Hong Kong Treasury Markets Associations (TMA)
review has clear implications for future contracts
as well as future Hong Kong Interbank Offered Rate (Hibor)
Interbank Offered Rate (Libor) fixing scandal this
July, the TMA study was commissioned by the Hong
Kong Association of Banks (HKAB), the owners and administrators
of the Hibor,
The reports suggestions include dropping
the number of Hibor tenors from 15 to seven, and creating a
clearer legal definition in Hibor for use in contracts. It also
states that the TMA has taken into account the
Reviews recommendations, albeit adjusting them
for the Hong Kong market.
Counsel generally welcome the changes, saying
that they are in line with whats been suggested in other
markets. However questions remain over whether the changes are
sufficient to prevent Hibor fixing.
Eliminating Hibor tenors
The largest change is the reduction of Hibor
tenors. Chapter 6 of the report proposes eliminating Hibor for
two-week, four-month, five-month, seven-month, eight-month,
nine-month, 10-month and 11-month tenors.
While eliminating eight rates may seem drastic,
counsel noted that some were quite obscure.
Eversheds Kingsley Ong said that
eliminating the eight off-market maturities wont hurt the
markets, and that the TMA has correctly identified the key
maturity points for Hibor that the market uses.
By and large, I dont think
the absence of publicly-available Hibor reference for odd
periods such as 11 months will hurt the markets, he
In the TMAs report, it proposes a
12-month phase out period with the changes announced on the TMA
and Hong Kong Monetary Association (HKMA) websites.
But the TMA rejected a key change suggested
elsewhere. It studied changing the level of trimming, to take
out the top and bottom 30% of submissions before averaging,
instead of 15% as it does today. However it concluded that it
would be too difficult for the HKAB as the 15% is
in its Forward Rate Agreement.
Equally important are the TMAs
recommendations for contract standardisation. In Chapter 7.1(b)
it notes that some contracts may refer to Hibor or
Hibor-HKAB without requiring further description,
while other contracts provide a narrower definition.
It also suggests that counsel consider a
backstop arrangement to write into contracts, should Hibor not
Ive seen contracts that just
reference Hibor but dont provide for market disruption
contingencies, which the TMA has highlighted, said Ong.
Although this has worked well so far, the TMAs
suggestions make sense.
Ong suggested that a starting point may be to
adopt the International Swaps and Derivatives Association
definitions for Hibor, which provide for
contingencies in case certain Hibor quotations are not
One of the key TMA recommendations is for Hibor
to have an administrator; its ownership cannot be transferred
from HKAB because of the number of contracts it would disrupt.
The administrator will create a Code of Conduct for Hibor
The TMA said that the HKAB should entrust its
responsibility for administrating Hibor to a separate
organization. It suggested itself, although it should take
recommendations from the HKMA.
Although the HKMA would not comment on the
outcome of the proposals, a spokesperson said: We believe
that the code of conduct to be developed by the administrator
in the future will provide clearer guidance on rate submission
and set out the standards for compliance by reference banks for
their internal controls.
The HKAB declined to comment on the future of
Hibor. However its
release on the TMA report said it has engaged an
independent consultant firm to conduct a wider consultation
with industry, which will then be consolidated and sent to the
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