Proposal to adjust HIBOR fixing process

Report suggests five measures to boost controls on rate manipulation

The Hong Kong Association of Banks, or HKAB, said that the HIBOR (Hong Kong interbank offered rate) pricing mechanism needs transparency and controls to mute concerns about rate manipulation, after the UK London Interbank Offered Rate, or LIBOR, scandal uncovered rate manipulation by some banks to make gains.

"The three main objectives of introducing refinement measures are to enhance the rate fixing process transparency, to strengthen the discipline and internal controls of banks in determining HIBOR, and to elevate the governance of the HIBOR fixing process discipline," HKAB Chairperson Anita Fung said at a press conference on Monday.

According to the report commissioned by the HKAB which the Treasury Markets Association (TMA) prepared, there should be no need to change the current definition of HIBOR or to replace it because such fundamental changes will cause significant disruptions to existing contracts with reference to HIBOR.

HIBOR, which refers to a set of reference interest rates owned by HKAB that are in place for over 20 years, is used to price a range of financial products in Hong Kong like credit card rates and mortgages. TMA estimated that Hong Kong's banking sector held over HK$2.3 trillion ($296.77 million) contracts on its balance sheet that used the HIBOR as reference as at the end of September this year.

"The HIBOR fixing mechanism in Hong Kong remains basically sound and it is less likely to be manipulated as the LIBOR and can reflect the wholesale funding costs of the major commercial banks in the city," TMA Working Group Member Henry Cheng said at the press conference.

However, the report proposed five measures to refine the HIBOR fixings framework, including providing clear guidance for banks on rate submission, developing a code of conduct and sound practices on systems of control for the fixing process, enhancing the independence and governance of the HIBOR compilation process at the administrative level, reducing the HIBOR fixing tenors that have less market demand, and reviewing provisions in contracts that reference HIBOR.

"The HKAB will hire an independent consultancy firm to gather the banking industry responses toward the report and (will) submit the final report to the Hong Kong Monetary Authority, or HKMA, by the end of this year," said Edmond Lau, executive director for monetary management at the HKMA. The details of the refinement measures related to HIBOR will probably be available in the first quarter of 2013, he added.

The recommendations end an almost five-month review of fixing and governance amid rising global scrutiny of benchmark rates. Probes by regulators and industry groups followed worldwide after a record 290 million-pound $465 million) fine was levied against Barclays Plc in June for attempting to manipulate the LIBOR.

The UK's Financial Services Authority announced reforms to the LIBOR system in September that included cutting the number of rates calculated from 150 to just 20 and tighter auditing of banks that contribute the data.

Currently, HIBOR rates are set across 15 different maturities, ranging from overnight to 12 months. The HKAB is looking to cut the number of maturities to seven, focusing on those that are most commonly used as reference rates.

The HKAB is the first banking association in Asia to publish similar reforms. A similar review of benchmark rates is also under way in Singapore, where the central bank has ordered lenders to review the way rates are set for interbank lending and non-deliverable foreign exchange contracts.

Bloomberg and Reuters contributed to this story

oswald@chinadailyhk.com