Reform of Interest Rate Benchmarks

Over the past few years, the Financial Stability Board (FSB) has been working with authorities and standard-setting bodies to develop reform proposals to enhance the robustness of interest rate benchmarks. On 5 March 2021, the UK Financial Conduct Authority (FCA) confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:

  • immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and

  • immediately after 30 June 2023, in the case of the remaining US dollar settings.

As LIBOR is used extensively in the Hong Kong banking sector, the benchmark reform will have significant implications on the operations of Authorized Institutions (AIs). The related preparatory work can be substantial and complicated. In light of this, the HKMA has been engaging AIs in getting them prepared for the transition.

In Hong Kong, the Hong Kong Interbank Offered Rate (HIBOR) has been in place for many years and is still widely recognised by market participants as a credible and reliable benchmark. While the Hong Kong Dollar Overnight Index Average (HONIA) has been identified as an alternative to HIBOR, there is no plan to discontinue HIBOR. This multi-rate approach has also been adopted by many other jurisdictions.


Hong Kong banking sector’s exposures to LIBOR contracts

The HKMA has launched a regular survey to monitor the banking sector’s exposures to LIBOR contracts. As of December 2020, there were HK$4.5 trillion of assets and HK$1.4 trillion of liabilities in the Hong Kong banking system referencing LIBOR, representing about 28% and 9% respectively of the banking system’s total assets and total liabilities denominated in foreign currencies. Additionally, there were derivatives contracts involving an aggregate amount of HK$30.7 trillion in notional value referencing LIBOR. 27% of these LIBOR-linked assets and liabilities, and 9% of these derivatives contracts would mature after LIBOR’s cessation dates and did not have adequate fallback. These percentages decreased substantially in Q4 2020 following AIs’ adherence to ISDA’s IBOR Fallbacks Protocol and the announcement of the decision to continue to publish the main US dollar LIBOR settings for an additional 18 months after end-2021.

LIBOR transition milestones

In July 2020, the HKMA and the Treasury Markets Association (TMA) jointly developed three transition milestones which AIs should endeavour to achieve. In light of the latest developments and taking into account the industry’s feedback, the HKMA and the TMA agree 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. That said, AIs should continue to press ahead with their transition preparations and should cease to issue new LIBOR-linked contracts by the end of this year. These milestones should help facilitate an orderly LIBOR transition for the banking sector as a whole.

Hong Kong banking sector’s preparedness for LIBOR transition

The Hong Kong banking sector has made good progress in preparing for the transition from LIBOR to ARRs. All AIs have developed a bank-wide transition plan, covering the following key elements:

  • Quantification and monitoring of exposures to LIBOR contracts
  • Impact assessment across businesses and functions
  • Identification and evaluation of risks associated with the transition
  • Identification of affected IT systems, together with a plan to upgrade these systems
  • Identification of affected internal models, together with a plan to modify these models
  • A plan to introduce ARR products
  • A plan to reduce exposures to LIBOR contracts; and
  • A plan to communicate with customers and counterparties, and to remediate existing LIBOR contracts with them

On compliance with the transition milestones, most AIs have started to offer ARR products and included fallback provisions in new LIBOR contracts. All except a small number of AIs have adhered to ISDA’s IBOR Fallbacks Protocol to implement fallbacks for relevant legacy derivatives contracts.

In the remaining time before end-2021, AIs are expected to accelerate their work on reducing their reliance on LIBOR. The HKMA will continue to follow up with AIs where necessary to ensure a smooth transition from LIBOR to ARRs.

Last revision date : 26 April 2021