APAC IBOR Transition Benchmarking Study

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APAC IBOR Transition Benchmarking Study.

July 2020 Banking & Finance. 0 0

sia-partners.com 0 0

Content

6 • Executive summary 8 • Summary of APAC IBOR transitions 9 • APAC IBOR deep dives 10 Hong Kong

11 Singapore

13 Japan

15 Australia

16 New Zealand

17 Thailand

18 Philippines

19 Indonesia

20 Malaysia

21 South Korea 22 • Benchmarking study findings 23 • Planning the next 12 months 24 • How Sia Partners can help 0 0 Editorial team.

Maximilien Bouchet

Domitille Mozat

Ernest Yuen

Nikhilesh Pagrut

Joyce Chan 0 0

Foreword.

Financial benchmarks play a significant role in the global financial system. They are referenced in a multitude of financial contracts, from derivatives and securities to consumer and business loans.

Many interest rate benchmarks such as the London Interbank Offered Rate (LIBOR) are calculated based on submissions from a panel of banks. However, since the global financial crisis in 2008, there was a notable decline in the liquidity of the unsecured money markets combined with incidents of benchmark manipulation. In July 2013, IOSCO Principles for Financial Benchmarks have been published to improve their robustness and integrity. One year later, the Financial Stability Board Official Sector Steering Group released a report titled “Reforming Major Interest Rate Benchmarks”, recommending relevant authorities and market participants to develop and adopt appropriate alternative reference rates (ARRs), including risk- free rates (RFRs).

In July 2017, the UK Financial Conduct Authority (FCA), announced that by the end of 2021 the FCA would no longer compel panel banks to submit quotes for LIBOR. And in March 2020, in response to the Covid-19 outbreak, the FCA stressed that the assumption of an end of the LIBOR publication after 2021 has not changed. Especially, the issuance of cash products linked to sterling LIBOR has to stop by the end of Q3 2020 and the number of contracts referencing LIBOR must be notably decreased by Q1 20211.

In Asia, most of the jurisdictions plan to adopt a multiple-rate approach for their respective local benchmark reforms, with enhanced benchmarks expected to remain alongside alternative RFRs (transaction-based and insulated from manipula- tions). However, Interbank Offered Rate (IBOR) transition is at different stages of progress in APAC and seems particularly fragmented, as uncertainty still exists in some jurisdictions (where the future of local benchmarks has not yet been settled)2. While most regulators in Asia are not willing to rule out their local benchmarks, some of these benchmarks take USD LIBOR as a direct input (e.g. in Thailand and the Philippines), implying the LIBOR transition must be managed carefully and without delay.

Since LIBOR demise is around the corner and only one year and a half is left for the transition, we believe it is time to consider how far market participants have pro- gressed in the transition, and how much further they need to go. For that purpose, we conducted this APAC benchmark study to assess the state of readiness for transition from LIBOR (and other interbank offered rates) to alternative reference rates, as well as the challenges and nuances that market participants face in the transition across Asia.

1 FCA Statement, 23 March 2020 2 As referred on page 8 of this report 0 0 Executive Summary.

The first half of 2020 has proven to be the regulator and prepare for regu- Methodology an unprecedented time with many firms latory scrutiny related to the tran- operating under their business conti- sition; what are their approaches Discussions with financial institu- nuity plan (BCP) due to Covid-19. Des- to communicating with customers tions, including global and regio- pite the operational challenges, global and mitigating disputes and litiga- nal market players in the banking, firms with IBOR transition plan in place tion risks asset management and securities have continued to meet their key pro- services sectors. gramme milestones. However, through Operations and systems: what ongoing discussions with APAC head- is the current institutions’ level Interviews were structured through quartered clients, it is clear that many of of operational and technology a standardised questionnaire, co- them are not prepared for the transition. preparedness vering the 5 main areas of financial This report aims to provide holistic in- benchmark reforms. sights into the progress of the transi- Risk management and modelling: tion in the region and explore the key what are the progress and challen- The findings presented in this report challenges experienced by different fi- ges in updating risk management are based on the information provi- nancial institutions. Our survey covered processes ded during the interviews conduc- 5 main areas of the benchmark reform: ted from March to May 2020. Contract inventory and remedia- Transition organization and go- tion: how institutions are invento- The respondent panel consists of vernance: how institutions are rying their legacy contracts subject matter experts (SMEs) from organising their IBOR transition the regulatory affairs, treasury, mar- process The findings from the survey draw out ket and transformation functions, the key focus areas for firms on both as well as people in charge of di- Regulatory initiatives and litiga- the buy and sell sides as we edge clo- recting the LIBOR transition within tion: how institutions engage with ser to the transition deadlines. their firms. 0 0 Survey key findings.

