LIBOR Transition and IBOR Reforms
Interest rate benchmarks including the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR), the Euro Overnight Index Average (EONIA) and certain other Interbank Offered Rates (IBORs) are being reformed.
These reforms are expected to cause at least some IBORs to perform differently to the way they do currently or to disappear, which may impact the Hang Seng products and services you currently use and those we provide in the future.
Regulatory authorities and public and private sector working groups in several jurisdictions have been discussing the alternatives to IBORs but there is still uncertainty over when these alternative rates will be available and how the reforms will impact specific financial products and services.
The content of this page reflects Hang Seng’s current understanding and does not constitute any form of advice or recommendation. Clients should consider if they require guidance from their professional advisors on the possible implications of the changes including from a financial, legal, accountancy or tax perspective.
In financial products such as derivatives, bonds, loans, structured products and mortgages, interest rates can be fixed or alternatively calculated by reference to benchmark rates.
LIBOR, probably the most widely used benchmark, covers financial products denominated in GBP (British Pound), USD (US Dollar), EUR (Euro), JPY (Japanese Yen) and CHF (Swiss Franc). Certain currencies are also covered by their local benchmark such as EURIBOR and EONIA for EUR or the Tokyo Interbank Offered Rate (TIBOR) for JPY.
Financial regulatory authorities have expressed their concern that the interbank lending market, which IBORs are intended to reflect, is no longer sufficiently active or liquid. This concern has resulted in an effort to encourage financial markets to transition from the use of IBORs to risk free rates (RFRs) or change the way that IBORs are currently determined.
What alternative benchmarks may replace the current IBORs?
Public and private sector RFR working groups, including in the EU, US, UK, Switzerland and Japan, have identified alternative risk-free rates, as shown in the table below, and have begun developing strategies for transition:
|Currency||Reference Rate||Anticipated replacement||Regulator
|USD||USD LIBOR2||SOFR (Secured Overnight Financing Rate)||Federal Reserve Bank of New York|
|EUR||EURIBOR||To be confirmed. Alternatives might include a reformed EURIBOR or ESTER (Euro Short Term Rate)||European Central Bank|
|EUR||EONIA (EUR)||ESTER (Euro Short Term Rate)||European Central Bank|
|GBP||GBP LIBOR||Reformed SONIA (Sterling Overnight Index Average)||Bank of England|
|CHF||CHF LIBOR||SARON (Swiss Average Rate Overnight)||Swiss National Bank|
|JPY||JPY LIBOR & IBOR (JPY)||TONAR (Tokyo Overnight Average Rate)||Bank of Japan|
What do we know about these alternative benchmarks?
The RFRs under consideration are overnight near risk free rates while the IBOR rates incorporate both a term structure and bank credit risk.
A number of working groups are considering methodologies for supporting a term structure for the alternative RFRs. The term structure for Reformed SONIA is expected to be defined by mid-2019. The Alternative Reference Rates Committee (ARRC) in the US is also looking at developing the term structure for SOFR during the course of 2019. We anticipate term structures will evolve for each RFR as liquidity increases in the market.
LIBOR and most other IBORs are intended to measure unsecured interbank lending rates, whereas the proposed RFRs are based on short-term wholesale transactions for unsecured RFRs (i.e. SONIA and TONAR) and repo transactions for secured RFRs (i.e. SOFR and SARON). As a result, IBORs include or imply a credit spread over the RFRs. Spread adjustment may consequently be required when transitioning from IBORs to RFRs.
The new reference rates will be administered by the central bank (or nominated independent body) in the relevant jurisdiction. The Federal Reserve Bank of New York (FRBNY) for instance began publishing SOFR in April 2018 on a daily basis.
When will the changes take effect?
This depends on the relevant IBOR. For example, the UK Financial Conduct Authority (FCA) has stated that after 2021 it will no longer compel banks to submit rates used for the calculation of LIBOR and that firms should treat the discontinuation of LIBOR as something that will happen.
The RFRs for USD, GBP, CHF, and JPY are already published alongside the relevant IBORs. Certain market participants have started issuing bonds referencing the RFRs.
For existing transactions that extend beyond 2021, market participants may have to decide whether to convert them to the new benchmarks or use fall-back rates once the existing IBOR is discontinued. There are industry efforts to standardise the approach.
What do these reforms mean for Hang Seng clients?
These changes may impact the Hang Seng products and services you currently use and those we provide in the future, including changes to interest payment and other obligations. The extent of the impact will depend on a range of factors such as the IBOR referenced, the adjustment defined by the industry working groups, the date by when the changes will take effect and the nature of the product or service.
For example, if there is a permanent discontinuation of LIBOR and an alternative benchmark is agreed for a loan facility, it is possible that the alternative benchmark may result in changes to the amount payable under the facility.
We are actively monitoring developments. Hang Seng will provide more detailed information to impacted clients once there is more certainty on which new benchmarks are being adopted, their methodology, their term structure and the transition process agreed at industry level.
For more information
We will periodically update this site and/or provide communications relating to the reforms. In the meantime, if you require any further information, please contact your usual Relationship Manager.
The Frequently Asked Questions below attempt to clarify some of the key themes surrounding the reforms to interest rate benchmarks.
