(SEPT 27): Malaysia's central bank said on Friday it plans to fully transition to a new interbank rate used to price new financial contracts within three years.

The plan is to begin publishing the new Malaysia Overnight Rate (MYOR) next year, a proposed roadmap by Bank Negara Malaysia (BNM) showed. Exposure to the existing Kuala Lumpur Interbank Offered Rate, or KLIBOR, should be gradually reduced and its use in new products is to stop by 2027.

Given KLIBOR’s potential cessation, market participants should consider using MYOR or its Islamic counterpart MYOR-i for new financial contracts to avoid future transition issues, BNM said. Banks should also proactively engage with customers and promote their usage, it said.

The introduction of MYOR in 2021 as the new alternative reference rate for Malaysia comes in the wake of widespread rate rigging uncovered by authorities going back more than a decade ago.

The scandal involving London Interbank Offered Rate triggered investigations across the world from US to Singapore, prompting a shift towards more robust benchmarks based on actual transactions rather than the ones submitted and set by the banks themselves.

However, the continued use of KLIBOR has hindered the adoption of MYOR and there are still legacy contracts totalling RM929 billion at the end of 2023, including derivatives, bonds, and loans. Nearly 90% of the exposure to KLIBOR relates to derivatives, while only about 7% relate to bonds and loans.

BNM is now seeking feedback on the proposed permanent cessation of KLIBOR introduced back in 1987 and the full transition to MYOR away from the multiple-rate approach.

“This is intended to preserve confidence in the reliability and robustness of financial benchmarks used in the domestic financial market,” BNM added.

Feedback must be submitted by Oct 27, 2024.