Hong Kong exchange unveils inaugural swap clearing service using HIBOR alternative

July 9, 2020.

Hong Kong Exchanges and Clearing has launched the first clearing service using an alternative to the Hong Kong Interbank Offered Rate, or HIBOR, reflecting local regulatory efforts to nudge banks away from the old reference rate regime.

The exchange said Thursday that its central counterparty subsidiary, OTC Clearing Hong Kong, will offer clearing services of Hong Kong dollar interest-rate swap contracts using the newer Hong Kong Overnight Index Average, or HONIA.

The rate was identified last April by Hong Kong’s Treasury Markets Association trade group, which heralded HONIA as a “nearly risk-free overnight interbank funding rate” similar to other alternative rates chosen around the world.

“We are very excited to be providing clearing services to the Hong Kong dollar risk-free rate swap, as we support the development of the HONIA-based derivatives market and promote HONIA’s adoption in the financial industry,” said Calvin Tai, HKEX’s co-president and chief operating officer. “OTC Clear will continue its work on providing a paced transition to new risk-free reference rates for clearing members.”

The first centrally HONIA interest rate swap was between ’s Hong Kong branch and the Hongkong and Shanghai Banking Corporation, HKEX said. 

“[Bank of China] is very pleased to have participated in the first Hong Kong Dollar HONIA IRS transaction settled by OTC Clear, and looks forward to the introduction of more HONIA-based products in the market,” said Tony Wang, the general manager of global markets at Bank of China.

Also on Thursday, Hong Kong Exchanges unveiled the Master Special Segregated Account, an upgraded pre-trade checking of Northbound trades — the buying or selling of Chinese bonds with foreign investors.

The new program will support the exchange’s Support Connect mutual market access program with more efficient pre-trading. 

“HKEX is committed to investing in the further development of Stock Connect and related services, as we make our markets even more attractive and competitive for our global clients,” HKEX head of markets Wilfred Yui said.

The inaugural HONIA clearing service comes as Hong Kong authorities encourage banks to adopt it as a replacement for HIBOR, which is comparable to the London Interbank Offered Rate, or LIBOR. 

LIBOR, once the leading benchmark rate for interbank loans worldwide, has been long plagued by rate-rigging scandals, especially in the fallout of the 2008 financial crisis. 

Regulators and banks around the world have been working on their own alternative reference rates. The U.K., for one, plans to phase out its use of LIBOR by year-end 2021, while regulators in the U.S. warned banks this month that they could face greater risk of litigation and reputational damage from a clumsy transition.

Likewise, Hong Kong has been working to gradually phase out the similar HIBOR, but without completely decommissioning the rate. 

OTC Clear has put in place clearing services for swaps linked to the euro short-term rate and the secured overnight financing rate to smooth its customers’ transition from HIBOR, HKEX said. 

The exchange’s HONIA clearing service was praised by global banks, including the Bank of China.

“As one of the major international financial centers, Hong Kong is carrying forward the IBOR reform with other major financial centers,” Wang said. “The launch of HONIA further enhances the reliability of interest rate benchmarks.”

The move was also welcomed by Justin Chan, the head of global markets in Greater China and Asia-Pacific at , who called it a “major development of Hong Kong’s derivatives market.”

The London-based bank caught flack worldwide earlier this year when it publicly supported the highly controversial, Beijing-sponsored extradition law in Hong Kong.

“As a key industry player in the city, HSBC will continue to actively support the gradual market adoption of HONIA and enrich the suite of HONIA products for other market participants,” said Chan.