Welcome to KPMG’s latest issue of our monthly LIBOR newsletter in which we provide updates on LIBOR and other benchmark interest rate developments that directly impact banks and consider the potential implications of the related regulatory requirements.

Regulatory Updates

1. HKMA circular on the issuance of new USD LIBOR linked contracts after 2021

Riding on the Alternative Reference Rates Committee’s (ARRC) latest recommendation on Term SOFR, the HKMA published a circular to provide a few updates relating to the reform of interest rate benchmarks. While the HKMA continues to require authorized institutions (AIs) to stop enter into any new LIBOR-linked contracts after 2021, the HKMA recognized that there may be a need for AIs to issue new USD LIBOR linked contracts under certain exceptional circumstances. Therefore, the HKMA has set out below the circumstances under which issuance of new USD LIBOR-linked contracts after 2021 are permitted: 

  1. transactions that reduce or hedge an AI or its clients’ USD LIBOR exposures linked with contracts signed before 1 January 2022
  2. market-making in favour of client activities in connection with USD LIBOR transactions carried out before 1 January 2022
  3. novation of USD LIBOR transactions executed before 1 January 2022
  4. transactions executed for purposes of required participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting USD LIBOR exposure.

KPMG’s perspective: The special circumstances list out by the HKMA that issuance of new USD LIBOR-linked contracts is acceptable could act as a safety net for AIs. However, AIs should still stop the issuance of new USD LIBOR-linked contracts after 2021 and switch to new ARRs contracts as far as possible. AIs should keep a close eye on the updated list of exceptional cases from HKMA and monitor market development, to ensure regulatory requirements are fulfilled. When coming across other exceptional cases that issuance of such contracts after 2021 is necessary for risk management purpose, AIs should reach out to the HKMA on how these cases could be handled. 

19 August 2021, HKMA

2. HKMA letter on promoting the corporate sector’s awareness of the LIBOR transition

As overseas authorities have confirmed that most LIBOR settings will be discontinued starting from 1 January 2022, bank regulators such as the Hong Kong Monetary Authority (HKMA) have required banks to cease entering new LIBOR contracts after 2021 to ensure a smooth transition from LIBOR to Alternative Reference Rates (ARRs). In order to facilitate the transition, the HKMA issued a letter about the updated Q&As on LIBOR transition and request institutions to further promote the corporate sector’s awareness of the LIBOR transition by distributing the leaflet developed by the HKMA and the Treasury Markets Association (TMA) to their corporate customers which have outstanding LIBOR-linked contracts with them. 

KPMG’s perspective: As some of the corporate clients, especially those from non-financial institutions, may still be unfamiliar with the transition from LIBOR to ARRs and the timeline of the transition. It could be an obstacle for the contract renegotiation process to incorporate fallback language for LIBOR-linked legacy contracts which will mature after 2021. Apart from distributing the leaflet from HKMA, Banks could develop early client communication strategies and relevant materials (e.g. Q&A list) to increase customer acceptance on the transition.

8 July 2021, HKMA

3.FCA and BoE recommend switching to SOFR in the USD interest rate swap markets from 26 July

To support the recommendation from the CFTC’s Market Risk Advisory Committee’s Interest Rate Benchmark Reform Subcommittee (MRAC Subcommittee) as well as close engagement with market participants, the Financial Conduct Authority (FCA) and the Bank of England (BoE) encourage UK market participants including interdealer brokers and liquidity providers in the interdealer USD interest rate swaps market to shift their trading conventions for interest rate swaps from USD LIBOR to SOFR. Starting from 26 July 2021, under FCA and BoE’s recommendation, all trading in USD LIBOR swaps and USD LIBOR-based swap spreads in the interdealer broker market should be replaced by trading in SOFR swaps and SOFR-based swap spreads. Meanwhile, screens for LIBOR swaps and LIBOR-based swap spread would still be available until 22 October 2021 for informational purposes. 

KPMG’s perspective: Following the new milestone proposed by FCA and BoE, AIs should be prepared to take necessary procedures to implement SOFR as the default price for interdealer interest rate swap from 26 July 2021. Even though the screens for LIBOR swaps would exist until October this year, they should no longer be used in trading activity in the UK market. It is suggested that market participants should closely monitor its current position to follow the suggested timeline by FCA and BoE. Moreover, it could be expected that the market liquidity of SOFR would be improved continuously as it would gradually become the primary source of liquidity under the “SOFR first” initiative agreed by multiple regulators in the UK market.