If you would like more general information on interest rate reform and IBOR transition, the FCA, the Bank of England, the U.S. Commodity Futures and Trading Commission, the FRBNY, the European Central Bank, the Financial Stability Board, the International Organization of Securities Commissions and some of the working groups/industry bodies that are considering these issues have published information which can be found on their websites.
1 This summary provides an overview of the expected changes as at today, albeit there is significant uncertainty. We expect further regulatory guidance will be provided at national or supranational levels over the coming months.
2 The ARRC anticipates SOFR replacing the Effective Federal Funds Rate (EFFR) as the rate used for discounting and Price Alignment Interest (PAI) in the cleared context beginning Q1 2020.
Interest rates can be fixed or alternatively calculated by reference to benchmark rates. The London Interbank Offered Rate (LIBOR) is one of the most commonly used benchmarks for interest rates and is referenced in financial products such as derivatives, bonds, loans, structured products and mortgages. It often forms the basis on which interest payments under those products are calculated.
LIBOR is published on each London business day and is administered by ICE Benchmark Administration (IBA). It is based on quotations received from LIBOR panel banks, which are a group of banks who provide information to IBA as to the amount it would cost them to borrow from other banks so that an average can be calculated and published.
LIBOR is published in five currencies (euro, Japanese yen, pound sterling, Swiss franc and US dollar) and for seven interest periods (ranging from overnight to 12 months). Certain jurisdictions have their local benchmark for their currency such as EURIBOR and EONIA for EUR or TIBOR for JPY.
The issues which affect the perceived robustness of LIBOR (such as the lack of interbank lending transactions on which to base the rate) also affect other interbank offered rates (IBORs) such as the Euro Interbank Offered Rate (EURIBOR).
In addition to the IBORs, other interest rate benchmarks are being looked at. For example, the Euro Overnight Index Average (EONIA) may not meet the requirements of the EU Benchmark Regulation (BMR), which means that banks established in the European Economic Area could not use it in a number of new contracts, and potentially in existing contracts if relief is not provided by relevant regulators, after the end of 2019 or, if this period is extended in the BMR, 2021.
In the United States, the preferred risk-free rate (which is called the Secured Overnight Financing Rate or SOFR) is a new rate. Currently, the most frequently used overnight interest rate benchmark in the United States is the Effective Federal Funds Rate (EFFR). In connection with the transition away from US dollar LIBOR, a working group in the United States which consists of both private and public sector entities - known as the Alternative Reference Rates Committee (ARRC) - is currently planning a transition to SOFR which will result in SOFR being used instead of EFFR in a number of cases. Other rates are also being looked at in, amongst other places, Hong Kong, Singapore, Switzerland, Japan, Australia and Canada.
Hang Seng, as a member of the HSBC Group is working closely with HSBC who is participating in a number of public and private sector working groups such as the Sterling Risk-Free Rate Working Group, the Alternative Reference Rates Committee in the United States and the Working Group on Euro Risk-Free Rates, each of which is responsible for identifying the preferred risk-free rate for the relevant currency and planning transition to that risk-free rate.
Hang Seng may also participate in industry working groups, including those that are considering the impact of LIBOR/IBOR replacement on specific types of products and services to ensure our approach is aligned with industry practice.
Hang Seng is aware that the discontinuation of LIBOR or other IBORs may impact both its new and existing products and services and that the impact on all parties, including clients, will need to be carefully considered.
Hang Seng is conducting due diligence to review and confirm how LIBOR and other IBORs are used in Hang Seng products or services. Hang Seng is monitoring this situation and, where required, will provide clients with further information.
While Hang Seng’s internal planning and due diligence on these changes has already started, as noted above, it is not yet possible to accurately determine the precise impact on all parties, including clients, until a replacement for the existing benchmark rates (including the preferred risk-free rate and any necessary adjustments) have been confirmed at industry level and until more information is known on the timing of the changes.
Although the impact of the reforms is still unclear, we expect most clients will assess how the affected interest rate benchmarks are used in their financial products and services. This will include an understanding of existing contracts and arrangements as well as the changes and risks that may arise from discontinuation or modification.
Clients should also consider if they require guidance from their professional advisors on the possible implications of the changes including from a financial, legal, accountancy and/or tax perspective.
Hong Kong Interbank Offered Rates (HIBOR) are the rates of interest for Hong Kong Dollar deposits for the relevant period calculated by HKAB each day (except Saturdays and general holidays) and displayed at 11:15 a.m. on the website of HKAB. The fixings are made on the basis of quotations provided by 12-20 banks designated by HKAB as reference banks and are available for HKD deposit maturity ranging between overnight deposits and 12 months. The fixings are determined by averaging the middle quotes after excluding the highest three quotes and lowest three quotes received from the reference banks.
According to Hong Kong Monetary Authority (HKMA), there is currently no plan to discontinue HIBOR in Hong Kong. However, Hong Kong is obliged to follow the recommendation of the Financial Stability Board (FSB) to identify an alternative reference rate (ARR) for HIBOR and the Treasury Markets Association (TMA) has proposed adopting the Hong Kong Dollar Overnight Index Average (HONIA) as the ARR. 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.