Hong Kong Interbank Offered Rate (HIBOR)

What Is the Hong Kong Interbank Offered Rate (HIBOR)?

The Hong Kong Interbank Offered Rate, known by its truncation HIBOR, is the benchmark interest rate, stated in Hong Kong dollars, for lending between banks inside the Hong Kong market. The HIBOR is a reference rate for lenders and borrowers that participate straightforwardly or in a roundabout way in the Asian economy. As of December 2020, plans were in place to progress away from HIBOR to the Hong Kong Overnight Index Average (HONIA).

Figuring out the Hong Kong Interbank Offered Rate (HIBOR)

The banking industry utilizes an interbank market for transferring funds and currency, and for overseeing liquidity. Assuming that a Hong Kong bank is approaching the place where withdrawals are close to draining short-term cash reserves, that bank will go into the Hong Kong interbank market and borrow money at the Hong Kong Interbank Offered Rate (HIBOR). The terms of the loans fluctuate from overnight to one year. The U.K. variant, the London Interbank Offered Rate (LIBOR), is like the HIBOR.

The rate is delivered every day at 11:00 a.m. neighborhood time. It is gotten from the contributed statements of 20 banks determined by the Hong Kong Association of Banks (HKAB). The HKAB acts much the same way to a central bank for Hong Kong. The highest three and the most minimal three contributed values are disposed of leaving the leftover 14 contributions in the calculation.

HIBOR's primary function is to act as the benchmark reference rate in the Asian markets for debt instruments. This function helps government and corporate bonds, mortgages, and [derivatives](/subordinate, for example, currency and interest rate swaps, among numerous other financial products. For instance, a interest rate swap including two counterparties with great credit ratings, the two of which have bonds issued in Hong Kong dollars, will probably be quoted in HIBOR plus a given percentage.

In another model, a Hong Kong dollar-named floating-rate note (FRN), or floater, which pays coupons in light of HIBOR plus a margin of 35 basis points (0.35%) every year. In this case, the HIBOR rate utilized is the one-year HIBOR plus a 35 basis point spread. Consistently, the coupon rate is reset to match the current Honk Kong dollar one-year HIBOR, plus the predetermined spread.

If, for example, the one-year HIBOR is 4% toward the beginning of the year, the bond will return 4.35% of its par value at year's end. The spread normally increments or diminishes relying upon the creditworthiness of the institution giving the debt.

Analysis of HIBOR

Since the Asian currency crisis in 1997, worries over volatility and even liquidity developed to a point where HIBOR's value as a benchmark is questioned. Even LIBOR, which is a global benchmark, is enduring an onslaught, particularly since the 2012 LIBOR fixing scandal. As of December 2020, plans were in place to phase out the LIBOR system by 2023 and replace it with different benchmarks, for example, the Sterling Overnight Index Average (SONIA). SONIA depends on genuine offers and offers from the contributing banks and not indicated levels. The last option are subject to manipulation if the contributing bank has any desire to stow away or improve its capital position.

To be sure, in 2013, the HIBOR market had its scandal when the city augmented its investigation into conceivable manipulation of this key interest rate. The HIBOR fixing mechanism was eventually governed to be sound, yet with comparable issues surfacing in other interbank markets, the trend towards finding replacements is moving forward.

The replacement push centers on LIBOR since it is the globally recognized standard. The U.S. Federal Reserve presented the secured overnight financing rate (SOFR), another reference rate made in cooperation with the U.S. Treasury Department's Office of Financial Research.