Benchmark Rate Reform
Getting ready for implementation
Regulatory and industry participants in the global financial markets are waking up to the tremendous challenges that come from the discontinuation of London's Interbank Offering Rate ("IBOR") at the end of 2021, which will have knock-on effects for numerous other benchmark rates globally. The HKMA has advised all Authorised Institutions ("AIs") to step up progress in assessing comprehensively the impact that the changes in benchmark rates will bring to their processes, systems and overall business.
Practical implementation checklist
Drawing on a combination of our experience assisting clients in setting up transition programmes and emerging guidance from the regulatory community, Hong Kong AIs should make reference to the following key considerations when performing their own assessment of the impact from benchmark rate reforms.
1. Program Governance
- Appoint senior executives to direct the overall IBOR Transition Program.
- Establish a governance framework over all impacted business lines and functions.
- Identify key stakeholders, project leads and supporting staff to execute the transition.
- Create a working group to monitor market and regulatory developments, and provide regular internal communications to all relevant parties.
2. Transition Management Program
- Conduct a comprehensive impact assessment across key focus such as financial products, contracts, business process (including IT systems and valuation models).
- Establish a project management framework to monitor the following: resources, budget, progress of the implementation plan, and risks.
- Allow sufficient time and resources to identify and make operational change if needed.
3. Communication Strategy
- Establish clear communication strategy to be used both internally and externally.
- Develop communication material such as learning materials, newsletters for both internal and external stakeholders.
- Consider offering training programmes to relevant staff.
- Provide clear messaging on transition to impacts to clients and investors.
4. Identify and Validate Exposures
- Conduct a product exposure analysis to determine all IBOR-linked products for each line of business.
- Continuous monitoring of the approach for tracking these IBOR exposures throughout the transition period.
- Quantify exposures for IBOR products maturing beyond year end 2021.
5. Develop Product Strategy
- Establish a clear strategy and timeline on reducing the reliance on IBOR.
- Define risks and new product (based on new alternative reference rate) approval requirements.
- Put in place the capability to monitor and manage IBOR exposures.
6. Risk Management
- Identify key risks resulting from IBOR discontinuation including market readiness, business impacts, financial and legal risks. (Key financial risks include accounting treatment and valuation)
- Establish processes to measure and monitor these material risks.
- Identify mitigating actions to all identified risks especially around product, operational and conduct risk.
- Provide periodic update to senior management.
- Update risk management framework accordingly.
7. Contractual Impact
- Analyse existing IBOR related contracts and determine the impact of fall-back language.
- Define approach and prioritization strategy for renegotiating / repapering existing contracts as soon as possible.
- Amend contracts to include an enhanced fall-back language or determine whether the contract can be renegotiated/closed prior to end of 2021.
- Determine legal language on all new contracts.
8. Operational and Technology Readiness
- Assess where IBOR is used front-to-back across all affected business and operations.
- Develop a process to incorporate new market data sources and new calculation methodologies into IT system.
- Build testing plans for new product capabilities, models/validation. Ensure readiness plan will have oversight of the readiness state of material operation and technology vendors.
- Begin to plan for internal testing, third party validation /readiness for transition.
9. Accounting and reporting
- Identify instrument that might be affected by accounting issues.
- Identify impact on fair value accounting and impairment to profit & loss, credit allowances, and fair value hierarchy.
- Identify impact and changes need to be made to current finance systems, operations, and control environment.
- Update financial disclosures accordingly.
10. Taxation and Regulation
- Identify and understand tax implication based on current guidance update tax documentation if needed.
- Determine tax reporting requirements and consider jurisdiction affected.
- Review the nature of amendments to existing contracts and review intra-group arrangements (if any).
How we can help
IBOR transition is a complex undertaking. Its success with depend on active collaboration not only internally by externally as well. To help you through your journey, we offer assistance via:
Working with you to ascertain the businesses and products in scope for the financial exposures impact assessment. Building the initial view of operational impacts
In addition to implementation assistance, we can also provide subject matter expertise in any particular focus area within your transition programme
Ongoing project management & monitoring of project status with regular updates provided to management, programme sponsors and senior stakeholders
For further details on how we can help firms experience an effective transition away from IBOR, please contact our Hong Kong leaders of the Global Interbank Offered Rate Reform Leadership team.
Hong Kong IBOR reform lead
Phone: +852 2258 6099
IBOR Regulatory & Risk partner
Phone: +852 2238 7700