MAS committee lists 3 recommendations on adjustment spreads for Legacy SOR contracts

The recommendation covers SOR contras that remain outstanding after 31 December 2024.

MAS' Steering Committee for SOR & SIBOR Transition to SORA (SC-STS) has listed three recommendations on adjustment spreads that will apply to legacy SOR business loans and derivatives that remain outstanding after 31 December 2024.

The adjustment spread is required for a legacy SOR contract in the wholesale market to be converted to a SORA-based contract, and is used to account for structural differences between SOR and Compounded SORA, such as the credit and term premia absent in SORA.

"In the past year, wholesale market participants were able to rely on a liquid SOR-SORA basis swap market to price these adjustment spreads," MAS said.

However, with the bulk of SOR-based derivatives transitioned to SORA, liquidity in the SOR-SORA basis swap market is declining, resulting in difficulties in pricing the adjustment spreads," the agency added.

To address this pain point, SC-STS has recommended the following:

The MAS Recommended Rate should be based on Compounded SORA, given that SORA is now the main interest rate benchmark for SGD financial markets;
Adjustment spreads within the MAS Recommended Rate should be derived from the historical median spread between SOR and SORA; and
Adjustment spreads for the period before end-2024 should be based on a linear interpolation between a reference spread based on a recent shorter historical median (e.g. 6M) of the SOR-SORA spread and the adjustment spread within the MAS Recommended Rate.

“The SC-STS’ consultation on the approach to set the MAS Recommended Rate will help to facilitate the industry’s final phase in transitioning out of legacy SOR contracts. This will provide more certainty to market participants with SOR contracts maturing after end2024, while supporting the active transition of legacy SOR contracts in the coming quarters ahead of the discontinuation of SOR in mid-2023," Wee Ee Cheong, Deputy Chairman and CEO of UOB Ltd, ABS Chairman and SC-STS Co-Chair, said.

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