A joint consultation report is recommending that the Singapore interbank offered rate (SIBOR) be discontinued in three to four years, to be replaced by the Singapore overnight rate average (SORA) as the main interest rate benchmark for financial markets in the city-state.
The report, compiled by the Association of Banks in Singapore (ABS), the Singapore Foreign Exchange Market Committee (SFEMC) and the Steering Committee for SOR Transition to SORA (SC-STC), says the proposed adaptation will provide a more transparent loan-market pricing for borrowers, a deepening of SORA markets and more efficient risk management for lenders.
SORA was identified in August 2019 as the replacement interest rate benchmark to the Singapore dollar swap offer rate (SOR), which will be discontinued, along with the US dollar LIBOR (London interbank offered rate), after end-2021.
SIBOR, is used in home loans, commercial and syndicated loans, trade financing and working capital financing. At present, in Singapore, about a quarter of borrowers' housing loans are pegged to either the SIBOR or SOR.
The report comes in the wake of global efforts on interest rate benchmark reform and action by the ABS and SFEMC who initiated a reform of SIBOR and an industry transition from SOR to SORA.
The ABS and SFEMC consulted on a new waterfall methodology for SIBOR in December 2017, and transition testing was conducted from July 2019 to June 2020 to prove this new methodology.
Over the past 6 months, the SC-STS says that it has progressed 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.
The SIBOR transitional testing showed that while the resulting rate – named the ‘new polled benchmark’ – was comparatively robust, it showed noticeable differences in volatility and levels compared to SIBOR.
This 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.
Consequently, 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 Singapore dollar financial markets to shift to a SORA-centered Singapore dollar interest rate.
This will avoid market fragmentation, facilitate transparency and easier comparison of loan pricing, and promote the development of deep and efficient Singapore dollar financial markets.
To ensure a smooth transition for existing SIBOR users, the report proposes for the transition to be done in a phased approach.
“The adoption of SORA by Singapore provides the local financial market with a truly domestic floating rate benchmark, which is not derived from Libor, an external benchmark,” says Jose Luis Yepez, Asia-Pacific head of rates and currencies trading, Citibank, in conversation with The Asset. “I expect this new benchmark will deepen the rates markets in Singapore and provide users of this financial tool with a more efficient and transparent mechanism to manage market risk. This transition process will not be without challenges, but I can envision a smooth transition."
Major financial centres globally will be moving to a risk-free rate (RFR)-centred approach or increasing the use of their RFRs, notes Samuel Tsien, chief executive officer of OCBC Bank and ABS, and chairman of SC-STS. “The SORA-centered approach will better position Singapore dollar financial markets for the future,” he states. “It will allow users of Singapore dollar floating rate products, including retail consumers and SMEs [small and medium-sized enterprises] with products that reference Sibor today, to benefit from a deeper and more efficient market, and greater transparency.”