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Bank Negara Malaysia Launches Landmark Malaysia Islamic Overnight Rate (MYOR-i), the World’s First Islamic Benchmark Reference Rate

Bank Negara Malaysia Launches Landmark Malaysia Islamic Overnight Rate (MYOR-i), the World’s First Islamic Benchmark Reference Rate 

Bank Negara Malaysia (BNM) launched the landmark Malaysia Islamic Overnight Rate (MYOR-i) on 25 March 2022, thus becoming the first central bank to issue a transaction-based Islamic benchmark rate in the world.

“The introduction of MYOR-i,” explained Bank Negara, “will spur the development of innovative Sharia’a-compliant financial products which will further deepen Malaysia’s Islamic financial market. It will also reinforce a holistic Shariah-compliant ecosystem and enhance best market practices and standards.”

It comes three months after the phased transition away from LIBOR (the London Interbank Offered Rate) as the pre-eminent interest rate benchmark by 31 December 2021, and its replacement by overnight risk-free rates (RFRs). This transition to alternative reference rates (ARRs) over the next year represents one of the biggest changes to the financial services industry ever.

“With an estimated US$370 trillion of LIBOR-related activity globally, covering loans, bonds/Sukuk, derivatives, working capital and trade products,” observes international law firm Clyde & Co., “the LIBOR transition will significantly affect how contracts are priced and how risk is managed by market participants, lenders, borrowers and guarantors which use/d LIBOR as their operating model.”

LIBOR cessation raises important issues for the global Islamic finance industry, projected to rise to US$4.94 trillion in 2025. Islamic financial institutions will replace LIBOR with the benchmark rate designated, nominated or recommended by the administrator of LIBOR or Applicable Regulatory Body in their respective jurisdictions.

BNM launched the Malaysia Overnight Rate (MYOR) last September as the new ARR for the conventional financial sector in the country after a robust market consultation which started in January 2021. BNM gave notice that it was in the process of launching an alternative Islamic reference rate that adheres to global standards for financial benchmarks by the First Half of 2022.

As such, the new MYOR-i replaces the existing Kuala Lumpur Islamic Reference Rate (KLIRR), which will be discontinued with immediate effect. MYOR-i is developed in accordance with the Principles for Financial Benchmarks and has been approved as Sharia’a-compliant by BNM’s Shariah Advisory Council (SAC). The Principles for Financial Benchmarks is developed by the International Organization of Securities Commissions (IOSCO) and provides an overarching framework of principles for benchmarks used in financial markets.

BNM collaborated with the Financial Markets Committee (FMC) in developing MYOR-i, which comprises representatives from the central bank, financial institutions, corporations, financial service providers and other institutions which have prominent roles or participation in the financial markets, the Islamic Market Technical and Development Committee (IMTDC) of the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM) and the Financial Markets Association Malaysia (FMAM).

The key features and governance standards of MYOR-i include:

  1. MYOR-i is administered and calculated by BNM. It is a volume-weighted average rate of return on Sharia’a-compliant unsecured overnight Ringgit interbank transactions. This includes BNM’s Islamic overnight monetary operations but excludes Standing Facilities.
  2. MYOR-i is currently based on the Commodity Murabahah instrument. New Sharia’a-compliant instruments may be included in the future.
  3. MYOR-i for any given Kuala Lumpur business day will be published on BNM’s website at 12 p.m. on the following business day.
  4. BNM will conduct periodic reviews of MYOR-i to ensure that it remains robust and representative of conditions in the underlying market.

BNM is confident that the establishment of MYOR-i as the Islamic benchmark rate “will be a catalyst in driving Islamic financial product innovation and creating transparency for market players to negotiate and standardise their financial contracts, thus achieving efficient pricing across all financial instruments. This will help to deepen the onshore Islamic financial market and enhance its role in financing real economic activities in Malaysia.”

MYOR-i is calculated as the volume-weighted average rate of return on Shariah-compliant unsecured overnight MYR interbank placements, rounded to two decimal places. Eligible transactions comprise “unsecured placements between interbank institutions (either brokered or direct/bilateral)”; and “BNM’s Islamic overnight monetary operations, which comprise tenders conducted through FAST or manual operations, and direct overnight placements between the Bank and interbank institutions, excluding Standing Facilities.”

To ensure MYOR-i is reflective of the latest conditions and developments in the Islamic financial market, new Eligible Instruments may be added in the future, subject to the instruments being approved by the BNM’s SAC; and the instruments meet all requirements for MYOR-i as assessed by the Bank, including but not limited to liquidity, data quality and robust governance standards.

The MYOR- i documents are applicable to all interbank institutions in Malaysia and pursuant to sections 152 and 155 of the Islamic Financial Services Act 2013 (IFSA) and section 116 of the Development Financial Institutions Act 2002 (DFIA).

Interbank institutions refer to the following institutions which are approved by BNM to deal in the interbank market, whether acting as principals or agents in the wholesale financial markets. They include licensed Islamic banks under the IFSA; licensed banks and licensed investment banks approved under section 15(1)(a) of the FSA to carry on Islamic banking business; prescribed development financial institutions approved under section 33B(1) of the DFIA to carry on Islamic financial business; and any other interbank institution which is a direct participant of the Real-Time Electronic Transfer of Funds and Securities System (RENTAS);

In the event of disruption to the normal production of MYOR- i, Bank Negara shall calculate MYOR- i based on the average MYOR- i, adjusted for any changes in the Funding Facility profit rate, over the previous three publication days. For exceptional circumstances, the Bank shall exercise expert judgement and recommend an appropriate rate.

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