Transition Organisation & Governance

Some regional banks 82% 70% and buy side firms have not started transition have a mature Global did not experience any planning led IBOR transition transition delays due to programme Covid 19

Regulatory Initiatives & Litigation 67% 82% 91% require greater clarity have external have interactions with the from regulators especially communication plan to regulators, though mainly on APAC IBORs mitigate litigation risk with HKMA and MAS

Operations & Systems

All firms 55% completed less 17% 33% completed front to completed target complete loans back impact analysis than 50% operating model F2B impact for derivatives of their transition design analysis

Risk Management 62% 8% 15% 38% have capability to run completed risk completed factoring of are in progress of transition scenarios to identification liquidity ratios in their assessing liquidity measure risk impact and assessment transition ratio impact

Contract Inventory & Remediation

Client engagement 18% 33% 92% noted as the biggest concern began fallback option considered using AI began contract review discussions with & machine learning tools clients 0 0 Summary of APAC IBOR transitions3.

Comparatif des offres de streaming audio

Alternative Key Transition Jurisdiction Currency reference Approach rates necessary? rates

Hong Kong Multi-rate approach: HKD HIBOR HONIA Enhanced HIBOR to X SAR continue alongside HONIA

Reformed SIBOR SIBOR Multi-rate approach: X Singapore SGD Enhanced SIBOR to Reformed continue alongside SORA SIBOR SIBOR √

TONAR or TIBOR JPY LIBOR √ or OIS Rate Multi-rate approach: JPY TIBOR is expected to continue Japan JPY JPY TIBOR TIBOR alongside TONAR Euroyen TIBOR X may be discontinued Euroyen TIBOR TIBOR √

Multi-rate approach: AONIA / RBA Australia AUD BBSW Reformed BBSW to Cash Rate X continue alongside AONIA

New Multi-rate approach: NZD BKBM OCR BKBM to continue X Zealand alongside OCR

THBFIX THOR Short term: multi-rate approach Thailand THB Long term: THBFIX and BIBOR √ BIBOR THOR might be decommissioned

Not PHIREF identified yet Philippines PHP Not identified yet N/A Not PHP BVAL identified yet

Short term: multi-rate approach Indonesia IDR JIBOR IndONIA Long term: JIBOR might be √ decommissioned

Not Malaysia MYR KLIBOR Not identified yet N/A identified yet

Not CD Rate South identified yet KRW Not identified yet N/A Korea KORIBOR Not identified yet

3 Based on Sia Partners independent research as of June 2020 0 0

APAC IBOR deep dives. The maturity of the IBOR transitions in APAC differs country by country. Sia Partners has been actively monitoring the progress in the region based on close participation in industry working groups and discussions with our clients. 1 1 Hong Kong.

Rate Description Challenges Current status

HIBOR Set of reference interest rates To remain compliant Changes made to enhance the robustness for HKD deposits based on with international of HIBOR (independent oversight through quotations provided by 12-20 standards establishment of a Surveillance and banks and calculated by the (IOSCO Principles Governance Committee and issue of new Hong Kong Association of for Financial policies on conflicts of interest, complaints, Banks (HKAB) Benchmarks) whistleblowing and error correction) Hong Kong Monetary Authority (HKMA) works with the Treasury Market Association (TMA) to ensure HIBOR compliance

HONIA Effective overnight and risk- Lacks sufficiently TMA will work with the industry to promote free reference rate of HKD robust underlying development and trading of HONIA-based unsecured lending transactions transaction data financial products in the Hong Kong interbank Lacks a term TMA will explore means of developing market, executed through a structure term rates for HKD, such as an Overnight panel of contributing brokers Index Swap (OIS) market for HONIA-based transactions

Both LIBOR and HIBOR are used transaction data. In December 20195, will be undertaken to underpin the HI- extensively in the Hong Kong banking the TMA published the Consultation BOR to transaction data to the greatest industry. As of September 20194, conclusions on technical refinements extent possible. HK$4.5 trillion of authorized institu- to HONIA (data source, reporting win- Regarding the transition from IBOR tions (AIs)’ assets referenced LIBOR, dow and publication time) to enhance rates, HKMA issued several circulars amongst which HK$1.5 trillion will ma- the robustness of the benchmark. in 20196: the first one, in March, urged ture after 2021, and HK$4.7 trillion are While HONIA serves as an alternative AIs to prepare for the transition and referencing HIBOR. Moreover, Hong to HIBOR, there is currently no plan to start identifying and evaluating key Kong banking sector’s derivatives ex- discontinue HIBOR. HIBOR has been in risks arising from the reform and for- posures referencing LIBOR amounts place for many years and is still widely mulating firm-wide action plans. The to HK$34.6 trillion (of which HK$16.1 recognised by market participants as a latest circular in October 2019 outlined trillion will mature after 2021) while credible and reliable benchmark. Like HKMA will conduct a regular survey to exposures referencing HIBOR totals a few other jurisdictions in the region, collect information on AIs’ exposures HK$12.2 trillion. Hong Kong will adopt a multiple-rate referencing IBORs and the progress of The TMA has proposed to adopt the approach. Meanwhile, TMA will conti- their preparatory work for the transi- HONIA as the ARR. While lacking a nue to strengthen HIBOR to ensure tion to take suitable follow-up actions term structure on its own, this reference that it remains in compliance with (results of the first survey for Q4 2019 rate is robust and based purely on international standards, and reforms have been published in April 2020).

