Interbank Offered Rate (IBOR) Transition: The impact on Asia-Pacific Markets
Following the International Organization of Securities Commissions’ (IOSCO’s) recommendations to reform IBORs and improve their reliability and robustness, the UK’s Financial Stability Board (“FSB”) announced that the London Inter-bank Offered Rate (LIBOR) would be discontinued by the end of 2021. National regulators of key LIBOR currencies are required to identify suitable Alternative Reference Rates (ARRs) and oversee the transition.
In contrast, the majority of Asia-Pacific markets administer and maintain their own IBORs. This allows local regulators and industry bodies more time and flexibility to decide whether replacing, retaining or improving existing interest rate benchmarks. Nevertheless, these choices, combined with US’ transition from LIBOR to Secured Overnight Financing Rate (SOFR) will have significant implications for cash and short-term investors in Asia-Pacific.
Australia: Retaining BBSW and adopting cash rate as the alternative risk-free rate
The key interest rate benchmark for the AUD is the Bank Bills Swap rate (BBSW). Developed in the 1980s and originally administered by the Australian Financial Markets Association (AFMA), BBSW helps establish the funding costs for short-term debt issued by Australian banks.
Unlike LIBOR, BBSW remains an important benchmark today with significant volumes and liquidity across multiple tenors. Major commercial banks, which have significant wholesale funding needs, rely on BBSW to price bank bills and certificates of deposit. In recent years, the rate has also become an important benchmark for investment funds.
Since its inception, BBSW is calculated daily at 10am Sydney time, based on surveying funding costs of various banks. FSB’s recommendations to improve the reliability of IBORs has prompted the AFMA to introduce a new pricing methodology in 2014. Known as the National Best Bid and Offer (NBBO), the new methodology was based on executable bids and offers in the wholesale market.
In 2016, NBBO was superseded by volume-weighted average price (VWAP) based on all eligible transactions. The rate setting window was widened and a broader range of counterparties and instruments were included. In addition, administration of the benchmark rate was transferred from the AFMA to the Australian Securities Exchange (ASX).
To meet FSB’s requirements, the Reserve Bank of Australia (RBA) confirmed that the cash rate would function as the alternative risk-free rate (RFR) for AUD. To improve the robustness and transparency of the cash rate, the central bank further implemented a new pricing methodology based on actual transactions in the cash market rather than a daily survey of banks’ aggregate cash balances.
These significant changes to BBSW’s pricing methodology have noticeably improved the transparency, volumes and investors’ confidence in Australia’s benchmark interest rate. This allows regulators to retain BBSW while adopting the RBA’s cash rate as the alternative RFR. The multi-rate approach enables a broader range of choices and empowers market participants to select the most appropriate benchmark depending on their credit profile.
Hong Kong: Pursuing a multi-rate approach by retaining HIBOR and initiating HONIA
The Hong Kong Interbank Offered Rate (HIBOR) is currently the key interest rate benchmark in Hong Kong. Established in 1984, HIBOR was originally administered by the Hong Kong Association of Banks (HKAB) before this function was being transferred to the Treasury Markets Association (TMA). HIBOR’s importance to Hong Kong’s banking industry was evidenced in the Hong Kong Monetary Authority’s (HKMA’s) report, which estimates approximately HKD 4.5 trillion of assets reference the benchmark (as at Mar 2020). 1
HIBOR is based on the interquartile mean of estimated HKD deposit offer rates quoted by prime banks in the interbank market at 11am Hong Kong time. The rate is then published at 11:15am, covering a range of tenors from overnight to 12 months.
Prior to IOSCO’s recommendations, the TMA had already initiated a review of HIBOR and “concluded that HIBOR’s fixing mechanism remains sound”.2 Nevertheless, the review made multiple recommendations to further strengthen the benchmark; this includes phasing out less used maturities and transferring the administration of HIBOR from the HKAB to the TMA. In March 2019, the TMA confirmed its preference to retain HIBOR and pursue a multi-rate approach, stating that “HIBOR is a benchmark widely recognized by market participants, and see it desirable and necessary for HIBOR to remain”.3
To comply with FSB’s recommendations, the TMA endorsed the HKD Overnight Index Average (HONIA) as its preferred ARR. Both HKMA and TMA recommended that financial institutions should be in a position to offer products referencing HONIA from 1 January 2021.4
HONIA is the effective overnight reference rate of HKD unsecured lending transactions in Hong Kong’s interbank market, executed through a panel of contributing brokers. It is owned and administered by the TMA and is calculated using a volume-weighted mean of eligible transactions. A public consultation was conducted in April 2019 to improve HONIA’s data quality, reporting window and publication time.
The multi-rate approach adopted in Hong Kong provides continuity while avoids the complexity and confusion that would be triggered by the removal of HIBOR. Meanwhile, improvements to HONIA offer a liquid and reliable ARR for market participants.
Singapore: Retaining SIBOR while replacing SOR with SORA
Unlike other markets in Asia-Pacific, Singapore is currently operating two major interest rate benchmarks, the Singapore Interbank Offered Rate (SIBOR) and the SGD Swap Offer Rate (SOR). Both rates are administered by the Association of Banks in Singapore (ABS) and generally move in the same direction. The major difference is that SOR is institutional focused and acts as the basis for interest rate derivatives, while SIBOR is more retail focused.
SIBOR is based on the interquartile mean of estimated SGD borrowing rates from a panel of banks for different tenors from 1 month to 12 months. The rate is published daily at 11.15am Singapore time.
Acknowledging FSB’s recommendations to strengthen IBORs, the ABS and the Singapore Foreign Exchange Market Committee (SFEMC) announced several proposals in December 2017 to enhance SIBOR. This includes increasing the use of market transactions, incorporating a broader range of reference data, and discontinuing 12-month SIBOR due to a lack of underlying market transactions. Following a public consultation in July 2018, several technical issues were identified; all three proposals were accepted and implemented by mid-2019.
SGD SOR is the foreign exchange (FX) implied swap rate between SGD and USD based on actual transactions in the USD/SGD FX swap market and USD LIBOR interest rates. SOR is calculated for tenors from overnight to 6 months, and published at 12 noon London time.
With LIBOR being discontinued by the end of 2021, reforming SOR is considered impossible. In August 2019, ABS and SFEMC identified the Singapore Overnight Rate Average (SORA) as the ARR.
SORA was launched by the Monetary Authority of Singapore (MAS) in July 2005 as a measure of short-term funding costs. SORA is a volume-weighted average of all unsecured overnight interbank borrowing rate based the average of all SGD overnight cash transactions traded in Singapore between 9am to 6:15pm. This rate is published daily at 6:30pm Singapore time.
Given the depth and liquidity of the overnight funding market, combined with its long historic record, SORA offers several benefits to market participants. To facilitate the transition, the MAS established a steering committee comprised of industry participants to advise on new products and provide strategic directions from SOR to SORA.
The multi-rate approach promoted by the ABS, is designed to satisfy the needs of multiple institutional and retail IOBR users in Singapore. The enhancements implemented to SIBOR will make it more accurate and robust, as its perpetuation offers continuity and avoids the confusion. Meanwhile, the replacement of SOR by SORA should offer institutional clients a more stable, accurate and reliable benchmark for financial contracts.
4 Reform of interest rate benchmarks, Hong Kong Monetary Authority (10 July 2020)