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Hong Kong’s slow reform of interest rate benchmarks has put US$2.2 trillion worth of hedging contracts at risk, say market observers
- About HK$17.4 trillion (US$2.2 trillion) of derivative contracts tied to global rate benchmark Libor maturing after 2021 at risk
- Hong Kong’s decision not to set a deadline to kill off Hibor has slowed adoption of alternative benchmarks, say market observers
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Hong Kong banks risk falling behind in the global effort to reform interest rate benchmarks as the scandal-ridden London Interbank Offered Rate (Libor) is set to be phased out by the end of next year.
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Hong Kong’s lack of a plan to phase out the local rate – the Hong Kong Interbank Offered Rate (Hibor) – means firms that have entered into hedging arrangements with banks that expire after Libor ceases to exist at the end of 2021 might struggle to restructure their contracts.
This could be an “operational bloodbath,” said Alexandre Bon, Asia-Pacific head of marketing and strategy at financial tech solutions provider Murex, who is working with banks in Hong Kong to prepare their IT systems for the Libor transition.
Hong Kong’s approach contrasts with banks in other markets such as Singapore, which have begun to explore replacing existing local currency interbank offered rates with a single benchmark, according to a recent consultation paper launched by their association of banks and the Monetary Authority of Singapore.
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Global regulators have decided to discontinue Libor by the end of next year after the Libor scandal in 2012, where several banks were found to have rigged it for profit.
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