LIBOR DISCONTINUATION

HIBOR: TMA will continue to strengthen HIBOR to ensure Multi-rate approach: that it remains in compliance with international standards HONIA and HIBOR will co-exist in the market and HONIA: Market participants are encouraged to market participants are free to choose between them incorporate HONIA into their business to reduce HIBOR exposures

Before 2021 After

4 Results of Survey on Reform of Interest Rate Benchmarks for Q4 2019, HKMA, April 2020 5 Consultation conclusion on technical refinements to HKD Overnight Index Average (HONIA), TMA, December 2019 6 Circulars on interest rate benchmark reform, HKMA, March and October 2019 1 1 Singapore.

Rate Description Challenges Current status

SIBOR Daily reference rate based on Based on offered Work is ongoing to enhance its robustness the interest rates at which banks rates and not and anchor it to market transactions to the offer to lend unsecured funds transaction data extent possible to other banks in the Singapore wholesale money market (or interbank market)

SOR Average interest rate on a FX SOR is pegged to To be replaced by SORA Swap basis, as calculated from USD Libor the actual transactions in USD/ SGD FX swap with USD LIBOR as input

SORA Average rate of unsecured Overnight tenor only Monetary Authority of Singapore (MAS) will overnight interbank SGD explore the publication of SORA averages cash transactions brokered in for various tenors Singapore

There are two key SGD interest rate enhanced waterfall methodology for rate. They also plan to provide indus- benchmarks that are widely refe- SIBOR was conducted in the second try guidance on appropriate fallbacks renced in financial contracts: SIBOR half of 20197. The Association of Banks for cash market products to market and SOR. Currently, SOR is used for (ABS) is expected to provide an up- participants by mid-2020, as well as cash market products (loans, bonds) date on the proposed enhancements guidance on a deadline for market and derivatives and SIBOR is used for to SIBOR by end of June 2020, inclu- participants to cease originations of cash market products (loans) but not ding the targeted implementation date new SOR contracts by the end of this for derivatives. SOR is an FX swap of the new waterfall methodology. year8. implied interest rate, computed from The industry has plans to develop ac- While it is unclear the exact exposure actual transactions in the USD/SGD FX tive trading of SORA derivatives from of the corporate loans held by Singa- swap market, and using USD LIBOR the first half of 2020. ABS declared it pore banks that are priced using SOR as an input. The mechanical depen- will be focusing in the next few mon- (SOR underpins the S$3.5 trillion dence of SOR on USD LIBOR made it ths on readying market conventions SGD derivatives market9), market unreliable as a benchmark over the and infrastructure, building liquidity observers had said that the concern long-run and SORA has been identi- in SORA markets, engaging early is less likely over an outsized expo- fied as the ARR. adopters on pilot product structures sure, but that of ensuring an orderly for SORA usage in the cash markets, transition. SORA is a transaction-based bench- and helping customers’ transition le- The first DBS bond tied to SORA was mark underpinned by a deep and gacy contracts. On the other hand, issued on the 14th of May 202010. liquid overnight interbank funding MAS will explore the publication of market. Published since 2005 by the SORA averages for various tenors MAS, the availability of a long histori- and/or a SORA index by the end of cal time series for SORA allows mar- 2020. ABS also stated that they will ket participants to perform technical publish guidance on the use of com- analysis and model trends for risk pounded SORA rates in various cash management, asset-liability pricing, market products in 3Q 2020, as well and trading simulations. Further SORA as a customer segmentation study consultations and enhancements to to identify the types of products and the reformed SIBOR are expected in market segments that could benefit 2020. Transitional testing of a new from the use of compounded SORA

7 Press Release, ABS, 1 July 2019 8 Steering Committee for SOR Transition to SORA, ABS, 19 March 2020 9 The Business Times, 19 March 2020 10 Press Release, DBS Bank, 6 May 2020 1 1

LIBOR DISCONTINUATION

SIBOR: Enhanced SIBOR’s continued existence will consider bank funding structures and international developments SIBOR: Enhanced SIBOR used for cash market products (loans); but SOR: Encourage transition of not for derivatives legacy derivatives and cash market contracts to SORA SOR: SOR still used for some cash markets SORA: SORA (compounded) used Multi-rate approach: for derivatives and some cash SOR to be replaced by SORA SORA: Facilitate take-up of SORA market products (compounded) for derivatives. Term SORA benchmark used for Enhanced SIBOR to continue Develop term-SORA other cash market products alongside SORA

1H 2020 1H 2021 After 2021 1 1 Japan.

Rate Description Challenges Current status

JPY Average interbank interest rate Expected to be To be replaced by: LIBOR at which banks on the London discontinued after • TONAR (unsecured risk-free rate) money market are prepared to 2021 • TIBOR (unsecured interbank offered rate) lend one another unsecured funds • OIS Rate denominated in Japanese yen

TONAR Transaction-based benchmark, Overnight tenor only Trading of TONA Futures is expected to representing the risk-free TONA futures trading resume at some point in 2020 • OIS rate is unsecured interbank overnight is currently suspended, an option for a forward term rate for TONA interest rate eliminating a possible (does not include information derived from data source for futures trades) TONA term structure development

JPY Average interest rates quoted N/A N/A TIBOR by reference banks on the unsecured Japanese interbank call market

Euroyen Average interest rates quoted by May be discontinued Possibility to develop an “adjusted JPY TIBOR” TIBOR reference banks on the Japan Fallback rate should be individually offshore market determined and agreed between the parties to the contract

In April 2014, the Japanese Bankers nal investors are underpinned by the expectations of the Japanese risk-free Association (JBA) transferred its TI- Euroyen Tibor as the benchmark rate. rate, received the most support as an BOR calculation and publication ope- In December 2016, the “Study Group alternative benchmark to JPY LIBOR rations to a new administrator – the on Risk-Free Reference Rates” iden- for both loans and bonds13. Japanese Bankers Association TIBOR tified TONAR as the Japanese yen A “Task Force on Term Reference Administration (JBATA) – to be in line RFR. The market volume of uncollate- Rates” was formed by the BoJ in July with the IOSCO Principles. The JBATA ralised overnight call rate transactions 2019 to establish a framework for cal- calculates the JBA TIBOR by using was $0.14 trillion in July 201812. culation and publication of Term Re- banking quotes for five different matu- In August 2018, the Bank of Japan ference Rates based on the risk-free rities (from one week up to 12 months). (BoJ) set up a “Cross-Industry Com- rate TONA14. Several options have mittee on Japanese Yen Interest Rate been proposed amongst which the JBA TIBOR has been reformed in July Benchmarks” to improve the integrity development of a forward term rate 2017 to integrate and clarify the cal- and robustness of benchmarking based on futures (however the trading culation and determination processes rates ahead of the discontinuation of of overnight call rate futures is current- of reference banks’ submission rates. the JPY LIBOR (for cash products such ly suspended on the Tokyo financial More than $35 trillion transactions as loans and bonds as derivatives Exchange), and an OIS rate (not inclu- are referencing either JPY LIBOR or transactions are covered by the Inter- ding information derived from futures TIBOR11. JPY LIBOR transactions co- national Swaps and Derivatives Asso- trades). Term rates are expected to ver derivatives ($27.7 trillion), business ciation (ISDA)). A public consultation be developed and implemented by loans ($1.3 trillion) and Bonds ($27.8 was held on the appropriate choice mid-2021 and temporary use of other billion for floating rates only). Moreo- of alternative benchmarks to JPY LI- options will need to be explored until ver, many derivatives contracts traded BOR. A term reference rate, which their development for the transition. by financial institutions and institutio- would be calculated based on future

11 IBOR Global Benchmark Survey, 2018 12 Bank of Japan, October 2018 13 Public Consultation on Japanese Yen Interest Rate Benchmarks, BoJ, July 2019 14 Press Release, BoJ, 30 July 2019 1 1

In March 2020, the Financial Services Agency (JFSA) and the BOJ commu- nicated a summary of the results of a survey conducted amongst Japanese financial institutions on the use of LI- BOR. The summary underlined that most of the Japanese financial institutions surveyed are in the process of preparing the business operations to the LIBOR transition or have not started yet. The JFSA and the BoJ highlighted they will deliberate on the need to set more specific core tar- gets and conduct on-site monitoring, considering the progress in financial institutions’ preparations for LIBOR transition15.

LIBOR DISCONTINUATION

JPY LIBOR: Conclude new contracts referencing alternative benchmarks Change language in existing contracts that refer to LIBOR Multi-rate approach: JPY LIBOR expected to be discontinued and TONAR: The BOJ’s Committee will support the replaced by TONAR (and a long-term rate to be development of Term Reference Rates by mid-2021 developed)

JPY TIBOR & Euroyen TIBOR: JBATA will, in Reformed TIBOR to continue alongside TONAR cooperation with relevant authorities and organizations, undertake efforts to raise awareness Euroyen TIBOR may be discontinued or integrated of future retaining Japanese Yen TIBOR and to the JPY TIBOR to create a new benchmark promote the use of Japanese Yen TIBOR in new (JBATA currently envisions a preparation period transactions of approximately two years following the permanent Euroyen TIBOR would not cease before 12-2021 cessation of LIBOR)

Before 2021 After

15 Survey Results on the Use of LIBOR and Main Actions Needed, FSA and BoJ, 13 March 2020 1 1 Australia.

Rate Description Challenges Current status

BBSW Denotes the cost for highly Some BBSW tenors The Royal Bank of Australia (RBA) rated banks in Australia to issue are exhibiting a has encouraged market participants short-term bank paper for each degree of illiquidity to adopt robust fallbacks for BBSW (such monthly tenor between one as AONIA rate) month and six months

RBA Cash Average interest rate on Overnight tenor only Use BBSW rate for longer tenors Rate / unsecured overnight loans in the short term AONIA between banks RBA has expressed support for efforts to develop a Term AONIA

