Standard Chartered Bank today announced the successful completion of the first USD/HKD cross currency basis swap referencing the Hong Kong Dollar Overnight Index Average (HONIA) and the USD secured overnight financing rate (SOFR). The bank has also completed the first USD/HKD cross currency basis swap referencing the 3-month HIBOR and SOFR.

The successful conclusion of these transactions provides a solid basis for the USD LIBOR transition to SOFR at the end of 2021. It also offers market participants additional hedging instruments as LIBOR-based instruments fade out.

Let’s recall that The UK Financial Conduct Authority (FCA) has stated that they will no longer compel banks to contribute to London Interbank Offered Rate (LIBOR) post 2021. In light of this, regulators across the global have signalled that firms should shift away from using the LIBOR and switch to alternative overnight risk-free rates (RFRs).

Whereas alternative RFRs for each of the LIBOR currencies have now been identified, the different jurisdictions are at varying stages of progress. In particular, the depth and liquidity of the market differs across the respective RFRs and product sets (e.g. derivatives, bonds and loans).

The alternative RFRs are considered more robust and reliable interest rate benchmarks than LIBOR as their calculation is based on actual transactions in the underlying market. For instance, while USD LIBOR has a daily average of USD 1 billion of underlying transactions, the chosen replacement, the Secured Overnight Financing Rate (SOFR), is underpinned by daily transactions of approximately USD 1 trillion. As RFRs are based on actual transactions, instead of submissions using expert judgement, they are seen as more representative of the true cost of funding in the underlying markets.