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.

Overview

Asset and wealth management has been in a period of upheaval since the Global Financial Crisis (GFC) that’s intensifying. The industry is rapidly evolving at an exponential rate and will continue to be reinvented. There is a great opportunity for growth but there will likewise be major changes to fees, products, distribution, regulation, technology and people skill.

 

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What it means for Hong Kong?

Hong Kong Monetary Authority: Circular on Interest Rate Benchmarks Reforms

On 5 March 2019, Hong Kong Monetary Authority (HKMA) issued a circular to request authorised institutions to make preparations for the transition associated with the internet rate benchmark reform undertaken under the Financial Stability Board (FSB). On 30 May 2019, HKMA’s Deputy Chief Executive reinforced the circular’s expectations by stating “interest rate benchmark reform is complex, but it is something too important for any market participant to ignore”.

Prepare for the transition to ARRs

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:

  • Program mobilisation and governance
  • Systems and process changes
  • Impact assessment and transition planning
  • Risk and valuation model changes
  • Contract management and remediation
  • Managing related tax and accounting implications
  • Client and customer outreach and communications

Are you interested in evaluating the impact of LIBOR and reference rate reform on your business? Contact us today!

 

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Contact us

Amy Yeung

Partner, PwC Hong Kong

Tel: +[852] 2289 1245

Ian Farrar

China and Hong Kong Corporate Treasury Leader, PwC Hong Kong

Tel: +[852] 2289 2313

Ilka Vazquez

Partner, PwC Hong Kong

Tel: +[852] 2289 6565

Alex Xiang

Partner, PwC China

Tel: +[86] (755) 8261 8701

Jenny Yip

Director, PwC Hong Kong

Tel: +[852] 2289 1968

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