The publication of AUD LIBOR has been strengthen the financial benchmarks derivatives market that allows users to discontinued in 2013 and replaced by and ensure they were aligned with exchange cash flows linked to these the BBSW. Thus, Australian market is the IOSCO Principles. To this end, benchmarks already exist. In June founded on mainly two benchmarks: new methodologies have been 2019, the South Australian Government BBSW and Cash Rate. implemented: BBSW is now largely Financing Authority (SAFA) issued the The notional value of financial transaction based for the critical 3- first FRN referencing the AONIA18. contracts that reference BBSW rate and 6-month tenors and the cash rate In April 2020, regulators released in Australia are estimated to A$18 is calculated directly using the actual feedback on Financial Institutions’ trillion (including derivatives, loans transactions in the cash market17. Preparation for LIBOR Transition19, and securities). BBSW is used as a As markets transition from referencing following the ‘Dear CEO’ letter sent reference rate in around one-third of LIBOR to RFRs, there may be some by the Australian Securities and non-government bonds denominated corresponding migration away from Investments Commission (ASIC) in in Australian dollars, in almost all BBSW towards the cash rate. Even May 2019. Responses confirmed asset-backed securities issued by though referencing a credit-based that the overall impact of LIBOR in Australian securitization trusts, and in benchmark (i.e. BBSW) is relevant for Australia is substantial and indicated some issuance by state and territory many financial products (e.g. corporate that due to liquidity concerns in governments. The RBA cash rate is the loans), for some of them an RFR may alternative reference rates, entities reference rate for around A$7 trillion be more appropriate (e.g. floating rate are continuing to write LIBOR-linked in derivatives contracts. On average, notes (FRN) issued by governments). contracts. Regulators underlined they around $4.2 billion in underlying The infrastructure is in place for have taken this into consideration in volume is transacted in the interbank BBSW and the cash rate to coexist as the review process and acknowledge overnight cash market per day16. the key interest rate benchmarks for these external dependencies. In 2018, the RBA launched programs to the Australian dollar and a functioning

LIBOR DISCONTINUATION

No change identified on the local rates: Regulators encourage market participants to adopt standards of ‘best practice when transitioning away from LIBOR: • transition program Multi-rate approach: • client outreach and communication programmes BBSW to continue alongside AONIA, users can • readiness of IT systems and infrastructure choose the benchmark that is most appropriate • base and alternative scenarios planning for their circumstances

Before 2021 After

Rate Description Challenges Current status

BKBM Short-term interest rate bench- The falling volumes traded Use an alternative rate (OCR) when mark calculated on observed at the BKBM rate set have risk-free rates are more appropriate transactions and reflecting the raised concerns that the supply and demand for Bank benchmark rate may not Bills (securities representing accurately represent the short-term debt obligations of underlying market and a bank with a maturity up to six thus is becoming less months) reliable

OCR Interest rate set by N/A N/A the Reserve Bank

New Zealand’s benchmark inte- warrant attention. Most notably, there is ticipants should adopt the new fall- rest rates (i.e. BKBM) have always growing concern about the declining back provisions that will be provided been based on actual transactions, volumes of bank bills being traded by the ISDA into their contracts refe- consistent with the IOSCO principles. during the rate set. Between 2011 rencing BKBM rates. Furthermore, the However, in 2015, it has been reformed and 2017, the total monthly volumes NZFMA has advised that it intends to by the New Zealand Financial Markets of bank bills traded in the daily BKBM operate dual interest rate benchmarks, Association (NZFMA) to further im- rate set have fallen from $25 billion to retaining BKBM and developing RFR. prove its reliability and robustness. $3 billion20. Lower volumes indicate The new risk-free interest-rate bench- Some of the main changes have been: that the market is less liquid, resulting marks will be calculated independently to introduce a better governance sys- in more volatility in BKBM rates, doing to the BKBM fall-back benchmark rate, tem (including the introduction of the harm to the rates’ representativity and with the NZFMA currently developing a Benchmark Oversight Committee), to credibility. term structure methodology22. widen the Trading Window from one to The Reserve Bank of New Zealand In January 2020, the OCR has been two minutes, the creation of operation (RBNZ) underlined though that most selected by the NZFMA in conjunction guidelines that include rules and penal- market participants think the BKBM re- with market participants to act as the ties for participants, and the move from mains a good benchmark for the New risk-free fall-back benchmark interest banks contributing rates directly to the Zealand environment and there is no rate for BKBM rates to comply with FSB NZFMA to the capture by brokers. plan to discontinue this benchmark guidelines, and has been officially sup- While significant improvements have soon21. ported by the RBNZ23. been made to the BKBM rate capture However, at the beginning of the year, process over time, some issues still the RBNZ highlighted that market par-

LIBOR DISCONTINUATION

No change identified on the local rates: Regulatory authorities encourage market participants who have contracts referencing LIBOR to transition to alternative benchmark rates, and adopting more robust fallback provisions in their contracts referencing IBORs Multi-rate approach: (including BKBM rates) BKBM and OCR will continue to coexist

Before 2021 After

20 Reserve Bank of New Zealand, 2018 21 The Reserve Bank Bulletin, RBNZ, June 2017 22 Press Release, RBNZ, 28 January 2020 23 Press Release, RBNZ, 28 January 2020 1 1 Thailand.

