The Hong Kong banking regulator has imposed new rules that govern how banks submit rates for HIBOR and other benchmark fixings. 

This alert summarises the Hong Kong benchmark reform package and compares these reforms against those spearheaded by the Wheatley Review in the United Kingdom.    It also describes the proposed offshore Renminbi benchmark rate that has been proposed.


The fallout from recent rate-fixing scandals has resulted in a global regulatory about-turn to consider how the cloistered process of benchmark fixings takes place.

The International Organization of Securities Commissions (IOSCO) has proposed principles for financial benchmarks and has appointed a special task force that is co-chaired by the previous head of the Securities and Futures Commission, Martin Wheatley.

The response from individual regulators to the rate-fixing scandals has been mixed.  This corresponds to the degree of perceived weakness in the creation of particular benchmarks.  The London interbank offered rate (LIBOR) and Hong Kong equivalent (HIBOR)1 sit at different ends of this spectrum for various reasons, with early indications pointing to ‘light touch’ reforms in Hong Kong. 

However, the measures ultimately proposed by the Treasury Markets Association (TMA) and adopted by the Hong Kong Monetary Authority (HKMA) largely emulate developments in the United Kingdom.  

A.  Key changes in Hong Kong

The key developments announced in Hong Kong are as follows:

  • Guideline - All authorised institutions (AIs) that submit rates for benchmark fixings are subject to a new “Code of Conduct for Benchmark Submitters” contained in a statutory guideline published by the HKMA (HKMA Benchmark Guideline).  Non-compliance can result in a loss of licence, with potential flow-on implications for directors, chief executives and others.
  • Change in administrator – The administration of the HIBOR fixing process will move from The Hong Kong Association of Banks (HKAB) to the TMA, which will be subject to a new surveillance and governance structure.  However, HIBOR will still technically be “owned” by HKAB.
  • Phase-out – HIBOR fixings for 4-month, 5-month, 7-month, 8-month and 11-month tenors will be phased out, on the basis that they have insufficient market demand.
  • Annual panel review – The composition of the panel of HIBOR reference banks will be subject to annual review.
  • Audit – The HKMA will require periodic independent external audits on the TMA’s controls with respect to its administrator functions.

In its February press release, the HKMA also intimated that it may force banks to participate in rate fixing to ensure that there are sufficient reference banks to maintain a credible benchmark. 

B.  What the new HKMA Benchmark Guideline says

The new HKMA Benchmark Guideline contains an industry code developed by the TMA in consultation with HKAB to govern the submissions process for HIBOR.  That code is enshrined in an umbrella statutory HKMA “Guideline” that applies to all benchmark fixings and forms part of the HKMA’s Supervisory Policy Manual. 

The upshot is that the HKMA Benchmark Guideline (including the embedded industry code) should be treated as a formal regulatory standard for benchmark submissions in Hong Kong.

The overarching requirements of the HKMA Benchmark Guideline are as follows:

Click here to view table.

The industry code embedded in the HKMA Benchmark Guideline supplements these principles with further detail in respect of HIBOR specifically.  It also includes specific requirements with respect to the rate corroboration process, including:

  • supporting data - explicit and transparent supporting data from arm’s length transactions;
  • hierarchy - a clear hierarchy of transaction data relevant to Hong Kong dollar interest rates, flowing from directly relevant transactions (ie certain qualifying loans) to indirectly relevant transactions (eg cross-currency swaps) to quotations;
  • expert judgment - the exercise of expert judgment in an objective and consistent fashion;
  • framework - a structured and documented approach towards HIBOR submissions;
  • reviews - involvement of independent reviewers, such as risk managers, and relevant analysis and back-testing of indirectly relevant transactions;
  • criteria - criteria for identifying “prime banks”, which is relevant to the estimates provided by reference banks; and
  • procedures and records - procedures for rate corroboration with a clear audit trail.

C.  How does Hong Kong measure against international reforms?

Generally speaking, Hong Kong has largely tracked the reforms in the United Kingdom, although neither regime has been finalised.  

The following table provides a snapshot of how some of the key aspects of the Hong Kong reform package (as currently understood) compare against the reforms being undertaken in the United Kingdom.

Click here to view table.

There are a range of other developments occurring internationally that are likely to shape Hong Kong’s regulation of financial benchmarks.  These include IOSCO’s proposed Principles for Financial Benchmarks.  Those developments must be considered when designing internal policies and procedures.  This makes the issue a moving target, although we now have strong indications about where this area of regulation of going.

D.  New CNH benchmark

On 25 April 2013, the TMA also announced a plan to launch a formal CNH Hong Kong Interbank Offered Rate fixing in June 2013, in recognition of the increasing need for an offshore Renminbi interest rate benchmark for loans, interest rate contracts and other agreements. 

The key aspects of the proposal are as follows:

Click here to view table.

The precise launch date, reference banks and calculating agent are expected to be confirmed soon.  In the meantime, the TMA already publishes the offered rates of 13 banks across these tenors on its website.

Submissions will need to comply with the HKMA Benchmark Guideline and, we expect, specific industry guidance akin to the HIBOR industry code that is annexed to that Guideline.

Next steps

AIs involved in Hong Kong benchmark submissions should ask:

  • Do we have a Hong Kong-specific policy and procedure that specifically covers the new requirements?
  • Do we have the right people and the necessary resources?
  • Are our systems sufficient?
  • Are senior managers aware of their new responsibilities?
  • Do our Treasury, Risk Management and Compliance functions know what to do?
  • Do our HIBOR-referenced contracts need to be amended?
  • Do we have any legal concerns about moving transaction data between different parts of the organisation or otherwise complying?