Howard Lee: Benchmark regulation and migration Closing keynote by Mr Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Bloomberg-ISDA Benchmark Conference "Benchmark Regulation and Migration", Hong Kong, 30 May 2019. * * * Taran [Khera], ladies and gentlemen, 1. First of all, I would like to thank Bloomberg and ISDA for organising this Benchmark Conference and for gathering so many speakers and participants to exchange views on the important subject of benchmark reform. The subject of benchmark reform is always very close to my heart, as I have been involved in the review of interest rate benchmarks both in Hong Kong and in the context of the Financial Stability Board’s Official Sector Steering Group (FSB OSSG) deliberations for many years. LIBOR discontinuation: A turning point 2. If we look back to 2013 when the OSSG started to operate, there was a general agreement that given the changes in the interbank market, the interbank offer rates, or IBORs in short must be reformed. But given the long history of IBORs and the huge value of financial contracts referencing them, moving to new IBORs with fundamentally different determination methodologies, or switching to alternative reference rates is a very complex task, as we heard from many speakers just now. Understandably market participants generally took a ‘wait-and-see’ approach when dealing with benchmark transition issues. But now – with a growing recognition that LIBOR may discontinue after end-2021 – the situation is changing.
In case of Estonia, our earlier policy choices have resulted in an environment characterized by the openness of the economy - export and import reaching 179-180% of the GDP, by a stable fixedexchange-rate, by a long tradition of balanced fiscal stance and rapid integration with the European markets - all of them features favourable to a relatively rapid real convergence. We could even say that the convergence that presently takes place in our real economy takes place in a de facto EMU environment. 2  BIS Review 42/2003  According to an analysis recently conducted by the ECB, the correlation of manufacturing industries' business cycles between Estonia and the five larger EMU member countries is even higher than that for some of the present member countries, the correlation of overall economic cycles is slightly lower but that is due to the more rapid economic growth in Estonia compared to the euro area. But there is one more important aspect I would like to stress in this context - and that is the crucial role of the financial system in real convergence under a currency board based fixed exchange rate regime. It is fair to say that Estonian banking system is presently strong, well capitalized and liquid. The banks' forced reliance on their own capital and liquidity has had a direct impact on the market structure. Strategic foreign ownership - mostly by Scandinavian financial groups - has provided Estonian banks with both strong capitalization and transfer of international best practices.