Rate Description Challenges Current status

THBFIX The synthetic rate for deposits in LIBOR USD is Use of adjusted THBFIX (Using SOFR + THB, which represents the effec- used for THBFIX Spread) following ISDA recommendation tive cost of borrowing the THB calculation (compounded in arrears with a spread synthetically by borrowing USD based on mean/median approach) as for the same maturity and swap fallback out the USD in return for THB

THOR A risk-free overnight rate N/A (New rate New rate published since April 1st 2020 based on repo markets that is published since April expected to serve as alternative 1st, 2020) reference rate for new Thai Baht

BIBOR The rates at which contributing Survey based Bank of Thailand (BOT) issued a robust banks offer to lend THB funds to benchmark (not code of conduct for contributing banks prime banks, in a reasonable mar- IOSCO compliant) as a guideline for rate submission ket size, on an unsecured basis in methodology and procedure the Bangkok interbank market

The end of LIBOR submission will have a direct impact on the THBFIX, LIBOR DISCONTINUATION a transaction-based benchmark rate implied from the USDTHB FX swap. THBFIX: Renegotiate contract to Impacts from the reform might be include THBFIX Adjusted fallback material for Thailand since THBFIX is for legacy Include THBFIX predominantly used as the reference Adjusted fallback for new contract THBFIX: Enter into new contracts rate in various products, including referencing LIBOR Free rate loans, and interest rate and currency THOR: Encourage the issuance (i.e. THOR) derivatives24. of THOR linked product THBFIX probably going to get BOT has pushed a market consulta- (compounded in arrear) decommissioned after adoption tion focusing on the Adjusted THBFIX Start of OIS trading of THOR OIS methodology in the case of LIBOR cessation. The favored approach is to BIBOR: Establishments of new THOR: Framework ready for include an adjusted THBFIX as fall- code of conduct, governance transition of legacy THBFIX back using ISDA approach to replace and process controlBIBOR contracts, to reduce outstanding LIBOR (SOFR compounded in arrear 9-month ceased to be published THBFIX contracts both in cash with a spread based on median/mean due to lack of liquidity products and derivatives approach)25. In the long term, the favored RFR would be THOR based on repo market to serve as an alternative reference Before 2021 After rate, that BOT started publishing in April 2020. In addition, the global transition pushed the BOT to reform BIBOR with a new code of conduct to match as much as possible IOSCO principles26.

24 Official Website, BOT, May 2020 25 Responses to Market Participants’ Feedbacks on Adjusted THBFIX Consultation, BOT, May 2020 26 Annual Report 2014, BOT 1 1 Philippines.

Rate Description Challenges Current status

PHIREF Implied Peso interest rate derived LIBOR USD is Not identified yet from done deals in the interbank used for PHIREF foreign exchange swap market. calculation The PHIREF is used as the benchmark for the reset value for the peso floating leg of an Interest Rate Swap PHP Represents the benchmark LIBOR USD is used for Not identified yet BVAL rates for the Philippine peso PHP BVAL calculation in the government securities market

The PHIBOR, which represents the fore swapping back to the Philippine simple average of the interest rate of- Peso currency at the same tenor. So, if fers submitted by participating banks US LIBOR is discontinued, it needs to daily, has been ceased by the Bankers be replaced by an equivalent forward- association of the Philippines (BAP) in looking term rate to prevent substan- 2013. Besides, the BAP replaced the tial alterations in the current value of PDST Reference Rates and launched contracts linked to these rates. in 2018 the PHP BVAL Reference In November 2018, BSP issued guide- Rates, which represents the bench- lines on marking-to-market financial mark rates for the Philippine peso in instruments27, providing basis for the government securities market. establishment of reliable and mar- Today, the financial benchmark re- ket-based benchmarks and it is still forms will affect three important planning to retain local benchmarks, rates on the Filipino markets: the even though ARRs have not yet been Bangko Sentral ng Pilipinas’ (BSP) identified28. PHIREF (the interbank reference rate), BVAL Reference Rates, and the US dollar/Philippine peso FX rate. Indeed, these rates are computed using the US dollar LIBOR, as they indicate the cost of borrowing in USD be-

LIBOR DISCONTINUATION

Approach not defined yet: Local benchmarks should be retained, alongside No change identified on the local rates alternative reference rates

Before end 2021 2021 After

27 Media Release, Bangko Sentral ng Pilipinas, 14 November 2018 28 Study On Implications of Financial Benchmark Reforms, Executives’ Meeting of East Asia Pacific Central Banks, February 2020 1 1 Indonesia.

Rate Description Challenges Current status

JIBOR Determined by Bank Indonesia (BI) Lack of credibility Overnight tenor replaced with IndONIA based on the indicative offer rates Declarative Increased credibility by: quoted by a contributor bank to - Underpinning quote rates to the greatest BI within the submission window extent with transaction data time. JIBOR is the average of un- - Good governance secured lending indicative interest rates, which is offered and aimed for transactions by a contributor bank to another for rupiah lending in Indonesia for multiple tenors

IndONIA Based on the average interest N/A N/A rate for unsecured overnight (New rate published rupiah lending reported by all since 1 August 2018) banks to BI, based on market transactions

IndONIA is an index of interest rate for as a money market reference rate, unsecured overnight interbank rupiah contributor banks have to quote rates lending transactions, determined by by underpinning it to the greatest the average interest rate for unsecured extent possible with transaction data overnight rupiah lending based on in order to better reflect market rates market transactions and reported by and the process of JIBOR quotations all banks to Bank Indonesia. should be conducted with good In 2019, IndONIA replaced the governance29. JIBOR as an overnight interest rate benchmark. BI no longer publishes overnight JIBOR since the 2nd of January 2019 and financial contracts which used overnight JIBOR have shifted to IndONIA as reference rate for overnight tenor instead. To increase the credibility of JIBOR

