Ravi Chandran
The Association of Banks in Singapore (ABS) gave SORA usage a bump-up by announcing the timeline for cessation of SOR derivatives and SIBOR-linked products. It said this move will reinforce the shift to a SORA-centered SGD interest rate landscape.
The Steering Committee for SOR & SIBOR Transition to SORA (“SC-STS”) in March published a report announcing new industry timelines to cease issuance of SOR derivatives and SIBOR-linked financial products by end-September 2021. To reinforce the shift to a SORA-centered SGD interest rate landscape, SC-STS had, in February 2021, outlined plans to provide additional guidance on these cessation timelines.
The new timelines which better prepares financial institutions here for SORA usage specify that by end-September 2021:
- All financial institutions and their customers should cease usage of SOR derivatives in new contracts, except for specified purposes relating to the risk management and transition of legacy SOR positions to SORA. This complements existing industry timelines to reduce the stock of outstanding SOR products ahead of SOR’s discontinuation in mid-2023, including to cease usage of SOR in new cash market products by end-April 2021, and for all banks to substantially reduce their gross exposures to SOR derivatives by end-September 2021.
- All financial institutions and their customers should cease usage of SIBOR in new contracts. This is consistent with the preparation for the discontinuation of the less widely used 6-month SIBOR by March 2022, and the widely used 1-month and 3-month SIBOR benchmarks by end-2024. There is no immediate impact on existing SIBOR loans. Banks will reach out to their customers at the appropriate time and provide sufficient notice for customers to consider switching these loans to other alternative loan packages.
In preparation for this shift to SORA usage, most Domestic Systemically Important Banks (DSIBs) are already offering a range of SORA products, while other banks are expected to do so by end-April 2021.
While SOR remains available till mid-2023, liquidity in SOR derivatives markets has started to decline and this trend will likely accelerate with the new cessation timeline on the use of new SOR derivatives.
SC-STS therefore strongly encouraged market participants to take active steps to transition their SOR derivatives, loans and other contracts to SORA in 2021, when the liquidity conditions in the SOR-SORA basis swap markets is still expected to remain conducive. Market participants that are unable to actively transition contracts by end-2022 should incorporate appropriate fallback arrangements and expect increasing difficulties in managing such positions as liquidity in SOR markets declines further, advised SC-STS.
SC-STS has also reviewed its guidance around Fallback Rate (SOR), which was designed only as an interim fallback solution for contracts that cannot be transitioned to SORA before SOR ceases. It was previously announced that Fallback Rate (SOR) would be published for a period of about three years following the expected discontinuation of SOR after end-2021 (i.e. till end-2024).
With SOR now set to be discontinued later in mid-2023, more existing legacy SOR transactions would be able to mature and the need for extended Fallback Rate (SOR) arrangements would be much lower. Hence, SC-STS has decided to retain the original end-2024 end-date for Fallback Rate (SOR).
Mr Samuel Tsien, Group CEO of OCBC Bank, and ABS and SC-STS Chairman, said, “The industry has made significant progress over the past year to develop new SORA markets, including usage of SORA in a wide variety of cash market products and growing adoption in derivatives. Banks have been ramping up their preparations for the cessation of SOR usage in cash market products by end-April this year, and with that a shift to wider SORA usage.”
“With this latest move by the industry committing to cease issuance of SOR derivatives and SIBOR-linked products by end-September 2021, we look forward to a single SORA-centered interest rate benchmark regime, which will be beneficial to both customers and financial institutions for a more transparent and efficient market.”
Mr Leong Sing Chiong, MAS Deputy Managing Director and SC-STS member, said, “MAS supports SC-STS’ recommendations to further reduce reliance on SOR and SIBOR. Market participants should take active steps to shift both new use and legacy exposures to SORA, so as to minimise financial and operational risks as liquidity in SOR derivatives markets is expected to decline in 2022.”
“Financial institutions and their customers should make good use of the current window of opportunity to actively transition from SOR to SORA.”
Mr Paul Ho, chief officer at iCompareLoan, said: “iCompareLoan has a certified FinTech status recognised by the Monetary Authority of Singapore (MAS) as part of the Financial Sector Technology and Innovation (FSTI) Digital Acceleration Grant (DAG) program.”
“For us it is important to make use of the current window of opportunity to shift away from SORA derivatives and SIBOR-linked products to better SORA usage. This move will also benefit our customers.”
In July last year, SC-STS recommended the discontinuation of the SIBOR in three to four years, and a shift to the use of the SORA as the main interest rate benchmark for SGD financial markets. This shift will support the deepening of SORA markets, result in more transparent loan market pricing for borrowers, and more efficient risk management for lenders, said SC-STS.
Arising from global efforts on interest rate benchmark reform, ABS and SFEMC earlier initiated a reform of SIBOR and an industry transition from SOR to SORA.
ABS and SFEMC consulted on a new waterfall methodology for SIBOR in December 2017, and transitional testing was conducted from July 2019 to June 2020 to validate this new methodology. Under this new methodology, the underlying market for SIBOR was expanded beyond the term unsecured interbank funding market, to include wholesale funding transactions, such as large-sized corporate deposits.
Concurrently, SORA was identified in August 2019 as the replacement interest rate benchmark to the SGD Swap Offer Rate (“SOR”), which will be discontinued together with the USD LIBOR benchmark after end-2021 . Over the past 6 months, the SC-STS has made good progress in developing SORA markets. This includes establishing key SORA market conventions and infrastructure, enhancing industry and system readiness, and piloting new SORA products that cater to customers’ needs.
UK authorities have highlighted that it would not persuade or oblige panel banks to remain on the LIBOR panel after end-2021. As SOR relies on USD LIBOR in its computation methodology, the likely discontinuation of LIBOR after end-2021 directly impacts the future sustainability of SOR.
The SIBOR transitional testing showed that while the resulting rate – termed the New Polled Benchmark – was relatively robust, it displayed noticeable differences in volatility and levels compared to SIBOR. This posed two issues: (a) the more volatile nature of the New Polled Benchmark would make it more difficult for end-user acceptance, and (b) the different characteristics of the New Polled Benchmark will mean that it cannot directly replace SIBOR in existing financial contracts.
Hence, the Report assessed that, rather than implementing two transitions to separate interest rate benchmarks (i.e. SOR-to-SORA, SIBOR-to-New Polled Benchmark), it will be beneficial in the long run for SGD financial markets to shift to a SORA centered SGD interest rate market (“SORA-centered approach”). This will avoid market fragmentation, facilitate transparency and easier comparison of loan pricing, and promote the development of deep and efficient SGD financial markets.
To ensure a smooth transition for existing SIBOR users, the Report proposes for the transition to be done in a phased approach. Transition of contracts referencing the more widely-used 1M and 3M SIBOR will take place after the industry has substantially completed the transition from SOR to SORA. Thus, 1M and 3M SIBOR will only be discontinued in three to four years, to provide sufficient time for the transition of existing SIBOR contracts.
The 12M SIBOR was discontinued at the end-2020 as earlier announced by ABS, while the Report proposes to discontinue the 6M SIBOR when or shortly after the 6M SOR is discontinued after end-2021. Currently, 6M SIBOR is relied upon in the methodological fallback of 6M SOR. The discontinuation of 6M and 12M SIBOR is not expected to impact many customers given low market usage of these rates.
