UK: Be On The Mark – APAC Central Banks Release Study Of Benchmark Reform Implications

On 24 September 2019, the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP) published its study on the implications of benchmark reform across the East Asia and Pacific region (Study), including the effects of LIBOR discontinuation, the EU Benchmarks Regulation (BMR) and the ongoing reform of local benchmarks.

The Study provides important insight into market participants' varying levels of awareness of and preparedness for benchmark reform, as well as valuable guidance as to future regulatory developments we are likely to see from regulators keen to ensure regional markets are well equipped to handle these reforms. The Study also refers extensively to Herbert Smith Freehills' market-leading work on the BMR with ASIFMA.

Background

The EMEAP consists of executives from eleven central banks and monetary authorities from across the East Asia and Pacific region, including the Hong Kong Monetary Authority (HKMA), Reserve Bank of Australia, Monetary Authority of Singapore (MAS) and the People's Bank of China.

However, as the Study is based in large part on a survey undertaken by EMEAP of both its member institutions as well as other local regulatory institutions, financial institutions, institutional investors, corporates and retail investors, the Study provides not only valuable insight into central banks' thinking on these issues but also on the market's awareness and preparedness for these reforms.

The Study considers the issues and challenges associated with each of the three following key areas of benchmark reform affecting the East Asia and Pacific region, and sets out recommendations as to actions which could be taken by EMEAP members in respect of these issues.

LIBOR discontinuation

The Study sets out in detail the LIBOR discontinuation challenges reported by survey participants as affecting regional markets, including:

  • Low levels of awareness of the potential discontinuation of LIBOR and acceptance of alternative risk free reference rates (ARRs), particularly given a tendency by market participants to take a "wait and see" approach to this issue because of a perception that this issue will be dealt with at a head office level;
  • Significant legal risk as a result of the need to renegotiate and amend legacy contracts; and
  • The "chicken and egg" liquidity problem being experienced by market participants, as the liquidity of ARRs affects the price discovery and efficiency of interest rate risk of market participants. As a result, sufficient liquidity in ARRs is necessary before participants will view the ARRs as an appropriate replacement for LIBOR – but such liquidity requires a critical mass of participants.

The Study also noted that awareness and readiness levels vary significantly, with central banks and financial institutions being "moderately aware" but institutional investors and corporates only "slightly aware" of this issue. Given this, it is unsurprising that one of the Study's key recommendations to EMEAP members is to continue to focus on raising awareness in the market of the importance of preparing for LIBOR discontinuation and taking steps to transition accordingly.

However, importantly, the Study notes that while the region is heavily exposed to LIBOR through OTC derivatives, the work undertaken to date by ISDA and IOSCO has played an important role in mitigating the risks associated with LIBOR discontinuation in relation to these derivatives. This means that LIBOR discontinuation may in fact be more problematic for participants whose exposure to LIBOR is through corporate bonds, syndicated loans and other cash products. Accordingly, the Study specifically recommends that EMEAP members increase awareness of LIBOR discontinuation amongst these participants.

The Study also encourages central banks to:

  • require banks to undertake a risk assessment and impact analysis of their LIBOR exposures, ensure senior management oversight of LIBOR transition issues, and prepare transition plans. These recommendations are consistent with measures already implemented by the HKMA;
  • collect more detailed information regarding exposure of their corporate bond and syndicated loan markets to LIBOR; and
  • encourage the launch and trading of new ARR-based products (as also previously encouraged by the HKMA and the MAS).

EU Benchmarks Regulation

The BMR will, from 1 January 2022, prevent EU supervised entities from using an unregulated third country (ie non-European) benchmark in the EU.

As noted in our December 2017 report with ASIFMA, and as quoted by EMEAP in their Study, the BMR exposes the APAC region to significant issues and challenges, including market fragmentation and decreased liquidity. The Study notes in particular that EMEAP members are concerned that the failure of non-EU benchmark administrators to seek registration under the BMR could potentially force EU supervised entities to exit certain markets due to the unavailability of funding and hedging instruments in EMEAP markets.

However, despite this, the Study notes that its members consider the impact on their jurisdictions to be moderate, rather than severe, but that the scope of the Study's survey of members in relation to the BMR was limited to interest rate benchmarks only on the basis that such rates are generally most relevant to central banks. However, the Study also notes that a large number of interest rate benchmarks across the East Asia and Pacific region are administered by central banks, and as such are exempt from the scope of the BMR.

While these exemptions are likely to have reduced EMEAP members' concerns in relation to the BMR, and may well be a primary driver of this "moderate impact" conclusion, we recommend against complacency. As noted in our previous reports with ASIFMA on this subject, (see our December 2017, February 2018, target=_blankMay 2018, and October 2018 reports), non-EU benchmark administrators, including of rates other than interest rate benchmarks (such as commodity and FX rates) face significant difficulties in seeking registration under the BMR.

Indeed, despite the Study's "moderate impact" conclusion, the Study highlights that market participants raised some of these challenges with EMEAP, including administrators' difficulties in identifying a Member State of Reference in the EU, and the limited data many administrators possess about the use of their rates in the EU. These challenges may well explain why the Study urges those central banks whose local interest rate benchmarks will not benefit from the central bank exemption (such as Hong Kong, whose HIBOR rate is administered by the Treasury Markets Association, and Singapore's SIBOR and SOR rates (among others) which are administered by ABS Benchmarks Administration Co Pte Ltd) to consider seeking equivalence through introduction of domestic legislation, which would allow local administrators to avoid the need to seek registration of their rates.

Local benchmark reform

Finally, the Study also discusses the work undertaken by EMEAP members to reform local benchmarks following IOSCO's 2013 release of its Principles for Financial Benchmarks, including through identification of ARRs and adoption of a multiple rate approach where strengthened local benchmarks are expected to co-exist with ARRs.

Importantly, the Study notes that there are significant challenges in relation to the development of liquidity for ARRs at a regional level and, as a result, at the point at which there is a significant shift towards ARRs at a global level, there may be substantial regional risks as a result of low market awareness and acceptance of these rates. In particular, the Study observes that benchmark reforms in relation to major currencies could affect regional markets through the use of cross-currency or foreign exchange swap related products.

As a result, the Study urges central banks to focus on the following while also working on IBOR reforms and fallback arrangements:

  • encouraging market participants to be prepared to transition to alternative benchmarks, including by regularly reviewing their exposure to particular rates, putting in place robust contractual fallbacks to accommodate the potential cessation of a rate, and ensuring that they have action plans to deal with any transition. Notably, this is similar to the requirement under the BMR that EU supervised entities must maintain robust written plans setting out the actions they would take in the event that a benchmark ceases to be provided, including nominating rates which could be referenced as an alternative;
  • encouraging launch and trading of new ARR-based products such as bond issues, futures and swaps where appropriate; and
  • engaging with industry and market participants to determine the calculation methodologies of ARRs, including by considering the potential economic transfer involved in the calculation methodologies of alternative ARRs as well as their correlation against existing benchmarks, as this may assist in encouraging the adoption of ARRs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions