Chinese Central Bank Releases White Paper on International Benchmark Interest Rate Reforms

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The Chinese central bank has just released a white paper on efforts to reform international benchmark rates, signalling its commitment to a shift away from the use of LIBOR.

The People’s Bank of China (PBOC) released the “Participation in International Benchmark Interest Rate Reforms and Improving China’s Benchmark Interest Rate System” (参与国际基准利率改革和健全中国基准利率体系) on 31 August 2020.

In an official statement PBOC highlighted the declining influence of the London Interbank Offered Rate (LIBOR) as a benchmark rate over the past decade.

On international financial markets, the most widely used benchmark rate is LIBOR, but since the 2008 Great Financial Crisis, the interbank lending markets of various countries have shrunk and use of LIBOR as reference basis for quotes has weakened.

In particular, the emergence of multiple price manipulation scandals during the Great Financial Crisis severely undermined the trust of the market in LIBOR.

LIBOR’s managing body subsequently released a series of reform measures, but they have yet to obtain widespread acceptance from the market.

In 2017 the UK’s Financial Conduct Authority (FCA) announced that after the end of 2021 it would no longer make requirements of quoting banks, meaning that at such time LIBOR could withdraw from the market.

Given the potential for the imminent withdrawal of LIBOR, the central banks of various developed economies are pursuing benchmark interest rate reforms, with greater plat given to the Secured Overnight Financing Rate (SOFR) in the US, the Sterling Over Night Index Average (SONIA) in the UK and the Euro Short-term Rate (€STR) in the EU and the Tokyo Overnight Average Rate (TONAR) in Japan.

Thus far these benchmark rates are all overnight rates, however, prompting international research into longer tenor rates, primarily consisting of:

  1. A “retrospective method” which involves calculating rates of various tenors based on actual overnight benchmark rates;
  2. A “forward-looking method” which calculates rates of various tenors based on derivatives transactions.

PBOC said that it was actively participating in these international benchmark reform efforts, and had established a specialist team too guide market rate pricing mechanisms and undertake research.

Within China some banks undertake US dollar and other foreign currency operations based on LIBOR rates, and similarly face the issue of a shift in benchmark rates.

At present [PBOC] has already made clear that transfer involving LIBOR and other international benchmark rates will make reference to international consensus and best practice, and it will actively drive the use of new benchmark rate.

Based on this overall approach, PBOC has guided and drafted road maps and timetables for domestic transfer of benchmark rates, and guided relevant banks in various forms of preparatory work for launching benchmark rate transfers as early as possible.

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