Reform of Interest Rate Benchmarks


02 May 2019

Reform of Interest Rate Benchmarks


Hong Kong people, particularly those who are homebuyers, should be familiar with the Hong Kong Interbank Offered Rate (HIBOR), as mortgages using the one-month HIBOR as a benchmark for the mortgage rate are common.  HIBOR-based mortgages accounted for 86% of mortgage loans approved in March 2019.  In addition to mortgages, HIBOR is also extensively used in syndicated loans offered to corporations.  According to the HKMA’s statistics, HIBOR-based assets of the banking sector amounted to around HK$3,400 billion at the end of 2018.  Moreover, many derivatives contracts traded by financial institutions and institutional investors also use HIBOR as the benchmark rates.  The outstanding amount of such contracts is sizeable, although the exact figures are not available.

HIBOR has been in place for many years and is widely recognised by market participants.  However, with the uncovering of several cases of attempted manipulation of the London Interbank Offered Rate (LIBOR) in 2012 and the shrinking turnover of the interbank money market, the Financial Stability Board (FSB) under G20 has established a steering group to work with financial regulators and standard-setting bodies around the world and put forward a series of recommendations on benchmark reforms, with a view to enhancing the reliability and robustness of interest rate benchmarks.  As an international financial centre and a member of the FSB, Hong Kong is obliged to follow these recommendations, including identifying an alternative reference rate (ARR) for HIBOR.

The ARRs can serve as fall-backs in case the existing interbank offered rates are no longer regarded as reliable benchmarks.  As recommended by the FSB, the ARRs should be near risk-free overnight interest rates derived from actual transactions.  Unlike the interbank offered rates, the fixing mechanism of ARRs does not provide for falling back to expert judgement of contributing banks in making submissions if and when there is a lack of transactions.

The Treasury Markets Association (TMA) has earlier proposed adopting the Hong Kong Dollar Overnight Index Average (HONIA) as the ARR for HIBOR.  In line with the FSB’s recommendation, HONIA is an overnight interbank funding rate based solely on transaction data.  The TMA is now consulting the industry on some technical refinements to HONIA.  However, owing to differences in the calculation methodology between HONIA and HIBOR, and given that HONIA is only a benchmark overnight rate without longer tenors such as one-month or three-month rates, some technical difficulties would have to be overcome before making a switch to HONIA.

Some currency areas have come up with their own versions of ARR after taking into account local market circumstances.  The UK’s Financial Conduct Authority (FCA) have indicated repeatedly to the financial industry that it would no longer compel banks to make LIBOR submissions after the end of 2021, thus signifying the likely demise of LIBOR.  In light of this, the US Federal Reserve is encouraging the industry to completely replace the US dollar LIBOR with the Secured Overnight Financing Rate (SOFR) by the end of 2021.  Meanwhile, the Japanese authorities tend to use a multiple-rate approach.  This means following the global practice by introducing the Tokyo Overnight Average (TONA) as an ARR, while maintaining the Tokyo Interbank Offered Rate (TIBOR).  Indeed the FSB also agrees that interbank offered rates can continue to be used, provided they are considered reliable by local market participants and regulators.

While the global interest rate benchmark reform has an impact on HIBOR, the public need not worry too much as there is currently no plan to discontinue HIBOR in Hong Kong.  In other words, HONIA and HIBOR will co-exist in the market.  Outstanding HIBOR-based loans will not be affected.  However, should more HONIA-based products be introduced in the market, it would help reduce the market impact in case HIBOR has to be discontinued one day owing to changes in market circumstances.

On the other hand, even though HIBOR will stay, Hong Kong still must prepare for the phasing-out of LIBOR.  As an international financial centre and a banking hub in Asia, Hong Kong is used to the adoption of LIBOR in the terms of contracts for financial products.  LIBOR-based assets of the local banking sector amounted to HK$3,800 billion at the end of 2018.  As such, the HKMA had issued a letter to Hong Kong banks in early March, reminding them to undertake adequate preparatory work, including quantifying and monitoring affected exposures, identifying and assessing key risks, formulating action plans, and closely monitoring benchmark rate reforms in Hong Kong and elsewhere.  This will ensure a smooth transition in the banking sector once the ARRs replace the interbank offered rates.

Interest rate benchmark reforms are complex but important.  All financial institutions must attach great importance and devote sufficient efforts to their preparatory work.  The HKMA will continue to work closely with the industry to ensure that such work can proceed in a smooth and timely manner.


Howard Lee
Deputy Chief Executive
Hong Kong Monetary Authority

2 May 2019

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Last revision date : 02 May 2019