LIBOR Transition - Impacts to Corporate Treasury

April 2019 What is happening to LIBOR?

London Interbank Offered Rate (LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for unsecured loans of varying tenors. In 2017, Financial Conduct Authority stated that it will no longer compel banks to submit LIBOR data to the rate administrator post 2021 resulting in a clear impetus and need to implement alternative risk-free rates (RFR) benchmarks globally.

End of LIBOR LIBOR transition

2019 - 2021 Post 2021 Risk-free rates SOFR (U.S.) LIBOR (RFR) Phase-out RFRs • an unsecured rate at which banks and SONIA (U.K.) • rates based on secured or unsecured ostensibly borrow from one another transactions replace ESTER (E.U.) • a rate of multiple maturities with… • overnight rates • a single rate Other RFRs… • different rates across jurisdictions

How about HIBOR? Unlike LIBOR, the HKMA currently has no plan to discontinue HIBOR. The Treasury Market Association (TMA) has proposed to adopt the HKD Overnight Index Average (HONIA) as RFR for a contingent fallback and will consult industry stakeholders later in 2019.

Do you have any floating rate Do you have any derivative loans, bonds, or other similar contracts (e.g. interest rate Do you need to calculate financialEnsure they instruments have difficult with swap) with an interest leg market value of financial an interestconversations rate referenced to referenced to LIBOR? positions (e.g. hedging LIBOR? instruments) using LIBOR?

Have you applied hedge accounting (IAS 39 / Have you been approached IFRS 9) for hedging your Do you have any systems by your bank or vendor in LIBOR-underlying interest or processes that use respect of LIBOR rate risk? LIBOR (adjusted or discontinuation? unadjusted) as discount rate?

Do you have any funding Does your company currently arrangements (e.g. cash have or plan to issue bonds or pooling, intercompany commercialEnsure they paperhave difficultwith an loans) that calculate interestconversations rate referenced to interest based on LIBOR? LIBOR?

If your answer is YES to any of these questions, then you are very likely to be impacted by the LIBOR discontinuation.

Accounting and Tax These instruments are likely to get impacted… Regulatory and Legal Loans

Valuation and Curve Construction Commercial paper US$200 trillion1 of assets reference to Risk Management Deposits LIBOR globally Derivatives Operation and IT-Infrastructure Bonds

Liquidity

1 Federal Reserve Bank Alternate Rates Reference Committee, Second Report, March 2018

It has a wide impact to corporations within a broad range of financial instruments. Corporations should start planning for LIBOR transition as soon as possible.

Valuation and Curve Accounting and Tax Regulatory and Legal Construction

• Impacts on fair value calculation • Contract amendments will lead to • Impacts on pricing and valuation of according to IFRS 13 significant costs financial instruments, including • Derecognition of hedge accounting • Difference in requirements of RFRs derivatives and non-derivatives under IAS 39 / IFRS 9 across jurisdictions contracts • Potential tax acceleration impacts • Adjustments needed for existing curve framework • Challenge in curve construction led by insufficient liquidity of RFRs

Operation and IT- Risk Management Liquidity Infrastructure

• Basis risk led by different RFRs, • Documentation, implementation • Different fall back rates are only which will not be economically and administration of the transition short term solutions and could equivalent to LIBOR • Systems, especially those for increase liquidity risks • Pricing gaps and volatility arising interest calculation, needed to be • Challenge in refinancing due to the from change in reference rates updated facts that RFRs currently available • Operational risks resulting from • Different publication times and are mostly overnight rates and are differences between existing and pricing across all RFRs needed to not sufficiently liquid new contracts and parallel pricing be incorporated in processes and • Challenges through intercompany using LIBOR and RFRs systems. loans and agreements • New hedging and insurance plan and programs needed

Global alternative rates for LIBOR? successor to LIBOR.