16 June 2021, BoE

4.FSB releases statements to support a smooth transition away from LIBOR by end 2021

As most of the LIBOR panels will cease at end-2021, the Financial Stability Board (FSB) published a set of statements and reports to support a smooth transition away from LIBOR, which list out FSB’s recommendation for financial and non-financial sector firms. Documents include: 

KPMG’s perspective: The latest reports and statements released by the FSB are expected to assist market participants to have a more comprehensive understanding on the key transition milestones initiated by international working groups, which could serve as a useful reference for Banks to enhance the transition roadmap to align with the regulatory milestones. AIs are also recommended to move forward with the transition in terms of pricing, valuation and risk models utilising tools available in the market without reliance on a forward-looking term SOFR. Banks may also make reference to other conventions published by industry bodies including the ARRC on the use of overnight SOFR across different types of financial products regarding interest calculation and pricing strategies.

2 June 2021, FSB


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Industry Update

1. ISDA, NAFMII Publish Chinese Language IBOR Fallbacks Documents

ISDA and the National Association of Financial Market Institutional Investors (NAFMII) have published two Chinese language documents that allow firms to incorporate fallbacks provision for onshore derivatives transactions documented under the 2009 NAFMII Master Agreement in China by signing a multilateral amendment agreement. And the updated definitions of the IBORs with fallbacks will come into effect on 29 October 2021. The new set of documents are drafted based on the ISDA 2020 Fallbacks Protocol, and would cover fallbacks for sterling Swiss franc, euro, US dollar and yen LIBOR, EURIBOR, Australia’s Bank Bill Swap Rate and HIBOR. 

KPMG’s perspective: The documents released by ISDA and NAFMII could ensure that the majority of over-the-counter derivatives transactions between onshore entities in China, which are not covered by the ISDA IBOR Fallbacks Protocol previously, could also have adequate fallback provision before the major LIBOR settings become non-representative after 2021. The new documents could minimize the legal uncertainty and disruption that could occur if the transition work in China cannot complete before the designated LIBOR cessation date. It also aims to facilitate the overall transition progress for the derivatives market in China. 

30 July 2021, ISDA

2. ARRC formally recommends Term SOFR

As the change in interdealer trading conventions is completed on 26 July 2021 under the SOFR First initiative developed by the MRAC’s Interest Rate Benchmark Reform Subcommittee, the Alternative Reference Rates Committee (ARRC) has formally recommend CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates on 29 July 2021, which is an essential transition tool for market participants to use. This also marks the completion of the Paced Transition Plan proposed by the ARRC. ARRC also listed out the best practice recommendations related to the scope of use for Term SOFR. For new contracts, the ARRC continues to recommend SOFR for all products, and as a general principle recommends that market participants use overnight SOFR and SOFR averages given their robustness. In the meantime, the ARRC also supports the use of the SOFR Term Rate in areas where the use of overnight and averages of SOFR has proven to be difficult. 

KPMG’s perspective: ARRC official recommendation on the use of Term SOFR marks an important milestone in the transition process from LIBOR to ARRs. Before applying Term SOFR issued by CME Group, banks are encouraged to read the guidelines provided by ARRC and the scope of use to determine and justify the use of Term SOFR for legacy and new contracts respectively. Besides, as CME Group only publish 1-month, 3-month and 6-month Term SOFR, banks would need to consider the calculation approach if they would like to provide other tenors to client which are not available from CME Group.

29 July 2021, ARRC

3. FMSB publishes final Standard on the use of Term SONIA

The FICC Markets Standards Board (“FMSB”) has published the finalized Standard on use of Term SONIA reference rates on July 28, 2021. Regulators expected that Sterling fixed income and wholesale lending markets should predominantly transition to SONIA compounded in arrears instead of Term SONIA, and the use of this forward-looking benchmarks would be relatively limited. For loan products, the scope of use of Term SONIA is restricted to mid-size corporates, private banking, retail, export finance and emerging markets lending. As for derivatives, only contracts used for hedging cash products that reference Term SONIA or hedging tough legacy products referenced to synthetic LIBOR (if synthetic LIBOR is based on Term SONIA) could apply Term SONIA as the reference rate. FMSB also stated qualitative principles that market participants should follow to use Term SONIA appropriately, which include the fallback arrangement if Term SONIA is not available and internal control strategies.

KPMG’s perspective: As the robustness of Term SONIA depends on the liquidity in the SONIA-based interest rate swaps market, the use of forward-looking SONIA Term Rates is restricted. Banks should mainly rely on conventions currently available on the use of SONIA compounded in arrears to complete the transition. If Term SONIA is to be used, market participants should ensure they have a robust rationale for using Term SONIA and consider the possibility that Term SONIA could be discontinued or declared non-representative in the future.

