LIBOR and reference rate reform

A global initiative

The global financial industry is currently undergoing unprecedented transformation. Firm-specific and industry-wide efforts across the globe are taking pace to address the transition from London Interbank Offered Rate (LIBOR) to alternative rates by end of 2021.

In July 2017, UK’s Financial Conduct Authority (FCA) CEO Andrew Bailey made a speech on the “Future of LIBOR” alerting the markets on the viability of the LIBOR. By end of 2021, FCA will no longer compel panel banks to make submission for the LIBOR and may lead to the discontinuity of the world’s most widely-used benchmark rate.

Industry working groups across the world have since accelerated their plans and identified alternative risk-free rates (ARRs) as a replacement benchmark for IBORs. At the same time, regulators are increasing pressure for banks to actively reduce their exposure to IBOR and accelerate their transition towards ARRs products.

What it means for Hong Kong?

Hong Kong Monetary Authority: Circular on Interest Rate Benchmarks Reforms

On 10 July 2020, the Hong Kong Monetary Authority (HKMA) issued a circular to share the latest results of the Survey on Reform of Interest Rate Benchmarks and the key milestones that authorised institutions (AIs) should endeavour to achieve in the transition to alternative reference rates (ARRs).

Similar to the timelines announced by ARRC in the US and the Sterling Working Group in the UK, the target milestones outlined by the HKMA represent a tangible set of transition guidance for Hong Kong, not just for AIs but for all market participants including investors, third-party service providers and corporates. The milestones also provide a yardstick for the HKMA to measure progress and firms should expect they will be held accountable.

Prepare for the transition to ARRs

Impact assessment

Quantification and monitoring of affected exposures regularly

Scenario planning

Identification and evaluation of key risks arising from the reform under different scenarios

Action plan development

Formulating an action plan to prudently manage the risks identified

Proactive monitoring

Monitoring closely the reform developments and updating the scenarios and action plan as appropriate

Key considerations for banks

Do we have available data and metrics to determine the balance sheet exposure to IBORs by products, maturity and counterparties?
What will the impact be on pricing and valuation as new curves and volatility surfaces are developed as part of the transition?
Can our current systems be updated to integrate new interest curves? Can it support multiple rates for legacy and new transactions?
What are the accounting implications of modifying the existing hedge strategies triggered by the IBOR transition?
What is the mix of contracts that have reference to IBOR? How many have a provision for replacing IBOR?
How will we effectively communicate and negotiate contractual changes with our clients?
Does the front-to-back staff have appropriate knowledge for transitioning to alternative reference rates?

How PwC can help?

The transition from LIBOR is market, not regulator driven and institutions and territories are preparing at different rates. PwC’s LIBOR and reference rate reform specialists in territories throughout the globe can help you assess, prepare for, and execute on the transition. We work with you across the entire lifecycle of the transition, including: