for the transition to alternative reference rates, in case the need to fall back on such alternative reference rates arises.

The boards of directors of locally incorporated authorized institutions and the head/regional offices of authorized institutions incorporated overseas should provide oversight of the process and be kept informed of the progress of the preparatory work. The preparatory work should cover the following elements:

  • Quantification and monitoring of affected exposures regularly
  • Identification and evaluation of key risks arising from the reform under different scenarios (including but not limited to a London Interbank Offered Rate, or LIBOR, discontinuation scenario)
  • Formulating an action plan to prudently manage the risks identified
  • Monitoring closely the developments of the benchmark reform both in Hong Kong and internationally and updating the scenarios and action plan, as appropriate

In the past years, FSB has been working with authorities and standard-setting bodies to develop reform proposals to enhance the reliability and robustness of interest rate benchmarks. In UK, FCA has indicated that LIBOR may discontinue after the end of 2021. Thus, FCA and PRA have jointly written to banks to remind them to pay attention to risks associated with the transition to alternative reference rates. As an FSB member, Hong Kong is obliged to follow the FSB recommendation to identify an alternative reference rate to the Hong Kong Interbank Offered Rate (HIBOR), which is a widely recognized benchmark by industry stakeholders. The alternative reference rate should be nearly risk-free and should serve as a fallback for HIBOR. In this connection, the Treasury Market Association has proposed to adopt the Hong Kong Dollar Overnight Index Average (HONIA) as the alternative reference rate and plans to consult industry stakeholders later in the year.

Both LIBOR and HIBOR are used extensively in the Hong Kong banking industry. It is estimated that, as of December 2018, HKD 3.8 trillion of authorized institutions’ US dollar assets referenced LIBOR while HKD 3.4 trillion of HK dollar assets referenced HIBOR, representing about 36% of authorized institutions’ total assets denominated in the two currencies. Therefore, the ongoing interest rate benchmark reform will have significant implications on authorized institutions’ businesses, risk management, and operational processes; moreover, the corresponding preparatory work can be substantial and complicated. As the reform develops, HKMA may approach authorized institutions again to understand their progress and readiness for the transition.

Keywords: Asia Pacific, Hong Kong, Banking, Securities, Interest Rate Risk, Interest Rate Benchmarks, LIBOR, HIBOR, Risk Free Rate, HKMA

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