In March, we issued two circulars to all banks in Hong Kong. The first one reminded them to undertake risk assessment and make preparation for the necessary transition. The second one served to clarify that genuine amendments to existing derivatives contracts which are made to give effect to interest rate benchmark reform will not be considered new contracts from the perspective of the HKMA’s margin requirements. This removes one of the uncertainties about the transition. For the time being, we have not specified a timeline for the banks to get ready their transition plan but we will approach them at a later stage to understand their progress and readiness for the transition. HIBOR and HONIA 15. As financial institutions in Hong Kong are gathering pace in their preparation for the LIBOR transition, we are also making progress in identifying an alternative reference rate for HIBOR. We understand market participants are keen to have forward-looking term rates to mirror the structure of HIBOR. Therefore, the HKMA conducted a feasibility study of compiling HKD term rates based on actual wholesale funding transactions by major banks. But the results showed that while transaction-based wholesale term funding rates generally followed term HIBORs, they exhibited a high level of daily volatility, which made them an impractical substitute for term HIBORs. 16. More recently, TMA proposed adopting the Hong Kong Dollar Overnight Index Average (HONIA) as the alternative reference rate for HIBOR. Similar to many alternate reference rates chosen in other currency areas, HONIA is an overnight interbank funding rate.
While lacking a term structure on its own, this reference rate is robust and based purely on transaction data. 17. In early May, TMA completed a consultation with the industry on several technical refinements to HONIA. This is part of its ongoing initiative to further enhance the robustness of its benchmarks. It is now reviewing the feedbacks received, and will consider how best to put in place the relevant enhancements. 18. When these enhancements are done, TMA will work with the industry to promote development and trading of HONIA-based financial products. Later on, it will also try to promote trading in the OIS market, and hopefully develop an OIS curve from HONIA. But this would have to depend on market conditions. 19. While HONIA serves as an alternative to HIBOR, there is currently no plan to discontinue HIBOR. HIBOR has been in place for many years and is still widely recognised by market participants as a credible and reliable benchmark. Similar to a few other jurisdictions in the region, Hong Kong will adopt a multiple-rate approach. In other words, HONIA and HIBOR will co-exist in the market and market participants are free to choose between them. Meanwhile, TMA will continue to strengthen HIBOR to ensure that it remains in compliance with international standards. 20. Of course, we are facing the irony that if HIBOR remains, market players may see little incentive to develop and trade HONIA-based products. However, I encourage all market participants to start exploring how to incorporate HONIA into their business.