Introduction

Financial benchmark reforms are underway in various jurisdictions to improve the integrity and reliability of interest rate benchmarks, in line with the Financial Stability Board’s (FSB) recommendations. Among the key recommendations are the development of a nearly risk-free alternative reference rate (ARR) and strengthening of the existing interbank offered rate (IBOR) of respective jurisdictions.

In line with the FSB’s recommendations, Bank Negara Malaysia (Bank Negara) has announced the launch of the Malaysia Overnight Rate (MYOR) as the new ARR for Malaysia. Globally, ARRs are being introduced as part of a transition to transaction-based rates, in line with the London Interbank Offered Rate (LIBOR) reforms after the global financial crisis. The introduction of ARRs aims to facilitate usage of benchmark rates that are more robust and based upon transactions in active, liquid markets.

In Malaysia, the MYOR will run in parallel to the existing Kuala Lumpur Interbank Offered Rate (KLIBOR) with periodic reviews to ensure that the financial benchmark rates remain robust and reflective of an active underlying market. This multiple-rate approach is supported by the FSB and adopted by many other jurisdictions. The availability of two financial benchmark rates provides market participants with the flexibility to choose the rate that best suits their needs and facilitates the development of MYOR-based products. The offering of MYOR-based products will provide a wider array of hedging instruments that will support additional risk management strategies.

Key takeaways

Given the general trend to move away from interbank offered rates and transition towards risk-free rates and other alternative rates, the introduction of MYOR will provide sufficient time for market participants to prepare for its adoption. Market participants would therefore be well advised to take proactive measures and consider whether it would be prudent for their finance agreements to adopt MYOR as an ARR in anticipation of the discontinuation of KLIBOR. This is especially relevant for agreements with tenors that will extend beyond 2023.

MYOR features

In conjunction with the launch, Bank Negara has published the MYOR Policy Document, which incorporates the following key features and governance standards developed in collaboration with the Financial Markets Committee (FMC) after a robust public consultation process:

• Calculation and eligible transactions: MYOR is calculated as the volume-weighted average rate of unsecured overnight Malaysian Ringgit interbank transactions, rounded to two decimal places and comprises the following eligible transactions:
  • Wholesale conventional unsecured deposits between interbank institutions (either brokered or direct/bilateral); and
  • Bank Negara’s conventional overnight monetary operations, which comprise tenders conducted through FAST¹ or manual operations, and direct overnight lending/borrowing against interbank institutions, excluding certain lending/funding facilities and deposit/acceptance facilities offered by Bank Negara.
• Data sources and quality: The data used to calculate MYOR is collected from two key sources – RENTAS² and FAST. If there is insufficient or missing transaction data submitted through RENTAS, interbank institutions will be required to provide all relevant data on their overnight interbank money market transactions to Bank Negara. Consequently, the senior management of interbank institutions will be required to put in place and implement robust internal policies and mechanisms, including effective back-up arrangements to ensure the accuracy of RENTAS transaction data and enable timely detection of errors which may affect the calculation of MYOR.
• Publication: The publication of MYOR for a given Kuala Lumpur business day will be at 10.00am on the following business day on Bank Negara’s website. Interbank institutions are required to report any identified errors to the Investment Operations and Financial Market Department of Bank Negara by 12.00noon on the publication day. A republication of MYOR will be made by 2.00pm on the same publication date if the erroneous rate is two or more basis points away from the correct rate.
• Administration of MYOR: Bank Negara is the administrator of MYOR and will undertake periodic reviews of the design and methodology of MYOR to ensure that the benchmark rate accurately reflects the underlying market structure. Bank Negara will also seek the views of the FMC to ensure that a holistic approach is undertaken when reviewing any changes to MYOR design or methodology. For material changes, Bank Negara will conduct a public consultation to seek feedback from market participants.
• Contingency arrangements:  In the event of disruption to the normal production of MYOR (eg, disruption to trade settlement, interbank trading or data collection), Bank Negara will calculate and publish MYOR based on the overnight policy rate (OPR) announced by Bank Negara from time to time plus the average spread of MYOR to OPR over the previous three publication days. For exceptional circumstances other than short-term disruptions, Bank Negara will exercise expert judgement and recommend an appropriate rate for publication.

KLIBOR discontinuation

It should be noted that Bank Negara will be discontinuing the publication of the two- and twelve-month KLIBOR tenors, which are the least referenced rates in the market for financial contracts, on 1 January 2023. The remaining one-, three- and six-month KLIBOR tenors (which are actively being used in the market) will be reviewed by Bank Negara in the second half of 2022. Any updates from the review will be communicated thereafter. The FMC will engage the International Swaps and Derivatives Association (ISDA) to ensure continuity of KLIBOR derivatives contracts in the event of a temporary or permanent discontinuation of KLIBOR publication.

^[1] FAST means the Fully Automated System for Issuing/Tendering which is a centralised system for the issuance of debt securities and to facilitate Bank Negara’s monetary policy operations.
^[2] RENTAS means the Real-Time Electronic Transfer of Funds and Securities System which is the real-time gross settlement system.

For further information, please contact Peter Godwin, Hannah Cassidy, Natalie Curtis, Sophie Lenox, John Patrick Angus, or your usual Herbert Smith Freehills contact.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.