ABS, SFEMC, SC-STS launch consultation paper on SIBOR to SORA transition

It aims to make SORA the main interest rate benchmark for SGD financial markets.

The Association of Banks in Singapore (ABS), the Singapore Foreign Exchange Market Committee (SFEMC), and the Steering Committee for SOR Transition to SORA (SC-STS) have issued a consultation report on discontinuing the SGD Singapore Interbank Offered Rates (SIBOR) and to shift into using the Singapore Overnight Rate Average (SORA).

In a press release, the consultation aims to encourage the use of SORA as the main interest rate benchmark for SGD financial markets. This shift will support the deepening of SORA markets, claiming to result in a more transparent loan market pricing for borrowers, and more efficient risk management for lenders.

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 transition testing was conducted from July 2019 to June to validate this new methodology.

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 six months, the SC-STS said they have made good progress in developing SORA markets. This included establishing key SORA market conventions and infrastructure, enhancing industry and system readiness, and piloting new SORA products that cater to customers’ needs.

The SIBOR transitional testing showed that whilst the resulting rate–termed the New Polled Benchmark–was relatively robust, it displayed noticeable differences in volatility and levels compared to SIBOR.

It said that it posed two issues: the more volatile nature of the New Polled Benchmark would make it more difficult for end-user acceptance, and 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 is said to 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, the report proposed for the transition to be done in a phases. 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 will be discontinued by end-2020 as earlier announced by ABS, whilst the report suggested that the 6M SIBOR to dissolve when or shortly after the 6M SOR is discontinued after end-2021. The discontinuation of 6M and 12M SIBOR is not expected to impact many customers given low market usage of these rates.

“Major financial centres globally will be moving onto a risk-free rate (RFR)-centred approach or increasing the use of their RFRs. The SORA-centered approach will better position SGD financial markets for the future. It will allow users of SGD floating rate products, including retail consumers and SMEs with products that reference SIBOR today, to benefit from a deeper and more efficient market, and greater transparency,” Samuel Tsien, ABS and SC-STS chairman, said.