Singapore to proceed with Sora transition, even as Libor discontinuation may be pushed back

Tue, Feb 02, 2021 – 2:02 PM

SINGAPORE will press ahead with its industry transition to the Singapore Overnight Rate Average (Sora) as the new interest rate benchmark by the end of this year, even as the discontinuation of a key global rate – the Libor – could be pushed to mid-2023.

This comes as a recent consultation by ICE Benchmark Administration proposed extending the end date for the widely-referenced USD Libor settings to June 30, 2023. It was earlier slated to cease by end-2021.

In a speech, Leong Sing Chiong, deputy managing director (markets & development) at the Monetary Authority of Singapore (MAS), said that the proposed extension of Libor discontinuation means that Swap Offer Rate (SOR) will end when Libor ends in mid-2023. SOR uses the USD Libor in its computation.

This will allow about 70 per cent of existing stock of legacy SOR cash products, or about S$65 billion of bilateral and syndicated loans, to mature before the new deadline, he told the audience at a virtual event on the transition to Sora.

The extension also provides time to do more to actively transition legacy SOR contracts to Sora, and to deal with the “most challenging legacy transition issues”. This transition is expected to be completed by end-2022, Mr Leong said.

While the proposed extension for Libor discontinuation will allow more time for the transition of legacy contracts, the UK and US authorities have stressed that the use of Libor in new contracts is to be discontinued as soon as possible, said the steering committee overseeing the industry transition to Sora in a statement.

To further boost the transition to Sora, several notable Sora initiatives will be expanded to facilitate price discovery across longer tenors and support further growth of Sora markets. Among them, the central clearing of Sora derivatives for transactions will be extended up to the 21-year tenor, from the 5-year tenor currently.

The MAS Sora derivatives auction parameters will also be widened to cover more key industry participants, while transaction tenors will be extended to 20 years from the current five years.

Finally, the MAS Sora floating-rate notes (FRN) programme will be expanded to include 1-year and 2-year tenors, from the current 6-month tenor.

Singapore is in the midst of its transition from SOR and the Singapore Interbank Offered Rate (Sibor) to Sora as the new interest rate benchmark. There is greater urgency to shift from SOR – the current benchmark used to price derivatives and business loans in the Republic – to Sora, given the supposed end of the scandal-tainted Libor by end-2021. Sibor, widely used in retail mortgages and corporate loans, will be discontinued by end-2024, in line with global reform efforts to improve the robustness and integrity of financial benchmarks.

Sora was found to be the “most robust and suitable alternative”, underpinned by a deep and liquid overnight funding market.

On Tuesday, the committee said it will set out guidance on timelines to cease the use of SOR in new derivatives contracts, as well as to stop the use of the Sibor in new loan contracts, to be finalised in the coming months.

It also reaffirmed its earlier industry guidance for lenders and borrowers to cease the use of new SOR-linked cash market products by end-April 2021. With new products increasingly referencing Sora, this will support further deepening of liquidity in Sora derivatives, as market participants manage and hedge interest rate risks, said the committee.

A set of market guidance to support active transition of legacy SOR contracts to Sora will also be published by April 2021.

Samuel Tsien, chairman of the Association of Banks in Singapore and the steering committee, said: “The likely extension of SOR’s end date to mid-2023 due to the extension of USD Libor cessation does not derail the industry’s efforts to develop a Sora-centred interest rate market. In fact, we should take advantage of this longer runway to build a deep and robust Sora market.”

Mr Tsien, who is also the group chief executive officer of OCBC, urged market participants to prepare their systems, staff and customers to use Sora instead of adopting a “wait-and-see” attitude to better seize market opportunities.

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