28 July 2021, FMSB

4. FCA consults proposed decision to require synthetic LIBOR for 6 sterling and Japanese yen settings

The Financial Conduct Authority (FCA) has published a consultation about its planned policy framework to exercise its new powers under the Benchmarks Regulation (BMR), to wind down LIBOR in an orderly manner. The FCA would consult on requiring the more widely used of 1-month, 3-month and 6-month sterling and Japanese yen LIBOR settings to be determined under a changed methodology, for example, on a ‘synthetic’ basis, after the benchmark cessation date at end-2021. According to the current available information, it is expected that the 3 Japanese yen LIBOR setting would be published for one year only and will cease after end-2022. The synthetic LIBOR would be calculated using a forward-looking term version of the relevant RFRs (i.e. the Tokyo Term Risk Free Rate and term SONIA referenced rate) and the fixed ISDA spread adjustment will be used for the respective LIBOR setting.

KPMG’s perspective: For the synthetic sterling and yen LIBOR that may be available after end-2021, Banks should be aware that there will be a time limitation for its publication, therefore, transition to other risk-free rates including SONIA and TONA is still a necessary step. As suggested by the FCA, any synthetic LIBOR should be considered as a safety-net limited for tough legacy contracts which may not be migrated smoothly. Therefore, market participants should not rely on the potential synthetic LIBOR as a solution, but to continue active transition away from LIBOR following market conventions available.

24 June 2021, FCA

5. AFX launches AMERIBOR term structure of interest rates based on overnight AMERIBOR cash and Futures Prices

Based on the agreement with Numerix, the American Financial Exchange (AFX) has launched the AMERIBOR term structure interest rates, which is constructed by the overnight unsecured AMERIBOR cash rate and implied forward rates from AMERIBOR futures contracts listed on the Cboe Futures Exchange (CFE). Currently, AMERIBOR provides the only exchanged-traded and regulated credit-sensitive overnight lending benchmark specifically intended to track activity in the unsecured lending market. Market participants would be able to issue AMERIBOR-referenced commercial notes, loans and derivatives including interest rate swaps, caps, floors and swaptions that fix upfront like LIBOR. 

KPMG’s perspective: As a separate and distinct alternative benchmark rate, AMERIBOR could reflect the actual borrowing costs of the thousands of banks across America which do not borrow at either LIBOR or SOFR to fund their balance sheets. AMERIBOR also possesses a unique characteristic differing from other risk-free rates in the market as it is sensitive to market stress due to its unsecured nature. The increase in choices of alternative reference rates could also be seen as a positive indicator for constructive market progress in transitioning away from LIBOR and adopting the use of alternative benchmark rates. 

22 June 2021, AFX

6. Chairman of SEC questions the use of BSBY

On the statement published by the U.S. Securities and Exchange Commission (SEC), the chairman of SEC has expressed his concern over the use of the Bloomberg Short-Term Bank Yield Index (BSBY) as it has certain drawbacks similar to LIBOR, for instance, both LIBOR and BSBY are based upon term, unsecured and bank-to-bank lending, and the median trading volume is also low for 3, 6 and 12-month BSBY. Moreover, as BSBY encounters the same problem of inverted pyramid as LIBOR, there may also be economic incentive to manipulate the rate. Therefore, SOFR as a risk-free rate based on a nearly trillion-dollar market, is a preferable alternative rate as indicated by the chairman of SEC.

KPMG’s perspective: As more SOFR alternatives become available in the market, market participants should carefully assess the potential use of such alternative benchmark rates on certain products by taking into account their characteristics and constraints. Despite observing an increase in the use of BSBY in the US market, Banks should consider the recent regulatory criticism on credit-sensitive benchmarks when examining the use of BSBY on loans and derivatives contracts. Market participants should also keep a close eye to the market convention and regulatory updates regarding the development of the BSBY Term Rate and CME’s SOFR Term Rate.  

11 June 2021, SEC

7. ARRC welcomes MRAC Subcommittee’s recommendation on the dates for transitioning Interdealer Swap Market Trading Conventions to SOFR

The Interest Rate Benchmark Reform Subcommittee of the CFTC’s Market Risk Advisory Committee (MRAC) has announced on 8 June its recommendation for transitioning Interdealer Swap Market Trading Conventions to SOFR, that on 26 July 2021 and thereafter, the USD linear swap trading conventions for interdealer market should be changed from USD LIBOR to SOFR, while the interdealer broker LIBOR linear swap screens will remain available until 22 October 2021 for informational purposes. The Alternative Reference Rates Committee (ARRC) welcomed the MRAC Subcommittee’s recommended milestones, and once the switch is in place, the market indicators for recommending a SOFR term rate could be met such that ARRC would be able to formally recommend the CME SOFR term rates shortly afterwards.

