Singapore to move ahead with Sora transition by year-end

_{Singapore will press ahead with its industry transition to the Singapore Overnight Rate Average (Sora) as the new interest rate benchmark by the end of this year, even as the discontinuation of a key global benchmark – the scandal-tainted London Inter-bank Offered Rate (Libor) – could be pushed to mid-2023. PHOTO: ST FILE}

Updated from : The Business Times, 3 Feb 2021

SINGAPORE will press ahead with its industry transition to the Singapore Overnight Rate Average (Sora) as the new interest rate benchmark by the end of this year, even as the discontinuation of a key global benchmark – the scandal-tainted London Inter-bank Offered Rate (Libor) – could be pushed to mid-2023.

The cessation of the widely-referenced USD Libor was earlier slated to be end-2021, but administrator ICE Benchmark Administration recently proposed to delay its discontinuation. This reprieve gives the market more time to prepare, as the global financial industry face challenges making the switch to other alternatives, especially with the Covid-19 pandemic delaying progress in the phasing out of Libor.

As it is, Libor affects trillions of dollars worth of derivatives, loans and bonds contracts.

In a speech on Tuesday, Leong Sing Chiong, deputy managing director (markets & development) at the Monetary Authority of Singapore (MAS), said that the proposed extension means that the Swap Offer Rate (SOR) will end when Libor ends in mid-2023. SOR is directly affected as it uses the USD Libor in its computation. This reprieve will allow about 70 per cent of existing stock of legacy SOR cash products, or about S$65 billion of bilateral and syndicated loans, to mature before the new deadline, he told the audience at a virtual event on the transition to Sora.

It also gives more time to actively transition legacy SOR contracts to Sora, and to deal with the “most challenging legacy transition issues”. This transition is expected to be completed by end-2022, Mr Leong said.

While the proposed extension for Libor discontinuation will allow more time for the transition of legacy contracts, the UK and US authorities have stressed that the use of Libor in new contracts is to be discontinued as soon as possible, said the steering committee overseeing the industry transition to Sora in a statement.

Victor Yong, rates strategist at UOB, noted that global regulators have been consistent in signalling that Interbank Offered Rate (IBOR) transitions should remain a priority.

“In this regard, Singapore’s decision to halt the issuance of new products that reference IBORs by the end of 2021 is in line with the objective of ensuring a smooth transition towards Sora as the new reference rate,” he said.

With Singapore still on track with its Sora transition by end-2021, several notable Sora initiatives will be expanded to facilitate price discovery across longer tenors and support further growth of Sora markets. Among them, the central clearing of Sora derivatives for transactions will be extended up to the 21-year tenor, from the five-year tenor currently.

The MAS Sora derivatives auction parameters will also be widened to cover more key industry participants, while transaction tenors will be extended to 20 years from the current five years.

Finally, the MAS Sora floating-rate notes (FRN) programme will be expanded to include one-year and two-year tenors, from the current six-month tenor.

Singapore is in the midst of its transition from SOR and the Singapore Interbank Offered Rate (Sibor) to Sora as the new interest rate benchmark. There is greater urgency to shift from SOR – the current benchmark used to price derivatives and business loans in the Republic – to Sora, given the supposed end of Libor by end-2021. Sibor, widely used in retail mortgages and corporate loans, will be discontinued by end-2024, in line with global reform efforts to improve the robustness and integrity of financial benchmarks.

Sora was found to be the “most robust and suitable alternative”, underpinned by a deep and liquid overnight funding market.

On Tuesday, the committee said it will set out guidance on timelines to cease the use of SOR in new derivatives contracts, as well as to stop the use of the Sibor in new loan contracts, to be finalised in the coming months.

It also reaffirmed its earlier industry guidance for lenders and borrowers to cease the use of new SOR-linked cash market products by end-April 2021. With new products increasingly referencing Sora, this will support further deepening of liquidity in Sora derivatives, as market participants manage and hedge interest rate risks, said the committee.

Samuel Tsien, chairman of the Association of Banks in Singapore and the steering committee, said: “The likely extension of SOR’s end date to mid-2023 due to the extension of USD Libor cessation does not derail the industry’s efforts to develop a Sora-centred interest rate market.”