BoT issuing THOR bonds next year

BoT issuing THOR bonds next year

New reference rate after LIBOR wrap-up

The Bank of Thailand plans to change its reference rate for the repurchase of corporate bonds. (Photo by Seksan Rojjanametakul)
The Bank of Thailand plans to change its reference rate for the repurchase of corporate bonds. (Photo by Seksan Rojjanametakul)

The Bank of Thailand plans to issue new bonds based on the Thai Overnight Repurchase Rate (THOR) next year, aiming to encourage the use of the new reference rate after the upcoming phase-out of the London Interbank Offered Rate (LIBOR).

THOR, in effect since April this year, was developed to replace LIBOR as the interest rate used as a reference for the repurchase of corporate bonds between banks.

The new rate will better reflect Thailand's financial market conditions and is in line with the central bank's policy interest rate and the country's money market, said Chayawadee Chai-anant, senior director of the financial markets department.

Britain's Financial Conduct Authority, the regulator overseeing LIBOR, announced in 2017 that all currency and term variants of LIBOR might be phased out after year-end 2021. The news led central banks worldwide to develop their owned home-based repo rates.

Underpinning mortgages, floating-rate bonds and other derivatives, LIBOR is used as a reference for US$350 trillion in financial products worldwide, according to the Nikkei Asian Review.

LIBOR was marred by scandal when banks were found to be falsely inflating or deflating their rates to profit from trades or enhance their credit worthiness. LIBOR manipulation dates back as far as 1991, according to the Financial Times.

Under the transition plan, the Bank of Thailand will stop using the Thai Baht Interest Rate Fixing (THBFIX), the existing reference rate which incorporates LIBOR for interest rate calculation, at year-end 2021 and adopt Fallback THBFIX, a collateral-based rate, from 2022 in order to compensate for those who have transactions referenced with THBFIX.

The use of Fallback THBFIX is expected to end in mid-2022. THOR will be fully adopted thereafter.

Ms Chayawadee said financial transactions, which are linked with the existing LIBOR and THBFIX, are mostly related to commercial loans, debentures and derivatives.

Such transactions mainly pertain to small and medium-sized enterprises (SMEs), large corporations and institutional investors, she said.

For the Thai financial market, there are about 50,000 contracts based on LIBOR and THBFIX, accounting for US$610 billion. Of the amount, $40 billion consists of loan contracts and the rest is from bonds and derivatives.

The switch from LIBOR and THBFIX to THOR will therefore have a limited impact on the overall domestic financial market.

"Business operators, especially SMEs, should be aware and prepare for the change," Ms Chayawadee said. "This will not lead to a significant change in financial costs for business operators and investors."

Financial institutions and business operators have moved to change the existing LIBOR-based contracts to THOR and offer new corporate loans based on the new interest rate.

On a separate issue, the central bank sought to clear up an ongoing misunderstanding that investors would no longer be able to use the baht for gold transactions this year.

As gold trading and gold investment cover online trading and the gold futures market, which are largely based on the US dollar, the central bank encourages investors to open foreign currency deposit accounts to settle their transactions, said Vachira Arromdee, assistant governor for financial market operations.

Investors can use the local currency to buy and sell gold bars and gold ornaments at gold shops as usual, Ms Vachira said.

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