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Hong Kong banks face deadlines to migrate US$205 billion of contracts tied to scandal-ridden Libor with no alternative rates in place

  • Banks in Hong Kong must step up efforts to remediate about US$25.8 billion legacy Libor-linked contracts to new benchmark by year end
  • As global regulators phase out the scandal-ridden Libor benchmark, companies must work with banks on transition to avoid legal disputes

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Arthur Yuen Kwok-hang, deputy chief executive of Hong Kong Monetary Authority (HKMA), photographed during a technical briefing on virtual banking at the HKMA Auditorium in Central. Photo: SCMP / Jonathan Wong
Georgina Lee

Hong Kong banks must step up efforts to migrate legacy contracts tied to the scandal-ridden London Interbank Offered Rate (Libor) benchmark as more than HK$1.6 trillion (US$205 billion) of assets, liabilities and derivatives will mature without any fallback.

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Lenders will have about six weeks to immediately transition about HK$201 billion of loans and derivatives into a new reference rate before the first of two deadlines arrives, the Hong Kong Monetary Authority (HKMA) said. That is when two of the seven dollar-Libor rates - the 1-week and 2-month tenors - will be discontinued on December 31. Five other tenors will be ended by June 2023.
This batch represents part of the amount the city’s de facto central bank highlighted as one of the pressure points in the transition plan. Banks had HK$5.5 trillion of assets and liabilities and HK$34.9 trillion in derivative contracts tied to Libor on September 30, the HKMA said. Of these, about 21 per cent of the assets, 17 per cent of the liabilities and 2 per cent of the derivatives would mature after Libor’s cessation dates and did not have adequate fallback, it added on its website.

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“There isn’t much time left, so experts within corporate treasury practices should [also] step up their efforts to push forward with the benchmark transition,” Arthur Yuen, deputy chief executive of the HKMA, said, referring to the December 31 deadline.

The central bank has been preparing banks for Libor transition since early 2019, but one of the biggest challenges impeding adoption of the new US dollar benchmark, the Secured Overnight Financing Rate (SOFR), has been from corporate borrowers who remain unfamiliar with the new benchmark, he added.

Libor, particularly when used as a reference rate in US dollar-denominated transactions, has been an important benchmark driving lending, investing and hedging activities in Hong Kong for many years, accounting for 26 per cent and 8 per cent of the banking system’s total assets and liabilities denominated in foreign currencies respectively.

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The HK$201 billion legacy Libor contracts account for less than 1 per cent of the banking sector’s total Libor exposures in the local financial market.

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