LIBOR Transition Notice

What are Interbank offered rates (IBORs)?

IBORs include the London Interbank Offered Rate (), the Euro Interbank Offered Rate (), the Euro Overnight Index Average (EONIA) and certain other rates. IBORs are globally accepted benchmark interest rates at which banks borrow short- term funds on the interbank market. IBORs are referenced in a large number of financial transactions and involved with diverse parties.

IBORs are used by financial institutions, corporations and governmental entities. IBORs are used not only as benchmarks in financial products, but also as the basis for asset valuations. The London Interbank Offered Rate (LIBOR) serves as the benchmark for an estimated US$350 trillion in financial product worldwide. LIBOR may also be used in commercial contracts for the purposes such as price adjustment mechanisms in share purchase agreements, reference rates for contractual interest on late payments, etc. LIBOR may also be specified in arbitration clauses as a benchmark rate for interest on the award. LIBOR is used in financial products denominated in USD (US Dollar), EUR (Euro), GBP (British Pound), JPY (Japanese Yen) and CHF (Swiss Franc) with seven tenors (O/N to one year).

In addition, certain currencies use specific non-LIBOR interest rate benchmarks such as the Hong Kong Interbank Offered Rate (HIBOR) for Hong Kong Dollars, EURIBOR and EONIA for Euro, the Bank Bill Swap Rate (BBSW) for Australian Dollars, the Tokyo Interbank Offered Rate (TIBOR) for Japanese Yen and the Singapore Interbank Offered Rate (SIBOR) for Singapore Dollars.

Most of the IBORS have traditionally been calculated from submissions made by panels of banks, which may sometimes be based on the expert judgment of such banks rather than actual transaction data.

Why is LIBOR being reformed or replaced? Since the financial crisis in 2008, concerns about counterparty credit risk and more stringent liquidity requirements have negatively affected activities in the unsecured interbank . Without sufficient transaction data, LIBOR submissions have

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become more reliant on the expert judgment of panel banks. Global financial regulatory authorities have expressed concerns about the reliability and robustness of existing interbank benchmark rates.

LIBOR has multiple scandals and pricing manipulation charges tied with the panel banks’ traders back since 2012. A series of manipulative and fraudulent actions exposed the weaknesses and risks of involving expert judgment in submitting quotes for LIBOR calculations. Regulators tried to reform the LIBOR benchmark submission process in 2014 but later deemed too flawed to reform, and on 27 July 2017 announced LIBOR to be phased out.

In response to the risks that may be caused by LIBOR calculation flaws, the Financial Stability Board (FSB) proposed that the interest rate benchmark must be reformed and converted to a more representative alternative (ARR) in 2014. This concern has resulted in an effort to encourage financial markets to transition away from the use of IBORs to risk free rates (RFRs), which are based on more active and liquid overnight lending markets. Some jurisdictions decided to retain their local IBORs, but reform their calculation methodology to include results of actual transactions in more active and liquid markets than the interbank lending market.

The UK Financial Conduct Authority (FCA) and the Bank of England noted that it had become increasingly apparent that the absence of active underlying markets and the scarcity of term unsecured deposit transactions raised serious questions about the future sustainability of the LIBOR benchmarks. Also, regulators are concerned that panel banks may decide to stop submitting quotes because of inefficient transaction data. LIBOR submissions made by panel banks to calculate LIBOR are largely based on the expert judgment of panel banks instead of actual transactions. The cessation or perceived unreliability of LIBOR could increase the risk of benchmark manipulation and cause massive disruption.

The FCA has stated that it will no longer request panel banks to submit rates used for the calculation of LIBOR after 2021. Following the declaration of the FCA, the likelihood of discontinuation of LIBOR after the end of 2021 emerged. Therefore, it is reminded by regulators to consider development of the mechanism to smoothly change reference interest rates and identification of and transition to alternative reference rates (ARRs).

