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Singapore sees broader transition to new rates benchmark next year

SINGAPORE expects to see a fuller transition to the use of its alternative benchmark rate, the Singapore Overnight Rate Average (SORA), starting next year, with key banks in the Republic ready to trade SORA derivatives that should boost market participation and liquidity.

Banks will pilot more new SORA products in the second half of 2020, with the goal of a "broader base" transition to this benchmark rate starting in 2021, the Association of Banks in Singapore (ABS) said in a statement on Monday.

ABS said there has been "significant progress" on this transition front.

Besides having major banks ready to trade SORA derivatives, the existing Singdollar (SGD)-denominated debt securities referencing the Swap Offer Rate (SOR) - the rate that SORA will replace - have been identified, said ABS.

ABS did not disclose the size of this debt market that will be impacted, but said that the potential impact of the transition on valuation, accounting and tax treatment of these instruments are being studied at this point.

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As for existing SOR-referenced loans, ABS said a "transition pathway" for existing SOR-referenced business and syndicated loans is being mapped out. Meanwhile, OCBC and CapitaLand in June inked Singapore’s first loan facility agreement referencing the SORA, for a S$150 million three-year corporate loan. 

An industry-standard guide to contractual provisions, used to transition impacted debt securities and loans to have them refer to SORA, should be finalised by the third quarter of this year. Such provisions to smooth out the transition to alternative benchmark rates for contracts based off existing rates that are due for replacement are known globally as the "fallback replacement language".

The SOR - a benchmark used to price derivatives and business loans here - will be replaced given the end of scandal-tainted Libor after 2021, as the Singapore rates benchmark uses the US dollar (USD) Libor in its computation. The SOR represents an implied interest rate on a foreign exchange (FX)-swap basis, as calculated from actual transactions in the USD/SGD FX swap market.

The Libor - short for the London Interbank Offered Rate - has been used as a reference rate for loans and derivatives. But the UK Financial Conduct Authority in 2017 said it would abandon Libor, the interest-rate benchmark on which trillions of transactions globally are priced.

This followed a rigging scandal in 2012, which led to billions in fines levied on banks for attempting to manipulate the Libor, rocking the credibility of the major benchmark.

The manipulation concerns ran alongside the problem that while Libor is the dominant benchmark for pricing of loans and derivatives, it has not reflected many actual transactions in the post-crisis period.

The situation left Libor vulnerable to the manipulation that occurred in 2012.

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