LIBOR DISCONTINUATION

JIBOR: Disappear on the long run as IndONIA liquidity develops for longer tenors (1 week, 1 month, 3 months, 6 months and 12 months) IndONIA: Develop liquidity in the longer tenors JIBOR: Develop liquidity in the longer tenors currently covered by JIBOR and aligning interbank currently covered by JIBOR rate with the policy rate

Before end 2021 2021 After

29 Official Website, BI 2 2 Malaysia.

Rate Description Challenges Current status

KLIBOR Average interest rate at which Survey based and not Not identified yet term deposits are offered transaction-based between prime banks in the Doubts about the reliability Malaysian wholesale money due to illiquidity of some market or interbank market of the tenors (e.g. 3-month futures contract)

The interbank offered rate, KLIBOR, is widely used in financial contracts, including retail and commercial loans and interbank transactions. In 2017, the Malaysia’s Central Bank enhanced the standards of its interbank benchmark rates to incorporate measures to further strengthen the integrity of the KLIBOR reference rate. These measures have been introduced following a review of the KLIBOR rate fixing process and covers the governance, oversight, accountability and transparency of the rates. The aim is to align with international best practices (IOSCO Principles), ensuring that the rate setting process is undertaken in a reliable and accurate manner to ensure the integrity and credibility of the rates being quoted by the KLIBOR submitters30. However, some liquidity concerns remain on the KLIBOR market, as illustrated by the phase out of the nine-month tenure in January 2018 by the Malaysia’s central bank. This measure has been decided after industry’s feedback on the limited market demand, relevancy and sufficiency of transactional data to support the 9-month KLIBOR rate setting process.31

LIBOR DISCONTINUATION Approach not defined yet: KLIBOR should still exist and serve as No change identified before end 2021 the benchmark rate

Before end 2021 2021 After

30 KLIBOR Rate Setting Report, Bank Negara Malaysia, 27 December 2016 31 Press Release, Bank Negara Malaysia, 29 December 2016 2 2 South Korea.

Rate Description Challenges Current status

CD rate 91-day Certificate of Deposit (CD) Insufficient volume of Alternative RFR under development issued by triple-A rated banks. CDs (91-day) issued The Korea Financial Investment and in circulation. The Association (KFIA) polls 10 local rate has long been securities companies twice each reliant upon expert day to calculate the rate judgement rather than actual transactions

KORIBOR Average interest rate at which Interbank offered rate, Alternative RFR under development term unsecured deposits are not based on actual offered between prime banks transactions in the Korean wholesale money market or interbank market

In June 2019, the Financial Services for the other option (as Repo volume Commission (FSC) and the Bank is a lot higher than call transactions)33. of Korea (BOK) jointly launched a The daily average balance of repo taskforce to select an alternative to transactions hit KRW89.6 trillion in the the current standard, the KORIBOR, first half of 201934, up from KRW51.9 which is based on the declining local trillion in 2016. Over the same pe- certificate of deposit market. The aim riod, we observe a significant drop is to develop a new benchmark by in overnight call transactions, with March 2021. Meanwhile, the taskforce daily average balances falling from will also come up with measures to KRW15.8 trillion to KRW10.6 trillion35. boost the issuance of CDs and im- Industry groups also highlighted other prove the current method of calcula- advantages of a repo rate, such as a ting CD rates32. lower counterparty risk compared to The taskforce is considering two a call rate, especially if only transac- options for the new risk-free rate: a tions backed by government bonds benchmark based on repo transac- are considered. tions and an RFR based on short-term As of now, there is no immediate unsecured loans (call transactions). plans to discontinue the 91-day CD Earlier this year, dealers in South Korea rate, and market players say they have expressed their preference for a will use the alternative RFR once it is next-day repo rate considering decli- available36. ning volumes in the underlying market

LIBOR DISCONTINUATION Approach not defined yet: Existing rates should No change identified before end 2021 still exist alongside a risk-free rate

Before end 2021 2021 After

32 Press Release, FSC, 17 June 2019 33 Risk.net, 24 February 2020 34 Korea Securities Depository 35 Bank of Korea 36 Risk.net, 24 February 2020 2 2

Benchmarking study findings. This section of the report explores the key findings of the study based on the discussions with financial institutions. It covers the 5 key areas of the transition including transition organization and governance, regulatory initiatives and litigation, operations and systems, risk management and modelling and contract inventory and remediation. The study aims to offer insights into how different firms surveyed in the region are preparing for the transitions and tackling the challenges in APAC.

To participate in the study and access the detailed survey results, please contact us 2 2

Planning the next 12 months.

Firms in the region have taken different approaches to prepare APAC IBOR transitions with some not started their preparedness planning. Keeping the next 12 months on track will be crucial as the IBOR transition deadlines get closer and regulatory guidelines become clearer. It is vital that firms continue to stay focused in preparing for the transitions.

