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Singapore on track to transition from benchmark behind S$3.5t SGD derivatives market

SINGAPORE is aiming to build active derivatives trading off a transition benchmark rate - known as the Singapore Overnight Rate Average (Sora) - by the end of this year, as the Republic keeps on track to shift from the Sing-dollar Swap Offer Rate (SOR) that underpins the S$3.5 trillion Singdollar (SGD) derivatives market.

Sora is becoming the new interest rate benchmark for the SGD cash and derivatives market. Singapore is due to launch Sora-based loans by end-2020, while a pilot for Sora-based retail loans should take off by then, according to an update on Thursday by the steering committee behind this rates transition.

In August 2019, it was announced that Singapore will transition from SOR to Sora over the next two years as the scandal-tainted Libor is expected to end its run by end-2021. SOR is the benchmark behind most interest rate swaps and currency rate swaps.

The SOR – the key benchmark used to price derivatives and business loans here – will be impacted, as it uses the US-dollar (USD) Libor in its computation.

Its replacement Sora, the average rate of unsecured overnight interbank SGD transactions brokered in Singapore, was found to be the "most robust and suitable alternative", as it is a transaction-based benchmark 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 roadmap 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 MAS in 2020, to catalyse similar issuances from other corporates and financial institutions.

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

Samuel Tsien, chairman of 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, Monetary Authority of Singapore's (MAS) 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, on Thursday noted the “broad support” for Sora to be adopted as the new interest rate benchmark, and seen as aligned with the global transition from Libor to overnight risk-free markets. This is in response to feedback received on the consultation report on the transition, released by the Association of Banks (ABS) and Singapore Foreign Exchange Markets Committee on Aug 30, 2019.