KPMG’s perspective: The MRAC Subcommittee’s recommendation on the switch of USD swap trading conventions demonstrate clear regulatory efforts to drive market progress in transitioning away from LIBOR for the interdealer swap market. It is expected that as the volume of SOFR transactions continue to increase in the future, the liquidity of SOFR-linked derivatives could be deepened, and the market will eventually be mature enough for the use of a stable and robust SOFR term rate. Banks should be aware of the transition milestones set for different financial products to ensure that regulatory requirements are duly fulfilled.

8 June 2021, ARRC

8. IHS Markit begins publishing credit sensitive SOFR alternatives

IHS Markit has started to publish forward-looking dynamic term rates, including IHS Markit USD Credit Inclusive Term Rate (CRITR) and the IHS Markit USD Credit Inclusive Term Spread (CRITS), which provide a broad measure of USD cost of funding on an unsecured basis. CRITR and CRITS will be updated daily at 8 am ET and are available in the following tenors: overnight, 1-month, 3-month, 6-month, and 12-months. As the first credit sensitive rates based on extensive constituent bases, CRITR and CRITS could track most USD commercial paper, short-term corporate bond transactions and institutional certificate of deposit utilising a robust methodology and compliance framework. 

KPMG’s perspective: Once approved by regulators and available for use, the publication of CRITR and CRITS could contribute to building a multi-alternative reference rate environment to facilitate the overall LIBOR transition. It also intends to address previous concern from certain segments of the loans and fixed income market over SOFR, which is an overnight and non-credit sensitive rate. When the rates are ready to use, they could be treated as either an add-on to SOFR or a single term rate which is credit sensitive. As there are more alternative referenced rates available in the market, Banks could utilise them for different financial products following regulator’s latest guidance on term rates.

1 June 2021, IHS Markit

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New Developments on Products and Pricing Strategy

1. CME SOFR Futures reach record volumes

After the previous Federal Open Market Committee and as regulators have called to action a shift from LIBOR, the five-day average daily volumes in CME’s SOFR futures has reached record trading volumes at 223,000 contracts. Chair of the Financial Stability Board has mentioned that as CFTC has recommended a “SOFR First” initiative to switch the trading of LIBOR linear swaps in interdealer market, the volume of transactions quoted in SOFR is expected to increase in the future and fulfil the market indicator for implementing a SOFR term rate. 

28 June 2021, Markets Media

2. DBS completes Singapore’s first USD SOFR export financing trade

DBS has completed its first export financing transaction referencing USD SOFR on 23 June 2021 with global food and agri-business, Bunge. As the global LIBOR transition gathers pace, the 25 million USD transaction priced off SOFR averages has strengthened Singapore’s position as a global trade centre and marked a significant industry milestone. Besides, by engaging its clients actively, DBS’ institutional client would be able to transit their trade financing instruments away from LIBOR to alternative risk-free rates before the cessation deadline at end-2021.

23 June 2021, DBS

3. DBS and Standard Chartered execute Singapore’s first SORA-referenced interbank option trade

DBS and Standard Chartered has successfully executed the industry’s first interbank option trade referencing the Singapore Overnight Rate Average on 28 May 2021. The trade was done in the name of a global real estate group to manage the potential market risk arising from a SORA interest rate option. After introducing these new facilities, corporate clients in Singapore market could have a wider range of SORA instruments options. Furthermore, the new trade could support the development and liquidity growth in SORA-based markets, while the Singapore Interbank Offered Rate could no longer be used in new loan products after the end of September 2021.

28 May 2021, DBS

KPMG’s perspective: The issuance of the first US dollar SOFR export financing transaction and Singapore’s first SORA-referenced interbank option marked important milestones for the market development of risk-free rates in Asia. A boost in the liquidity in relevant markets might be expected as the new trades could encourage an active engagement in the new ARR-referenced market. Banks are suggested to pay close attention to upcoming new product issuance in the local market in order to follow the overall market transition. Also, as the volume for CME SOFR futures has an observable increase, a SOFR term rate may be recommended by ARRC for certain use in the future.


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Tom Jenkins
Head of Financial
Risk Management
KPMG China
Michael Monteforte
Financial Risk Management
KPMG China
Gemini Yang
Financial Risk Management
KPMG China
Connie Kang
Financial Risk Management
KPMG China