Tuesday, July 31, 2012

Malaysia's Klibor unlikely to be manipulated

PETALING JAYA: The chances of interest rates on the Kuala Lumpur Interbank Offered Rate (Klibor) being manipulated is quite remote compared with interbank offered rates in other jurisdictions as it is closely tied to the overnight policy rate (OPR) coupled with the ample liquidity in the banking system, according to industry observers.

Source from (The Star Online): http://biz.thestar.com.my/news/story.asp?file=/2012/7/31/business/11759438&sec=business
Published: July 31, 2012

Nevertheless, they agree that continuous monitoring of the Klibor and whatever rules that may be implemented to govern it is essential to ensure the effectiveness and integrity of the local interbank market.

Ernst & Young Malaysia partner, assurance (financial services), Chan Hooi Lam said the possibility of Klibor being open to rigging was lower compared to, for example, the London interbank offered rate (Libor), as the former was closely tied to the OPR which was determined and set by Bank Negara after considering liquidity and other related conditions.

“As the central bank is also able to inject and extract liquidity into and from the market using its available tools, the risk of distortion to the rate is lower. Libor, on the other hand, is determined in London based on the quotes provided by 18 large banks, the outliers (on the higher and lower ends) are excluded and the Libor is generally determined by averaging the rests.

“This relatively liberal process of fixing the rate requires high ethical standard observed by the banks. It is possible that this self-regulated process is exploited for personal purposes (not only by the banks but also the key personnel of the banks) without appropriate check and balance, including appropriate supervisory oversight from the regulators,'' he told StarBiz.

To further improve and enhance the interbank lending market, the Financial Markets Association of Malaysia in consultation with Bank Negara is looking at drafting rules which are expected to be out over the next few weeks.

Bloomberg in a recent report cited the association's president Datuk Lee Kok Kwan as saying that one of the proposals would be that the 12 banks, whose estimates were used to compile the Klibor, would be required to lend funds to other banks at that day's rate during a five-minute period from 11am every day.

The news agency also said the new rules would stipulate a spread between Klibor and the rate that the 12 participating banks must pay for deposits during that five-minute window.

Klibor is determined by a daily poll carried out on behalf of the association that asks 12 banks to estimate how much it would cost to borrow from each other. The highest and lowest submissions are excluded, and an average of the remaining 10 entries are calculated to set the rate at 11am local time.

Asked whether Bank Negara would review the setting up of interbank rate in Malaysia in line with what Singapore had recently done amid rate-rigging of the Libor in other jurisdictions, the central bank said in a statement: “We have not seen any problems associated with the Libor issue occurring in the Klibor market. Nevertheless, we can learn from the experience of other markets and further strengthen the processes. Bank Negara supports the banking industry's efforts to further enhance the Klibor setting process.”

Meanwhile, an industry observer felt there was no rigging of the Klibor as the banking system was flush with ample liquidity and was well capitalised. Furthermore, unlike some other countries, he added, Bank Negara could trace the lending and borrowing between banks that constituted the Klibor.

Chan said the lesson learnt from the Libor incident should not be taken lightly, adding that it should serve as a reminder that there might not be a permanent and perfect model in fixing a benchmark interest rate, but continuous monitoring and review of the process would ensure integrity of the resulting benchmark rate.

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