Sell-side Buy-side

Stay Current on Regulatory Developments 1 Establish Formal Transition Governance • Engage with regulators and industry groups to • Establish a programme governance framework to understand transition guidelines and best practices provide oversight across impacted functions and as requirements become clearer in the region business lines • Maintain an agile delivery plan to meet evolving • Engage with all impacted stakeholders to align on regulatory requirements and challenges in the roles and responsibilities as well as accountability region • Define clear milestones and work packages to drive deliverables

Kick-off Contract Remediation 2 Initiate Impact Assessment • Establish the appropriate resource model at • Conduct a front to back assessment to identify product level to manage contract remediation taking business areas and support functions impacted by the into account local specificities and cost vs volume transition and to quantity the magnitude of the impact • Identify local requirements and assess feasibility • Define target operating model and business strategy of using AI/ machine learning tools to accelerate • Develop remediation and transition plan to remediation process mitigate transition risks, such as conduct risks

Drive Client Communications 3 Develop Communication Strategy • Drive execution of client communication strategy and • Establish internal and external communications continue to monitor its effectiveness in meeting clients’ strategy, including client/ product categorisation, needs and reducing conduct and litigation risks outreach prioritisation communication timelines • Train internal resources to understand the various • Ensure conduct risks are thoroughly considered transitions in the region to begin detailed client and mitigated discussions • Align communications plan with key transition • Begin Initiation of negotiation and remediation of activities, such as contract remediationdiscussions contracts with clients • Begin Initiation of negotiation and remediation of contracts with clients

Get Operations and Technology Ready 4 Ongoing Transition Monitoring • Identify and mitigate key risks arising from • Drive internal operational and technology non-preparedness of clients and non-market preparedness to meet IBOR transition deadlines participants, such as clearers, custodians • Monitor regulatory development and industry • Identify key dependencies on vendors and guidelines to ensure external requirements are met establish an engagement strategy with vendors to close out risks and issues. Develop a potential workaround plandiscussions • Begin Initiation of negotiation and remediation of contracts with clients 2 2 How Sia Partners can help.

“Sia Partners stands ready to assist clients with a comprehensive impact assessment including a platform review, data reference analysis, and systems traceability.”

Impact Analysis. Program Management Office and Support. Cognitive and process driven solutions to review current state to determine business/functions, Program oversight of the entire project as well as products, and size of assets that will be affected additional resources to support key transition ini- by the transformation to a new reference rate. Sys- tiatives. This includes status reporting, leveraging tems traceability exercise to determine scope of existing project governance structure (steering remediation required (i.e. Interest Rate Risk, Global committee and working groups), issue manage- Risk Management, Market Data, and other Interest ment, and escalation. Additionally, this will include Adjustments). participation in industry working groups so we can capture and deliver real-time information to you as it becomes available.

Using automation Support Operational techniques to accelerate and System Updates. your LIBOR transition. Management of required updates/ enhancements to operational and risk processes and systems in Labor-heavy areas of the transition will need to order to process transactions tied to ARRs and fall- look at innovative ways to approach their respec- backs. Additionally, these required updates could tive roadmaps. Contract remediation supported by present extensive testing and validation efforts Artificial Intelligence, Smart Workflow via Robotic post update. Process Automation (RPA) will be paramount to effectively approach these workstreams. 2 2 What to Do to Prepare for the IBOR Transition.

High level approach.

1 2 3 4

Analyse: Design: Plan: Execute: • Independent assessment • Target operating • Implementation planning • Stakeholder coordination • Centralisation of internal model design • Budgeting • Cross functional delivery documentation • Gap analysis • Project governance management • Articulation of strategic • Business cases structuring • Project tracking objectives and reporting

Project Support & Delivery.

Customised approach & project governance tailored Early SMEs & regulatory engagement to your organisation and to the monetary indexes specific requirements (incl. impact analysis on IT tools Anticipation of sign-off requirements & processes) Cross-functional project governance Clear strategic prioritisation at the onset of the project

Sia Partners to be Your Trusted Advisor.

✓ Combined expertise ✓ ✓ Experience in as consultants involved High quality facilitating similar have specialised deliverables supported assessment projects skillsets in Target by multiple projects across the financial Operating Model delivered in the services sector Definition and IBOR relevant space Transition • Abou Dabi • Frankfurt • Montreal • Amsterdam • Greater Bay • New York • Baltimore Area • Panama* • Brussels • Hamburg • Paris • Casablanca • Hong Kong • Riyad • Charlotte • Houston • Rome • Chicago • London • Seattle • Denver • Luxembourg • Singapore • Doha • Lyon • Tokyo • Dubai • Milan • Toronto

*Sia Partners Panama, a Sia Partners member firm

About Sia Partners.

Sia Partners is a next generation consulting firm focused on delivering superior value and tangible results to its clients as they navigate the digital revolution. With over 1,650 consultants in 17 countries, we will generate an annual turnover of USD 300 million for the current fiscal year. Our global footprint and our expertise in more than 30 sectors and services allow us to enhance our clients’ businesses worldwide. We guide their projects and initiatives in strategy, business transformation, IT & digital strategy, and Data Science. As the pioneer of Consulting 4.0, we develop consulting bots and integrate AI in our solutions.