Macroscope | Hong Kong must ensure a smooth shift away from the Libor benchmark
- Hong Kong has made some progress, but will need to accelerate its pace to complete the transition by the end-of-year deadline
- Singapore, on the other hand, compares quite favourably: the monetary authority has made a clear road map to the use of its new reference rate
Reference rates, like London’s Libor and Hong Kong’s Hibor, are technical financial benchmarks that are usually discussed by specialists. They should, however, be on the radar of anyone who deals with banks, insurers and asset managers, or any other company that sells financial products, as these rates are used to price trillions of dollars’ worth of assets – everything from mortgages and business loans to interest rates swaps.
In Hong Kong alone, there were HK$4.3 trillion worth of assets and HK$34.9 trillion of derivative contracts referencing Libor in September, according to Hong Kong Monetary Authority data. Around 19 per cent of the assets and 2 per cent of the derivatives lacked “adequate fallback” for when they mature after Libor’s cessation.
Failure to adequately make the shift to new alternative rates will lead to concrete disruptions – such as an inability to transact new business and limited liquidity, leading to poor execution of and potential dispute over trading terms.
The transition away from Libor is a multistep process. First, a financial institution must make new products that incorporate upcoming rates. Then, they need to move existing products onto the new rate, by relying on the fallback terms in the product documentation that are designed to facilitate transition in case Libor ceases to exist. All of this requires lots of legal work, systems upgrades and conversations with clients.
Despite efforts by local regulators, Hong Kong will need to accelerate its pace. The Monetary Authority was originally targeting the cessation of Libor-linked products by the end of June, but this has been postponed, and local financial institutions are expected to accelerate their work in reducing their reliance on the old rate by the end of the year.
Singapore, on the other hand, compares quite favourably, as regulators have set clear expectations for local financial institutions. The Monetary Authority of Singapore has made a clear road map to the use of its new reference rate, the Singapore Overnight Rate Average. The replacement rate is already being used, with several large Singaporean companies issuing debt referenced against Sora.
