R E P O R T 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 re- main 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 7 Survey key findings. Transition Organisation & Governance Some regional banks 80% 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 07% 80% 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 00% operating model F2B impact for derivatives of their transition design analysis Risk Management 62% 8% 10% 08% 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% 90% noted as the biggest concern began fallback option considered using AI began contract review discussions with & machine learning tools clients 0 8 Summary of APAC IBOR transitions0. 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 9 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 0 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.