Regulatory authorities and public and private sector working groups such as the

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International Swaps and Derivatives Association (ISDA) consultation on fallbacks to IBORs, the Working Group on Euro Risk-Free Rates, the Sterling Risk Free Reference Rates, the Alternative Reference Rates Committee (ARRC) and other working groups and forums in the UK, USA and elsewhere have been discussing alternative benchmark rates to replace the IBORs. These working groups are also considering how to arrange a transition to alternative rates and the development of new products referencing them.

These reforms are expected to cause at least some interest rate benchmarks to perform differently from the way that they do currently or to disappear, which may impact the E.SUN Bank (Hong Kong Branch) (‘E.SUN BANK’) products and services you currently use and those we may provide in the future.

What are the replacement benchmarks and which benchmarks are changing? Global regulators and working groups in several jurisdictions have identified replacement benchmarks and developed strategies for the transition.

Currency IBOR Alternative reference rate Secured Overnight Financing USD USD LIBOR Rate (SOFR) EUR EUR LIBOR/EURIBOR Euro Short Term Rate (ESTR) JPY JPY LIBOR/TIBOR Tokyo Overnight Average (TONA) Sterling Overnight Index Average GBP GBP LIBOR (SONIA) Swiss Average Rate Overnight CHF CHF LIBOR (SARON)

What could these changes mean for E.SUN BANK’s clients? The LIBOR transition may affect our existing products, contracts and services or which you may use or enter that referencing IBORs in the future. The impact will depend on various factors, such as:  which particular LIBOR is referred to in a product or services;  the adjustments which need to be made to reflect credit and term differences between the relevant LIBOR and the ARR;  the nature and term of the product or contract;  the date when any changes arising from LIBOR transition take effect; and  the nature of any fallback provisions in the particular contract, if any.

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LIBOR transition could have a number of effects on clients of E.SUN BANK. These include, for example, changes to the value of products, the need to amend existing contracts, the possibility that products may no longer serve the purpose for which they were originally intended and making changes to existing operational processes and/or systems.

There may also be tax, regulatory, legal and accounting effects depending on a client's particular situation. The effect of LIBOR transition may also vary depending on whether the relevant benchmark is being discontinued or reformed. A reformed LIBOR may result in different calculation methodologies being adopted, which may result in the reformed LIBOR performing materially different than it did prior to the reform.

Further, the effects of LIBOR transition may be experienced at different times with respect to different products and in different jurisdictions or regions. E.SUN BANK recommends you to conduct your independent assessment of the impacts and risks as a result of the LIBOR transition.

You should also contact your professional advisors on the possible impact of the LIBOR reforms on the financial products and services you use or may use in the future.

What are some of the key targets and dates for the LIBOR transition?

After consulting the Treasury Markets Association, HKMA developed the following transition milestones which banks in Hong Kong (i.e. authorized institutions, “AIs”) are expected to achieve: -

 AIs should be in a position to offer products referencing the ARRs to LIBOR from 1 January 2021;  Adequate fallback provisions should be included in all newly issued LIBOR-linked contracts that will mature after 2021 from 1 January 2021; and  AIs should cease to issue new LIBOR-linked products that will mature after 2021 by 30 June 2021.

For more information If you wish to obtain general information on the LIBOR transition, please consider reviewing published information from regulators, working groups and other industry bodies, including those listed below:

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United States  Alternative Reference Rates Committee (ARRC) Euro-zone  European Central Bank (ECB) United Kingdom  Bank of England (BoE)  Financial Conduct Authority (FCA) Japan  Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks Switzerland  Swiss National Bank (SNB) Hong Kong  Hong Kong Monetary Authority (HKMA)  Treasury Markets Association (TMA) Global  Asia Pacific Loan Market Association (APLMA)  Financial Stability Board (FSB)  International Swaps and Derivatives Association (ISDA)  Loan Market Association (LMA)  Loan Syndications & Trading Association (LSTA)

The content of this notice reflects E.SUN BANK’s current understanding of the expected changes. Considering the current level of uncertainty, this overview is not complete or exhaustive and does not constitute any form of advice or recommendation. Clients should contact their professional advisors on the possible implications of the changes such as financial, legal, accountancy or tax consequences.

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