Bank Negara launches new alternative reference rate

KUALA LUMPUR: Bank Negara has launch Malaysia Overnight Rate (MYOR) as an alternative reference rate (ARR), providing financial institutions with a wider array of hedging instruments that will support additional risk management strategies.

The introduction of ARRs was aimed to facilitate usage of benchmark rates that are more robust and based upon transactions in active, liquid markets. the central bank said in a statement today.

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 Financial Stability Board (FSB) and adopted by many other jurisdictions," Bank Negara said.

Globally, ARRs are being introduced to improve the integrity of financial benchmark rates 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 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 central bank said.

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

• The MYOR will be administered and calculated by Bank Negara as the volume- weighted average rate of unsecured overnight ringgit interbank transactions, including the Bank Negara’s overnight monetary operations (excluding Standing Facilities)

• The publication of MYOR for a given Kuala Lumpur business day will be at 10am on the following business day on the Bank’s website.

• Bank Negara will conduct periodic reviews of the MYOR to ensure it remains robust and representative of conditions in the underlying market.

Bank Negara will also discontinue the publication of the 2- and 12-month KLIBOR tenors, which are the least referenced rates in the market for financial contracts, on Jan 1, 2023.

The remaining one-, three- and six-month KLIBOR tenors, which continue to reflect an active underlying market, will be reviewed 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.

As part of ongoing efforts to further develop the Islamic financial market, a new Islamic benchmark rate is being developed in collaboration with industry associations, with the target to replace the Kuala Lumpur Islamic Reference Rate (KLIRR) by the first half of 2022.

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