A lack of awareness about benchmark reform and its impact on corporates and non-bank financial firms is a source of concern for banks in Asia, which are facing widespread adjustment of lending terms.
Lenders in the region are calling on industry associations and authorities to step up efforts to inform market participants about the consequences of the likely demise of Libor for financial products, particularly loans.
“What I’m really worried about is what the Loan Market Association is doing with all my corporate loans that are tied to Libor – or any of the Ibors for that matter,” said Frederick Shen, head of global treasury business management at OCBC Bank. “Every corporate counterparty is going to be in a bilateral negotiation with respect to the issue of spending.”
Shen added he had been receiving enquiries from non-financial counterparties about what the end of Libor meant for them, “but these are still few and far between”.
Shen was speaking today (September 10) at the Asia Risk Congress in Singapore. Fellow speaker Andrew Ng, head of treasury and markets at DBS, complained that the grasp of Libor reform among buy-side firms in the region was even more shaky.
“I’ve talked to asset managers who were supposed to be a little more sophisticated than the corporates, and those guys don’t know some of the basic technicalities. They have absolutely no clue what is going on,” said Ng.
Countries including Singapore have been drawing up plans to adjust to alternative reference rates once the regulatory imperative for Libor ceases at the end of 2021. Libor is important in Singapore because the local fixing, the Swap Offer Rate, is calculated with reference to US dollar Libor. SOR reflects the cost of borrowing in US dollars and swapping back to Singapore dollars at the same maturity.
With regulators keen to see reliance on Libor end, Singapore has had to develop an alternative. Last month, two industry groups backed the unsecured Singapore Overnight Average Rate (SORA) to replace SOR.
Alex Bon, senior manager for technology vendor Murex, said awareness of benchmark reform is growing in Asia but still remains patchy.
“I think awareness is building but it is spread unevenly across the region and you have different levels of awareness depending on what type of issues relating to the transition we are talking about,” he said.
For example, Australia is one of the more advanced jurisdictions in the region looking at this topic, with a greater awareness among institutions, while companies from other markets still have some way to go, said Bon.
He added that this isn’t helped by a “misconception” that the Libor changeover will be delayed.
“We need to make it clear that this is happening and, while Libor might continue post-2021, there will be no incentive for banks to stay on the benchmark for very long after the transition. So don’t expect a solution from the regulators at the last minute,” he said.
Libor is calculated from input data submitted by a panel of between 11 and 16 contributor banks for each of its five currencies. Once these contributing banks are ready to transition away from the benchmark, they will have no further incentive to continue submitting quotes.
This is what will cause the death of Libor, and why, unlike initial margining or Basel III mandates, regulators will not be able to give any relief, says Bon.
Ng believes there is more awareness in Europe and the US about the imminent demise of Libor, since swaps linked to the overnight financing rate in these jurisdictions have started to trade, which is not currently the case in Asia.
But this may change as swaps linked to SORA start to be traded, which is predicted to happen in the near future.
While this will help raise awareness among a broader selection of counterparties about benchmark transition, Ng said trade associations and regulators must increase their efforts to inform the industry.
Shen agrees that the financial markets in the region would benefit from improved outreach. “Education sessions need to be run on a holistic basis to make sure everybody is on the same page and delivering the same message,” he said.
However not everyone is clear what the message should be. Many of the elements of benchmark reform have yet to be mapped out, leaving bankers struggling to explain the transition to their clients.
“The issue we have is that there are more questions than answers we can provide. There are still many transition items that are not sorted out,” Shen said. “So when I talk to non-bank financial institutions about the Ibor transition and how it impacts them, for a lot of those things we don’t have the answer.”
Ng offered a stark warning over the consequences of failing to prepare for Libor’s demise. “If the industry doesn’t have a good transition plan to let everyone know what it intends to do, I think there will be confusion and chaos,” he said. “A lot of things need to be done in the next one-and-a-half years.”
A new 15-strong steering committee, which was set up on August 30 by the Monetary Authority of Singapore to oversee the transition from SOR to SORA, could help provide some answers. There are three buy-side representatives: the Association of Corporate Treasurers in Singapore, the Life Insurance Association Singapore and the Investment Management Association of Singapore.
Update, September 11, 2019: This article has been updated with additional context on why regulators may not be able to provide relief for those that have not adapted to the change from Libor.
Editing by Alex Krohn