Pandemic Delays Market’s Shift From Libor, StanChart Says

The pandemic has delayed the global market’s shift away from the London Interbank Offered Rate (Libor), according to a banker closely involved with the work.

John Tan, global head, financial markets regions at Standard Chartered Bank, spoke to Bloomberg News about the transition away from the key interest rate benchmark. Tan and his team oversee the move of all financial products to risk-free rates for StanChart globally.

Libor affects trillions of dollars worth of derivatives, syndicated loans and floating-rate bonds. The administrator of the benchmark recently said it’s looking to push back by 18 months the timeline for abandoning some of the interest-rate settings, from a previous target for the end of 2021. Policy makers have been developing new gauges after European and U.S. banks were found to have manipulated Libor.

In October, StanChart said it had completed its first USD/HKD swap referencing Hong Kong Dollar Overnight Index Average (Honia) and the USD Secured Overnight Financing Rate (SOFR). For Hong Kong dollar contracts that reference the Hong Kong Interbank Offered Rate (Hibor), transitioning to Honia is seen as less urgent, as the city will allow the two rates to coexist.

Comments have been edited and condensed.

What do you think of the planned delay of the Libor-phase-out?

Regulators’ potential plans to delay the U.S.-dollar Libor phase-out to mid-2023 show that they are accepting the reality that if you go too fast, the market won’t be ready. Due to the Covid-19 pandemic, a lot of work in the Libor phase-out has been delayed.

How will the potential delay affect StanChart’s plans?

For the Libor phase-out, we are ready to quote new vanilla contracts using SOFR anytime.

The delay in the Libor phase-out to mid-2023 is a big relief to us, though, regarding legacy Libor-linked contracts. If they didn’t change the timetable, we would have had to engage a lot of time and resources, perhaps even ask most of our operational staff to focus on talking to all parties in all existing contracts maturing after the end of 2021 and work on switching them to SOFR.

Have companies begun transitioning to SOFR?

Many clients have not yet changed their accounting systems to accommodate SOFR. Libor is fixed at the front and settled at the end. If a borrower has a three-month interest period on a loan, the amount of cash needed is known at the beginning of the interest period.

With SOFR, clients will only know how much cash they need for the interest payment closer to the end of the interest period and have less time to prepare the money. Even though there’s still a bit of time to prepare for the interest payment, psychologically clients don’t feel as secure as knowing for certain in the beginning.

What do you think of Hong Kong’s policy of allowing Hibor and Honia to co-exist?

The co-existence of Hibor and Honia is a very prudent approach on the part of the Hong Kong Monetary Authority. It isn’t forcing people to adopt Honia but is giving space for Honia to slowly mature.

How is the adoption of Honia going?

Most corporate clients are not keen to use Honia yet. It’s a chicken-and-egg problem where the more people start accepting and using Honia, the use of this benchmark rate becomes more widespread, but people need to start using the rate first. In the long run, clients should switch to Honia because it’s more representative and reliable as it reflects actual market trades.

©2020 Bloomberg L.P.

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