KUALA LUMPUR: Bank Negara Malaysia plans to fully transition to a new interbank rate for pricing financial contracts over the next three years.
Bank Negara said it will begin publishing the new Malaysia overnight rate (MYOR) next year, gradually reducing reliance on the existing Kuala Lumpur Interbank Offered Rate (Klibor).
The central bank aims to cease its use in new financial products by 2027.
"Given Klibor's potential cessation, market participants should consider using MYOR and Malaysia Islamic overnight rate (MYOR-i) for new financial contracts to avoid future transition issues.
"Banks should also proactively engage with customers to educate them on MYOR and MYOR-i and promote their usage."
For market participants who prefer to continue using Klibor, Bank Negara said it is essential to include appropriate contractual fallbacks to mitigate the risk of disruption in the event of the cessation, it said in its discussion paper published today.
Bank Negara introduced the MYOR in 2021 and MYOR-i in 2022 as the new alternative reference rates (ARRs) amid global moves towards more robust financial benchmarks.
It said this multiple-rate approach, where MYOR and MYOR-i coexist with the Klibor, offers market participants flexibility in choosing the most suitable rate for their needs.
According to Bank Negara, the proportion of term tenors in the interbank volume has gradually declined in recent years, driven by a shift in banks' preference in favour of the overnight tenor.
A recent survey of Klibor submitters indicated an increasing reliance on non-transaction-based inputs, which are generally considered as less robust than actual transactions.
Bank Negara noted that in contrast, MYOR and MYOR-i are based on a large pool of overnight transactions.
It said efforts were undertaken to facilitate and encourage greater activity in the MYOR and MYOR-i market, however, the coexistence of Klibor was observed as a factor contributing to the slower adoption of MYOR and MYOR-i.
"In line with the global financial benchmark reform movement, many jurisdictions are actively transitioning towards robust financial benchmarks anchored by deep and liquid markets.
"To ensure the robustness of domestic financial benchmark rates, Bank Negara now seeks to consult the industry on a full transition from Klibor to MYOR and MYOR-i and the cessation of Klibot, guided by the publication of an industry transition timeline," it added.