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10 Sep 2020

Econ Digest

THOR: the new reference rate that business operators should know

           

The end of the London Interbank Offered Rate (LIBOR) began about eight years ago when financial regulators in the US and Europe discovered that certain financial institutions deliberately reported distorted and false LIBOR rates for certain benefits. The incident severely damaged the credibility of the LIBOR. Although relevant parties worked hard to improve the compilation mechanism of LIBOR to establish transparency and restore credibility, their transaction volume continued to decline. Finally, the UK financial regulator announced that banks will no longer be required to submit information for the compiling of LIBOR from 2022 onwards.

 

One of the main tasks of financial regulatory authorities in many countries in preparation for the permanent cessation of LIBOR is to develop a new interest rate benchmark to replace LIBOR. Currently, the US, UK, Switzerland, Eurozone and Japan have established overnight repurchase reference rates for their currencies. For Thailand, the Bank of Thailand (BOT) has also developed a new overnight repurchase rate called THOR (Thai Overnight Repurchase Rate), besides the Bangkok Interbank Offered Rate (BIBOR) and Thai Baht Interest Rate Fixing (THBFIX) which are both key reference interest rates in Thailand’s money market.  

 

The advantage of THOR is that it can better reflect the liquidity of the Baht in the Thai money market and move in line with Thailand’s policy interest rates, compared with THBFIX which fluctuates with the liquidity of the US dollar and is affected by the termination of LIBOR. In addition, THOR is calculated based on the actual volume of transactions in the Thai private repurchase market (more than THB100 million per day), differing from BIBOR, which is obtained through daily inquiries with banks while there are few transactions that refer to BIBOR.

               

For business sector, large companies may be more familiar with THBFIX while SMEs are mostly familiar with the minimum loan rate (MLR). Therefore, businesses, especially large companies, shall review loan contracts that refer to THBFIX and contact financial institutions to revise THBFIX-based loan contracts in order to change to Fallback THBFIX which will be the substitute reference rate for THBFIX from 2022 onwards after the termination of LIBOR. However, the substitute will only be effective for existing loan contracts that have not yet expired. 

               

           In addition, businesses must prepare for and become familiar with THOR, which will be used as the reference interest rate for new loan contracts or financial products. It is expected that the guidelines for the development of THOR will be gradually issued over the next 1-3 years from this point onwards. However, its popularity will hinge on a concerted effort by all parties concerned, including the BOT, government agencies, financial institutions and the business sector.


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Econ Digest