Hong Kong Interbank Offered Rate (HIBOR)

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What is the interbank rate offered in Hong Kong?

The interbank rate offered in Hong Kong, known by its abbreviation HIBOR, is the benchmark interest rate, expressed in Hong Kong dollars, for inter-bank loans on the Hong Kong market. HIBOR is a benchmark rate for lenders and borrowers who participate directly or indirectly in the Asian economy.

Understanding the interbank rate offered in Hong Kong (HIBOR)

The banking sector uses an interbank market to transfer funds and currencies, and to manage liquidity. If a Hong Kong bank approaches the point where withdrawals are about to deplete short-term cash reserves, that bank will go to the Hong Kong interbank market and borrow money at the offered interbank rate in Hong Kong (HIBOR). The terms of the loans vary overnight to a year. The British version, the London Interbank Offered Rate (LIBOR), is similar to HIBOR.

The price is published every day at 11:00 am local time. It is derived from the ratings provided by 20 banks determined by the Hong Kong Banking Association (HKAB). The HKAB acts in the same way as a central bank for Hong Kong. The three highest contributions and the three lowest contributions are rejected, leaving the remaining 14 contributions in the calculation.

HIBOR as a measure

The main function of HIBOR is to serve as the benchmark reference rate in the Asian markets for debt instruments. This feature assists government and corporate bonds, mortgages and derivatives, such as currency and interest rate swaps, among many other financial products. For example, an interest rate swap involving two counterparties with good credit ratings, both of which have bonds issued in Hong Kong dollars, will likely be rated in HIBOR plus a given percentage.

In another example, a floating rate note (FRN) denominated in Hong Kong dollar, or floating, which pays coupons based on HIBOR plus a margin of 35 basis points (0.35%) per year. In this case, the HIBOR rate used is the one-year HIBOR plus a spread of 35 basis points. Each year, the coupon rate is reset to match the one-year HIBOR of the current Honk Kong dollar, plus the predetermined spread.

If, for example, the one-year HIBOR is 4% at the start of the year, the bond will return 4.35% of its nominal value at the end of the year. The spread generally increases or decreases depending on the creditworthiness of the debt-issuing institution.

A reference under attack

Since the Asian currency crisis in 1997, concerns about volatility and even liquidity have increased to the point of questioning the value of HIBOR as a benchmark. Even the LIBOR, which is a global benchmark, is under fire, in particular since the scandal of the fixing of the LIBOR in 2020. In Europe, the average interbank rate of the sterling night (SONIA) will replace the LIBOR as a reference from here 2021. SONIA is based on the offers and actual offers of the contributing banks and not on the levels indicated. These can be manipulated if the contributing bank wishes to hide or improve its capital position.

In fact, in 2020, the HIBOR market caused a scandal when the city widened its investigation into a possible manipulation of this key rate. The HIBOR fixing mechanism was ultimately found to be solid, but with similar problems emerging in other interbank markets, the trend to find replacements is moving forward.

The replacement pusher focuses on LIBOR as it is the globally recognized standard. The US Federal Reserve has introduced the Secure Overnight Financing Rate (SOFR), a new benchmark rate created in cooperation with the Office of Financial Research of the United States Department of the Treasury.

LIBOR is in danger, similar rates, including HIBOR, are also.

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