US UK Europe Switzerland Japan Secured Overnight Reformed Sterling Euro Short-Term Swiss Average$ Tokyo Overnight Financing Rate Overnight Index Rate (ESTER) Rate Overnight Average Rate (SOFR) Average (SONIA) (SARON) (TONAR) per month Key Characteristics Federal Reserve Bank of England European Central SIX Swiss Exchange Bank of Japan (RFR) Bank of New York Bank Transaction reference Repo transactions Money market Money market Repo transactions Money market Collateralized Secured Unsecured Unsecured Secured Unsecured Term structure Expect SOFR term Expect SONIA term On-going discussion On-going discussion On-going discussion structure in Dec. 2021 structure in Jun. 2019 Timelines Working group Alternative Reference Working Group on Working Group on Working Group on Study Group on Risk- Rate Committee Sterling Risk-Free Euro Risk-Free Rates Swiss Franc Reference Free Reference Rates (ARRC) Rates (WGSRFR) (WGERFR) Rates (WGSFR) (SGRFR) Current status ARRC consultation on WGSRFR agreed to set The transitional period Methodology on term Release of final report fall back language for up priority task forces to ESTER has been structure approach and on JPY IBOR transition bilateral business loans for SONIA in Feb’19 proposed to be recommendation on by cross-industry issued in Dec’18 delayed by two years, fall back language committee i.e. set to be effective from Jan’22. Expected guidance Results of ARRC Agreement on fall back Daily publication of Clarity on the SGRFR will hold a consultation on fall language and start on ESTER in Oct. 2019 compounded term rate consultation on the back language implementation approach in early 2019 transition to TONAR in 2019 Implementation date Implementation date is Panel banks will no Proposed as Jan’22 Implementation date is Implementation date is not embedded in longer publish LIBOR (EU Benchmarking not embedded in not embedded in regulation quotes as of end 2021 Regulation) regulation regulation

ASPAC alternative rates for LIBOR? successor to LIBOR.

China HK Singapore Australia Indonesia Reformed IBOR Reformed IBOR Reformed IBOR Reformed IBOR$ Reformed IBOR (SHIBOR) (HIBOR) (SIBOR) (BBSW) (JIBOR) per month National Interbank Treasury Market Association of Banks Australian Securities Bank Sentral Reformed IBOR Funding Center Association in Singapore Exchange Republik Indonesia IBOR Reformed SHIBOR HIBOR Reformed SIBOR Reformed BBSW Reformed JIBOR Key Characteristics (reformed IBOR) Transaction Money market Money market Wholesale Money market Deposits reference Collateralized Unsecured Unsecured Unsecured Unsecured Unsecured Term structure Available Available Available Available Available Timelines Current status SHIBOR is reformed in HKMA intends to keep Reformed SIBOR Banks are allowed to BSRI published 2013 HIBOR consultation was use multiple rates IndONIA (alternative finalized in 2018 RFR) in Aug. 2018 Expected guidance No public information Market consultation by Publication of SIBOR BBSW was reformed Reformed JIBOR is available on plans for TMA for HONIA as reformed methodology in 2018 expected to go further SHIBOR RFR in early 2019 in Q2 2019 through IOSCO reforms process early 2019 Implementation Reformed SHIBOR is Reformed HIBOR is Reformed SIBOR Reformed BBSW is Reformed JIBOR date published since 2013 published since 2016 publication starts in published since May publication starts in 2020 2018 2019

Communication Transition Impact Assessment Transition Planning Management Implementation

. Analysing the company- . Designing a detailed . Managing and participating . Providing support of the specific impacts based on planning based on below: in your discussions with implementation across all the implications for various external parties,  Different identified relevant business lines and following areas: including: financial instruments functions of the corporation  Accounting and Tax held by you  Financial institutions,  Regulatory and Legal  Implications for e.g. your banks and . Performing go-live different functions in derivative dealers readiness assessment and  Valuation and Curve QA on contracts analysis performed  System providers and Construction amendments . Establishing firm-wide vendors  Risk Management governance structure and  Regulators and  Operation and IT- status reporting cadence authorities Infrastructure to manage the plan and status for transition across  Liquidity different areas, business . Identifying affected lines and geographical products and contracts locations of your corporation

© 2019 KPMG Advisory (Hong Kong) Limited, a Hong Kong limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 8 Tom Jenkins Michael Monteforte Marie Gervacio Partner, Head of Financial Partner, Financial Risk Partner, Financial Risk Risk Management Management Management KPMG China KPMG China KPMG China T: +852 2143 8570 T: +852 2847 5012 T: +852 2685 7880 E: [email protected] E: [email protected] E: [email protected]

Edwin Hui Desmond Yu Tatjana Schaefer Director, IT Advisory Associate Director, Financial Associate Director, Financial KPMG China Risk Management Risk Management T: +852 2847 5009 KPMG China KPMG China E: [email protected] T: +852 2913 2591 T: +852 3927 5735 E: [email protected] E: [email protected]

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