TMA’s Hibor reforms explained

Author: Ashley Lee | Published: 16 Dec 2012
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The Hong Kong Treasury Markets Association’s (TMA) Hibor review has clear implications for future contracts as well as future Hong Kong Interbank Offered Rate (Hibor) tenors.

Following the London 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 report’s 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 Wheatley Review’s recommendations, albeit adjusting them for the Hong Kong market.

Counsel generally welcome the changes, saying that they are in line with what’s 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 won’t hurt the markets, and that the TMA has correctly identified the key maturity points for Hibor that the market uses.

“By and large, I don’t’ think the absence of publicly-available Hibor reference for odd periods such as 11 months will hurt the markets,” he added.

In the TMA’s 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 specified in its Forward Rate Agreement.

Contract changes

Equally important are the TMA’s 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 be available.

“I’ve seen contracts that just reference Hibor but don’t provide for market disruption contingencies, which the TMA has highlighted,” said Ong. “Although this has worked well so far, the TMA’s suggestions make sense.”

Ong suggested that a starting point may be to adopt the International Swaps and Derivatives Association (Isda) definitions for Hibor, which provide for contingencies in case certain Hibor quotations are not available.

What’s next

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 submissions.

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 press 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 HKMA.

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