3-Month KLIBOR

WHAT IS KLIBOR?

The underlying instrument of the country’s first interest rate derivatives contract, the FKB3, is the 3-Month Kuala Lumpur Interbank Offered Rate (KLIBOR). FKB3 was launched in May 1996.

Defining KLIBOR

The local interbank money market is for short-term deposits and borrowings between banks and other financial institutions. KLIBOR is the short-term interest rate announced and published by the central bank, Bank Negara Malaysia (BNM), every market day at 11:00 am after obtaining quotes from locally-incorporated banks. Rates are contributed by 12 banks designated by BNM. The final fixing rate is derived by eliminating the highest and lowest rates and averaging the remaining 10 rates. The KLIBOR rates give market participants an indication of market rates for the trading day. It is a generally accepted benchmark for short term interest rates.

What is FKB3?

FKB3 is a derivatives contract that allows the seller to deliver and the buyer to receive the KLIBOR at a future date. However, upon expiry, no physical delivery takes place as the contract specification provides for settlement on a cash basis. The final settlement value is obtained from Reuters (an information service provider) at 11:00 a.m. on the final trading day.

Prices of FKB3 are quoted in index terms, that is 100 minus the implied interest rate. This means that there is an inverse relationship between the derivatives price and interest rate. Hence, if the implied interest rate is 1.50%, then the derivatives price is 98.50.

Market participants can use FKB3 for trading, hedging and arbitraging strategies and FKB3 prices are determined by market supply and demand.