‍Introduction

Following the LIBOR scandal in 2012, many countries and financial centers have taken steps to transition their benchmark interest rates from Interbank Offered Rates (IBOR) to more objective Risk-Free Rates (RFR). IBOR rates are generally set by a rate setting body, to which financial institutions would submit the interest rates which such financial institutions have agreed (or theoretically agree) to lend to one another, for collation, setting and publication by the rate setting body.

Generally, RFR are set based on data on interest rates that are transacted in an open and liquid financial market, derived from actual financing and derivatives transactions. For such reason, RFR are generally seen to be more robust, more reflective of the actual market, and less susceptible to manipulation.

BNM Discussion Paper on KLIBOR Transition

On 27 September 2024, Bank Negara Malaysia (BNM) issued a Discussion Paper on the proposed full transition from the Kuala Lumpur Interbank Offered Rate (KLIBOR) to the Malaysian Overnight Rate (MYOR) and Malaysian Islamic Overnight Rate (MYOR-i), and the cessation of KLIBOR.

The issuance of the Discussion Paper marks the first public concrete step taken by BNM to transition Malaysia’s interest rate benchmark from KLIBOR, which has been the benchmark for Malaysian interbank lending rates since 1987, to MYOR/MYOR-i, which promises to be a more robust benchmark. MYOR is the volume-weighted average rate of unsecured overnight Ringgit interbank transactions. It was introduced by BNM in 2021 and has been quoted in parallel with KLIBOR since its introduction.

The transition from KLIBOR to MYOR/MYOR-i mirrors developments which have been taking place over the past decade in major financial centers around the world, such as:

• In the United Kingdom, LIBOR has ceased to be used since 2023. Banks have largely transitioned to RFR such as the Secured Overnight Financing Rate (SOFR) and Sterling Overnight Index Average (SONIA).
• In the United States, LIBOR has ceased to be used since 2023 and the main US Dollar interest rate benchmark is now the SOFR.
• In Singapore, the Singapore Interbank Offered Rate (SIBOR) will be discontinued by 31 December 2024 and be taken over by the Singapore Overnight Rate Average (SORA).

Proposed Timeline for KLIBOR Transition – a 3-year Roadmap

The Discussion Paper proposes a 3-year roadmap, to allow ample opportunity for Malaysian market participants to prepare for and support the transition to new financial products referencing MYOR/MYOR-i, with actual cessation of KLIBOR in 2028.

During the 3-year transition, market participants who continue to enter into KLIBOR transactions should draft appropriate transition provisions and fallback positions into their contracts, to take into account the impending cessation of KLIBOR.

Legacy KLIBOR Transactions and Contracts

Legacy contracts are transactions and contracts that reference an KLIBOR which extend past the KLIBOR cessation date. Effective management of these transactions and contracts are crucial to mitigate market disruption in the event of KLIBOR’s cessation.

The Discussion Paper sets out two main approaches to address legacy transactions and contracts:

• Active transition – where the parties actively amend legacy contracts to switch the reference away from KLIBOR to MYOR/MYOR-i ahead on the cessation date.
• Fallback provisions – where parties find difficulty in implementing active transitions, fallback provisions may be incorporated into legacy contracts. Fallback provisions govern scenarios where an IBOR has permanently ceased. Generally, fallback provisions specify the trigger event, the replacement rate and the adjustments needed to address the structural difference between the replacement rate and the IBOR. Fallback provisions will only apply following the actual cessation of an IBOR.

Feedback Deadlines

Market participants may submit feedback on the Discussion Paper to BNM electronically, by no later than 27 October 2024, using the hyperlinks set out in the Discussion Paper, which may be accessed here.

Conclusion

Sufficient and timely efforts by market participants are crucial to manage the risks of the transition from KLIBOR to LIBOR.

Malaysia has the advantage of observing IBOR transition processes in other jurisdictions such as the United Kingdom, United States, Singapore, Hong Kong and Japan. Hopefully, this will ease the transition process as many of the issues would have been fleshed out and dealt with in those jurisdictions.

The KLIBOR transition process will not only involve banks and financial institutions, but also their customers and borrowers. It is expected that the banks and financial institutions would normally take the lead in the transition process, but customers and borrowers (especially those that have large financing facilities and derivatives transactions pegged to KLIBOR) will have vital roles to play as well.

Based on the experience from other jurisdictions, these are the general steps which market participants have to go through when faced with a potential cessation of KLIBOR:

1. Understand the regulatory changes and their impact on outstanding financing and derivatives contracts and transactions;
2. Review all outstanding financing and derivatives contracts and determine the best way to transition from KLIBOR;
3. Formulate an implementation plan to amend all outstanding KLIBOR-denominated contracts and transactions;
4. Identify the group companies and entities which would be affected by the implementation plan;
5. Identify the counterparties to such contracts and transactions;
6. Negotiate the revised contracts and transactions with the identified counterparties; and
7. Identify, amend and upgrade (where necessary) all affected systems and processes, which may include IT, accounting, compliance and other systems and processes.

There would also be tax, accounting and legal issues to consider. Early involvement of the market participant’s lawyers and legal departments in the KLIBOR transition process would be critical in preventing disputes, by ensuring all terms are clear and compliant with regulatory standards.

If you have any questions or require any additional information, please contact  Loo Tatt King or the partner you usually deal with in Zaid Ibrahim & Co. (in association with KPMG Law).

This alert is for general information only and is not a substitute for legal advice.

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