(Bloomberg) -- Hong Kong banks have to renegotiate HK$1.6 trillion ($205 billion) in contracts linked to the London interbank offered rate before the benchmark ceases as corporate customers have been slow in transitioning to alternatives, the city's de-facto central bank said.
At the end of September, Hong Kong lenders had HK$4.3 trillion of assets, HK$1.2 trillion of liabilities and HK$34.9 trillion in derivative contracts tied to Libor, according to the Hong Kong Monetary Authority. Among these, HK$1.6 trillion mature after the rate ceases and don't have an adequate replacements, with HK$200 billion in need to be fixed before the end of this year.
Hong Kong, along with the rest of the world, is phasing out the benchmark rate that was tainted by a rigging scandal, prohibiting banks in the city from issuing new contracts after 2021. Long-time rival Singapore has already auctioned the first alternative benchmark, called SORA, in August last year, leading the global exit. Most Libor settings will stop being published by the end of the year, while some U.S. dollar fixings will continue until the end mid-2023.
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“A challenge facing banks is how to encourage their customers to adopt ARRs in new contracts,” HKMA's Deputy Chief Executive Arthur Yuen told reporters on Tuesday, referring to alternative reference rates. “This is particularly important given that progress in transitioning away from Libor in the corporate sector is relatively slow.”
But given that the latest level of contracts exposed that are in need of renegotiation has “greatly decreased,” HKMA has minimal concern on potential legal risks if contracts can't be fixed in time, Yuen said.
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