Interbank Offered Rate Reforms-Bank of Shanghai (Hong Kong)

Interest Rate Benchmarks Reform

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June 2021

Overview

Interbank Offered Rates (“IBORs”), including the London Interbank Offered Rate (“LIBOR”) and certain other IBORs, serve as a benchmark rate to calculate interest rates or other payments and are used for valuation of financial products including loans, bonds and derivatives.

Over the past few years, the Financial Stability Board (“FSB”), an international body that monitors and makes recommendations about the global financial system, has been working with authorities and standard-setting bodies to develop reform proposals to enhance the robustness of interest rate benchmarks. As LIBOR is used extensively in the Hong Kong banking sector, the benchmark reform will have significant implications on the operations of the industry. The related preparatory work can be substantial and complicated. In light of this, the Hong Kong Monetary Authority (“HKMA”) has been engaging the industry proactively to ensure a smooth transition away from the LIBOR [1].

Why are IBORs being reformed?

IBORs are meant to reflect the price of interbank funding markets and generally based on transactions among banks. However, the Financial Conduct Authority (“FCA”), a regulatory body in the United Kingdom, has made it clear over a number of years that the lack of an active underlying market makes LIBOR unsustainable, and unsuitable for the widespread reliance that had been placed upon it [2].

Globally, authorities in different jurisdiction are in progress of the transition away from LIBOR, and certain other IBORs are also undergoing reforms, known as IBOR transition or IBOR reform.

What will be the alternative reference rate for LIBOR?

The markets most affected by the transition away from Interbank Offered Rates (IBORs) are the five currencies: United States Dollar (“USD”), Euro (“EUR”), British Pound (“GBP”), Japanese Yen (“JPY”), and Swiss Franc (“CHF”). Transition away from LIBOR requires its replacement by alternative reference rates (“ARRs”) for each relevant currency.

Across jurisdictions, some regulatory or standard-setting working groups comprising public and private sector representatives have been established to ensure a smooth IBOR transition. Some of these working groups have now identified the ARR for each currency, as summarized in below table for your reference:

Currency	IBOR	Anticipated Approach	ARR	Working Group
Hong Kong Dollar	HIBOR	Multiple-rate approach-HIBOR continues alongside HONIA	Hong Kong Dollar Overnight Index Average (HONIA)	Treasury Markets Association
US Dollar	USD LIBOR	Transition is required.	Secured Overnight Financing Rate (SOFR)	Alternative Reference Rates Committee
Pound Sterling	GBP LIBOR	Transition is required.	Reformed Sterling Overnight Index Average SONIA	Working Group on Sterling Risk-Free Reference Rates
Euro	EURIBOR	EURIBOR has been reformed, allowing its continued use. Multiple-rate approach – the reformed EURIBOR continues alongside €STR	Euro Short Term Rate (€STR)	Working Group on Euro Risk-Free Rates
Euro	EURO LIBOR	Transition is required.	Euro Short Term Rate (€STR)	Working Group on Euro Risk-Free Rates
Swiss Franc	CHF LIBOR	Transition is required.	Swiss Average Rate Overnight (SARON)	National Working Group on Swiss Franc Reference Rates
Japanese Yen	JPY LIBOR	Transition is required.	Tokyo Overnight Average Rate (TONA)	Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks

When will the LIBOR replacement take effect?

On 5 March 2021, FCA has announced and 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 GBP, EUR, CHF and JPY LIBOR settings, and the 1-week and 2-month USD LIBOR settings; and
• immediately after 30 June 2023, in the case of the remaining USD LIBOR settings, including overnight, 1-month, 3-month, 6-month, and 12-month USD LIBOR settings [3]

What can customers do to prepare for the IBOR transition?

Customers are encouraged to stay up-to-update on the latest developments of the transition, and here are some steps that you may consider taking now:

Perform a review of all existing contracts to identify all LIBOR exposures, products such as loans, bonds and derivatives may use LIBOR in some form, for example, as a reference rate, a fallback rate or in a late payment clause
Remain aware of developments within cash and derivative markets
Identify impacted data and systems in your firm and reach out to third-party data and service providers to update the data and system if necessary (if applicable)
Understand the potential accounting and taxation impacts when transitioning from LIBOR to ARRs (if applicable)
Identify internal benchmarks that references to LIBOR (e.g., intragroup funding rates) and propose required changes to benchmarks (if applicable)

You may also reach out to your Relationship Manager to discuss your LIBOR exposures with Bank of Shanghai (Hong Kong) Limited (“the Bank” or “we” or “us”).

What is the Bank’s approach to IBOR transition?

The bank has been working closely with internal and external stakeholders to ensure a smooth transition.

We have established an IBOR transition project team covering several key areas, such as product strategy, customer communication, and contract review and modification, in preparation for the IBOR transition.

We have been assessing how the transition may impact IBOR-linked transactions and products. While closely monitoring market developments, we will continue to share the upcoming changes with our customers.

In the meantime, we recommend that you stay engaged with the transition and undertake a similar review exercise and consider the potential impact on your products.

More information

For further information on specific products and services you currently have with us, please get in touch with your usual contact from the Bank.

For general information on IBOR-related market developments, a non-exhaustive list of useful references from external industry bodies or organisation sources is included below:

1) Working groups

HKD HIBOR – Treasury Markets Association (https://www.tma.org.hk/en_market_LIBOR.aspx)

HKD HIBOR – Hong Kong Monetary Authority (https://www.hkma.gov.hk/eng/key-functions/banking/banking-regulatory-and-supervisory-regime/reform-of-interest-rate-benchmarks/)

USD LIBOR – The Alternative Reference Rates Committee(https://www.newyorkfed.org/arrc)

GBP LIBOR – The Working Group on Sterling Risk-Free Reference Rates

(https://www.bankofengland.co.uk/markets/transition-to-sterling-risk-free-rates-from-libor)

EURO LIBOR – The Working Group on Euro Risk-Free Reference Rates

(https://www.ecb.europa.eu/paym/initiatives/interest_rate_benchmarks/WG_euro_risk-free_rates/html/index.en.html)

CHF LIBOR – National Working Group on Swiss Franc Reference Rates

(https://www.snb.ch/en/ifor/finmkt/fnmkt_benchm/id/finmkt_reformrates)

JPY LIBOR – Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks (https://www.boj.or.jp/en/paym/market/jpy_cmte/index.htm/)

2) Other regulators

Financial Stability Board: an international body that monitors and makes recommendations about the global financial system, and coordinates with other regulators to ensure an effective transition. (https://www.fsb.org/work-of-the-fsb/market-and-institutional-resilience/financial-benchmarks/)

Financial Conduct Authority: the conduct regulator for financial services firms and financial markets in the UK that coordinates with other regulators to ensure an effective transition. (https://www.fca.org.uk/markets/libor)

International Swaps and Derivatives Association: the international association that works to manage the global derivatives markets and creates the ISDA Fallbacks Protocol to ensure an effective transition of IBOR linked derivatives. (https://www.isda.org/category/legal/benchmarks)

Reference

[1] See Reform of Interest Rate Benchmarks, Hong Kong Monetary Authority, last updated on 26 April 2021.

[2] & [3] See Announcements on the end of LIBOR, Financial Conduct Authority, published and last updated on 5 March 2021.

This web page was last updated on 28 June 2021.

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