Singapore on track to SORA transition despite market volatility

Singapore

AMID the recent turmoil in the financial markets, Singapore is still looking to build active derivatives trading off a transition benchmark rate - known as the Singapore Overnight Rate Average (SORA) - by the end of this year.

The Republic remains on track to make the shift to SORA from the current Sing dollar Swap Offer Rate (SOR) that underpins the S$3.5 trillion Sing dollar (SGD) derivatives market, according to an update on Thursday by an industry-led committee behind the rates transition.

The Business Times understands that the recent market volatility from the virus outbreak is likely an impetus for banks to complete its transition to SORA well ahead of 2021 to avoid last-minute complications, given that the change will have an impact on financial contracts which range from home loans to corporate loans to derivatives.

But markets aside, Ong-Ang Ai Boon, spokesman for the steering committee for SOR Transition to SORA, pointed out that the shift is necessitated by external factors, namely the discontinuation of London Inter-bank Offered Rate (Libor) at end-2021, and that is why a timeline was set out to ensure that the Singapore market is well prepared.

On the back of this, it was announced earlier in August 2019 that Singapore will shift from SOR to SORA over the next two years.

This comes as the end of Libor will impact SOR, the key benchmark used to price derivatives and business loans here, as it uses the US-dollar (USD) Libor in its computation.

SORA, the average rate of unsecured overnight interbank SGD transactions brokered in Singapore, was selected as the new interest rate benchmark as it was found to be the "most robust and suitable alternative", underpinned by a deep and liquid overnight funding market.

Several banks here have already undertaken SORA derivatives transactions, which include DBS, Deutsche Bank, OCBC, Standard Chartered and United Overseas Bank.

Other major dealers are expected to undertake these transactions in the coming months.

Some key priorities this year include getting SORA market conventions and infrastructure ready to enable broad adoption by market participants, such as publishing contract templates for SORA overnight indexed swaps, cross-currency swaps and SOR-SORA basis swap. It also entails the launch of central clearing of SORA derivatives and the publishing of guidance on market conventions across SORA derivatives, floating rate notes and loans.

The steering committee's road map also sets out initiatives to build liquidity in SORA markets to support take-up by end-users, by encouraging key banks to start making markets in SORA derivatives so that quotes and prices are actively displayed on key financial market data platforms.

It is also exploring the issuance of SORA-based floating rate notes by the Monetary Authority of Singapore (MAS) in 2020, to catalyse similar issuances from other corporates and financial institutions.

The committee's update also covered the transition of legacy SOR contracts, where an industry guidance on appropriate fallbacks for cash market products will be developed, as well as a guidance on a deadline to cease originations of new SOR contracts.

Samuel Tsien, chairman of the Association of Banks (ABS) and the steering committee, noted that a smooth transition to SORA would require significant industry effort, coordination and collaboration involving various stakeholders.

"The key priority is to ensure financial institutions and our end customers are well prepared for this transition, and customers are able to make informed choices which will have an impact on their financing," said Mr Tsien, who is also CEO of OCBC.

Jacqueline Loh, MAS's deputy managing director and steering committee member, said that financial institutions must be "proactive and make necessary preparations that are commensurate with the nature, scale and complexity of their operations and usage of such benchmarks".

"These include setting up a robust internal governance framework that provides oversight for the transition of operational functions and business lines to SORA, enhancement of treasury and loan systems to handle its usage, and ensuring sufficient resources to facilitate staff training and customer engagement," she added.

The steering committee for the rates transition, which was established by MAS, came up with its key priorities and transition road map in response to feedback received on the consultation report on the transition, released by the ABS and Singapore Foreign Exchange Markets Committee on Aug 30, 2019.