Hong Kong banks are in more advanced stages of transitioning away from the London Inter-Bank Offered Rate (LIBOR) benchmark interest rate than their Asian counterparts, according to a KPMG survey of more than 20 large banks operating in Hong Kong, Indonesia, Malaysia, the Philippines and Singapore.
The transition away from LIBOR comes as the Financial Conduct Authority (FCA) in the UK announced that it will not compel or persuade LIBOR panel banks to continue to submit quotes after 2021. As such, market participants should not rely on LIBOR being available after 2021.
The KPMG ASPAC LIBOR Readiness Report shows, of the 10 respondents from Hong Kong (comprising local and international banks), six banks have already started planning for alternative scenarios for the LIBOR transition. Five respondents have started trading or writing products using the new risk-free rates (RFR), but four of them are incorporated in the US or Europe, a reflection that regulators in these two markets are more active in encouraging industry participants to prepare for the transition and are leading discussions around new RFRs.
Tom Jenkins, partner, head of financial risk management, KPMG China, says, “In Hong Kong, the effect of the transition is likely to be considerable. LIBOR is widely referenced in the local banking sector, and the fixed exchange rate regime also means that Hong Kong maintains high levels of international reserves, and the value of many of these assets will depend directly or indirectly on IBOR. The Hong Kong Monetary Authority has been encouraging Hong Kong banks to perform impact assessments and has directed them to undertake risk assessments and make preparations for the necessary transition.”
Banks in Hong Kong surveyed all agreed that the transition from LIBOR to alternative reference rates is going to be complex, multi-faceted and require tremendous amounts of preparatory work to ensure a smooth transition. Despite this, only one bank has finished forming a transition plan, while the remaining banks are still in the process of, or are yet to start, forming a plan. Only three out of 10 banks said they have completed a quantification of their LIBOR exposures, and two of them are yet to start such an analysis.
Litigation risk remains a key focus area for most banks. Six out of 10 respondents in Hong Kong say that legal and litigation risk is their biggest concern around moving from LIBOR to the new RFRs. Meanwhile, five named new LIBOR replacement rates lacking liquidity as a top concern, four cited client outreach, four named transition scenario and timeline and three a lack of industry consensus on transition approach and new RFRs. Interestingly, none of the banks identified “quantification of exposures” as a key challenge in the LIBOR transition.
Marie Gervacio, partner, risk consulting, KPMG China, comments, “Some Hong Kong banks may have underestimated the effort and depth of the identification process. For example, some banks indicated that they have finished quantifying LIBOR exposure in the bank, but these banks also suggested that they are unsure about the approach for identifying the fallback language in the impacted contracts and/or systems affected by the transition.”
She adds, “Tackling legal and litigation risk is particularly important for Hong Kong banks whose clients have approached them to provide guidance on the transition. Banks should also continue to assess and manage conduct risk throughout the lifecycle to ensure that customers are treated fairly.”