MAS sets up steering committee for switch from interest rate benchmark SOR

THE Monetary Authority of Singapore (MAS) on Friday said it has established a steering committe to oversee an industry-wide interest rate benchmark transition from the Singapore dollar (SGD) Swap Offer Rate (SOR) to the Singapore Overnight Rate Average (SORA). The change, which will take place over the next two years, comes on the back of a likely discontinuation of the London Inter-bank Offered Rate (Libor).

SOR is a key interest rate benchmark in Singapore used in the pricing of SGD interest rate derivatives, commercial and retail loans, and other financial products. The three-month SOR is a benchmark used to price corporate loans. Some home loans are still pegged to the SOR, but mostly to the Sibor (Singapore Interbank Offered Rate).

SOR relies on the US dollar (USD) Libor in its computation methodology. As the likely discontinuation of the USD Libor will impact the sustainability of SOR, the Association of Banks in Singapore (ABS) and the Singapore Foreign Exchange Market Committee (ABS-SFEMC) have concluded that financial contracts that reference SOR, particularly SGD interest rate derivatives, should transition to reference SORA, MAS said.

In a separate joint statement, ABS-SFEMC noted that such a shift is necessary following the announcement by the UK regulatory authorities that the USD Libor will not be sustained by regulatory powers after end-2021.

ABS-SFEMC had studied various options and found SORA to be the "most robust and suitable alternative", as it is a transaction-based benchmark underpinned by a deep and liquid overnight funding market, it said.

"Given that SORA has been published by the MAS since July 2005, this also provides a long historical time series which facilitates analysis for risk management, and pricing purposes by market participants.

"Importantly, the choice of SORA as the reference benchmark for SGD interest rate derivatives is also aligned with the global shift for derivatives markets to reference near risk-free rates."

For SGD cash products (such as loans) that reference SOR, ABS-SFEMC recommends that these products can continue to reference various interest rate benchmarks, including Sibor, SORA, or banks' internal funding rates.

"This is consistent with the current industry practice where SGD cash products use a broad range of interest rate benchmarks," it said.

ABS-SFEMC envisages a phased transition from SOR to SORA over the next two years, starting with the deepening of new SORA-based markets, and thereafter the transition of SOR-based legacy contracts.

"As the transition involves many industry participants, as well as commercial and retail customers, it is critical to have adequate stakeholder engagement and a well-managed transition," MAS said.

Thus, the authority has established an industry-led steering committee, chaired by Samuel Tsien, group CEO of OCBC Bank and ABS chairman, to oversee the transition.

Among other things, the committee will be responsible for providing strategic direction on industry proposals to develop new products and markets based on SORA. It will also engage with stakeholders to seek feedback and raise awareness on issues related to the transition from SOR to SORA, MAS said.

The committee will comprise senior representatives from key banks in Singapore, relevant industry associations, and MAS.

ABS-SFEMC has released a consultation report detailing a roadmap for this transition, which can be found at https://abs.org.sg/docs/library/consultation-report-on-roadmap-for-transition-of-interest-rate- benchmarks-from-sor-to-sora.pdf.

It also invites stakeholders to provide feedback via this template: https://abs.org.sg/docs/library/feedback-template-on-roadmap-for-transition-of-interest-rate-benchmarks-from-sor-to-sora.docx

Those with further queries may email ABS at SORTransition@abs.org.sg or call +65 6224 4300.