Panel advises wholesale market to replace SOR exposures by year-end, retail market by October 2022

WHOLESALE market participants are being encouraged to "substantially shift" out of any legacy swap offer rate (SOR) exposures by Dec 31, while the retail market is expected to take a longer transition period from September till October 2022.

These timelines were among the key recommendations released by the Steering Committee for SOR and Sibor Transition to Sora (SC-STS) on Thursday, to facilitate the industry-wide transition of financial contracts away from SOR.

In its report, the SC-STS encouraged wholesale market participants to replace their SOR exposures using the SOR-Sora basis swap market, which provides market-determined pricing to exchange a stream of SOR payments to Sora, plus an adjustment spread.

The SOR-Sora basis swap market is expected to be liquid initially, as the industry makes the transition. But this liquidity will lessen next year, with potentially less favourable rates. The SC-STS has thus recommended against taking a "wait-and-see" approach to contract conversion.

Meanwhile, corporate borrowers and lenders should refer to the SOR-Sora basis swap mid-rate to start their conversion discussions. It also recommends a direct transition from SOR to Sora over relying on the fallback rate for SOR, an interim rate that will be discontinued after Dec 31, 2024.

For the retail loan market, however, SC-STS recommended a simplified transition approach, under which banks would make available a Sora to their retail customers at no additional fee or lock-in. This package, to be made available to retail customers with legacy SOR loans from Sept 1, 2021 to Oct 31, 2022, is to help them convert to comparable SORA loans.

To raise awareness on the industry-wide transition, the SC-STS will launch a public-education campaign in September. Banks will also engage retail customers with legacy SOR loans the following month, to encourage conversion.

READ MORE: Banks to cease issuance of SOR derivatives and Sibor-linked financial products by Sept