Over the past few years, the Financial Stability Board (FSB) had worked with authorities and standard-setting bodies to develop and implement reform proposals to enhance the robustness of interest rate benchmarks. In accordance with the timeline set out by the UK Financial Conduct Authority (FCA), the publication of all sterling, euro, Swiss franc and Japanese yen LIBOR settings, as well as the 1-week and 2-month US dollar LIBOR settings ceased after 31 December 2021. The remaining US dollar LIBOR settings will continue to be published until 30 June 2023. Overall, the Hong Kong banking sector has transitioned away smoothly from the LIBOR settings that ceased publication after end-2021.
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. Similar multi-rate approaches have also been adopted by many other jurisdictions.
The Hong Kong banking sector’s exposures to LIBOR contracts
The HKMA conducts a regular survey to monitor the banking sector’s exposures to LIBOR contracts. As of December 2021, there were HK$3.9 trillion of assets and HK$1.1 trillion of liabilities in the Hong Kong banking system referencing LIBOR, representing about 23% and 7% 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$31.0 trillion in notional value referencing LIBOR. 16% of these LIBOR-linked assets and liabilities, and 1% of these derivatives contracts require remediation to incorporate adequate fallback or other transition arrangements.
HKMA’s support for an orderly transition
The HKMA maintains regular dialogue with AIs on their progress in transitioning away from LIBOR and has collaborated with industry associations to develop a number of tools to assist AIs in supporting their customers’ migration to alternative reference rates (ARRs). These tools include a leaflet for raising corporates’ awareness of the transition and an information note on options available in the loan market to replace US dollar LIBOR.
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, and AIs have implemented a substantial portion of their bank-wide transition plans. In particular, AIs have dealt with the vast majority of their LIBOR contracts that require re-negotiation. AIs have remediated nearly all contracts referencing the LIBOR settings that ceased publication from end-2021 and put in place fallback plans to deal with those that remain outstanding. They have followed the HKMA’s guidance by ceasing the issuance of new LIBOR contracts. Meanwhile, many AIs have already carried out transactions referencing ARRs and the banking sector’s outstanding amount of ARR exposures continues to grow.
The International Monetary Fund also examined the Hong Kong banking sector’s readiness for the LIBOR transition in its Financial Sector Assessment Program and concluded that transition risks have been well-managed.1
The HKMA will continue to monitor the industry’s preparation for transitioning away from the remaining USD LIBOR settings that will cease publication after 30 June 2023.
1International Monetary Fund, People’s Republic of China – Hong Kong Special Administrative Region: Financial System Stability Assessment, June 2021, page 25. See https://www.imf.org/en/Publications/CR/Issues/2021/06/04/Peoples-Republic-of-China-Hong-Kong-Special-Administrative-Region-Financial-System-Stability-50197.