Financial benchmark reforms in Malaysia: Creating opportunities through collaboration
This article was written by Vicky Cheng, Head of Government and Regulatory Affairs, APAC, at Bloomberg.
In response to the global financial crisis and subsequent reform of the London Interbank Offered Rate, (LIBOR), alternative reference rates (ARR) are being developed to enhance and strengthen the integrity of financial benchmark rates as part of a worldwide transition toward transaction-based rates. In September 2021, Bank Negara Malaysia launched the Malaysia Overnight Rate (MYOR) as the fallback for the Kuala Lumpur Interbank Offered Rate (KLIBOR) and as the new ARR.
A multiple rate approach of having MYOR and KLIBOR run in parallel provides market participants with flexibility and eventual development of MYOR-based products to help meet different hedging tools and risk management strategies.
At the Financial Benchmark Reforms In Malaysia webinar, organized by Bank Negara Malaysia (BNM), the Financial Market Association (FMAM) and Bloomberg, regulatory specialists and industry experts across banks, the buy-side and corporations, came together to discuss the progression of Malaysia’s benchmark transition, sharing insights from the market’s readiness to explore new rates to the opportunities in the post-IBOR world.
The move to MYOR
As the days of LIBOR draw to a close, Malaysia, like the rest of the world, is undergoing a transition in its financial benchmark rates. Global firms continue to move away from outstanding LIBOR exposures, and much work continues to be done. Malaysia is prepared for the change, and the shift has been a fairly smooth one in many ways. Such progress in this early stage of implementation is a result of banks investing into systems and processes, working with regulators, and communicating with clients to understand their needs and challenges as they transition from legacy positions and, in some cases, enter into risk-free rate (RFR) positions for the first time. In January 2022, AmBank Group and Malayan Banking Bhd (Maybank) entered into the first MYOR interest rate swap transaction.
As banks transition the benchmark changes, corporations also need to make necessary preparations, including analyzing implications of a move from IBOR to an RFR, and doing a stock-take on derivative contracts and underlying contracts of a loan transaction. Documentation will need to be updated and revised for contracts with MYOR, as well as those with LIBOR ahead of its sunset in 2023. While the process of shifting away from legacy contracts will require effort and collaboration between banks and corporate institutions, corporate issuers are also looking forward to new financial RFR products and opportunities.
MYOR as an Alternative Reference Rate for further development
According to the panelists, MYOR has been welcomed as the fallback rate, and the steps required to accommodate the new rate in terms of documentation and systems are underway. Meanwhile, the journey of using MYOR may still be at the beginning.
A live poll of webinar attendees revealed that about 2% of respondents are exposed to financial products tied to MYOR, while 58% said they were using products tied to KLIBOR. With 19% saying they were using products tied to both, it reflects that KLIBOR still remains the dominant domestic benchmark.
In exploring what it would take to grow and expand the use of MYOR to become a successful and reliable benchmark, panelists urged regulators to provide a timeline to discontinue KLIBOR. This would call for further market development, policy framework and market infrastructures, as well as the encouragement of pioneering new transactions to attract liquidity, explore pricing and a push for new products. Speakers also agreed that this will require concerted effort and coordination across the market, from regulators to banks and corporations.
MYOR’s place in the ecosystem
The multiple rate approach gives the market the choice of which rate to use, and this transition means financial institutions must be prepared to cater to changing customer needs. Providing more and robust hedging products using MYOR would incentivize treasurers, chief financial officers or other corporate users to choose MYOR, in addition to the KLIBOR hedging products that banks currently offer. Panelists encouraged banks and corporates for more communication, and to understand customer’s investment and liability management needs to develop products to help accommodate the introduction of the new rate.
Market participants seem ready to explore new products: the majority of poll respondents expressed interest in MYOR-based loans and swaps, and about a quarter of respondents noted the need for futures based on the new rate. More than 40% of the respondents saw a need for securities like the RFR floating-rate notes seen in Hong Kong and Singapore.
MYOR’s success will depend on the ecosystem that supports it. To attract liquidity for MYOR – and the underlying rate of a vast array of new financial products – will require collaboration from the central bank, regulators, corporations and financial institutions. The development of a timeline and framework from the policymakers, with coordination from financial institutions, will give clarity to corporate users and help them plan for adopting MYOR as a benchmark. Similarly, communication between financial institutions and corporations will allow for the development of new financial products. While KLIBOR co-exists with MYOR for the time being, we should expect to see continued development of MYOR and movement in liquidity toward Malaysia’s new transaction-based rate.
Watch on-demand LIBOR transition webinars
- Financial Benchmark Reforms In Malaysia
- Mastering Malaysia’s New Benchmark Regime
- Life after LIBOR: Navigating Asia’s New RFR Bond MarketsÂ
How we can help
Bloomberg has been at the forefront of efforts to support the markets during the LIBOR transition. We offer a comprehensive suite of data, analytics and portfolio solutions to help firms assess the impact of the transition to alternative reference rates, with our industry-leading technology providing transparency and supporting adoption for all new rates to help you at every step of the journey. Visit our LIBOR transition solutions website to learn more.