‘Broad support’ for Singapore’s plan for new interest rate benchmark: Committee

SINGAPORE: Singapore’s plans to adopt a new interest rate benchmark called the Singapore Overnight Rate Average (SORA) has received “broad support”, a steering committee overseeing the change said in an update on Thursday (Mar 19), as it laid out key initiatives ahead.

It was announced in August last year that Singapore would transition from the use of the Singapore Dollar Swap Offer Rate (SOR) to SORA over the next two years.

This follows the likely discontinuation of the scandal-hit London Interbank Offered Rate (LIBOR) globally by end-2021, which is used in the computation of SOR.

To manage this transition, the Monetary Authority of Singapore (MAS) set up a steering committee last year, while a consultation report was released by the Association of Banks (ABS) and Singapore Foreign Exchange Markets Committee.

Citing feedback received for the report, the committee said Singapore’s move has been seen as being in line with the global transition from LIBOR to overnight risk-free rates.

Respondents also expressed “broad agreement” with the proposed two-year transition roadmap, although they pointed out issues that will need to be addressed such as establishing robust fallback arrangements and clear transition timelines.

With that, the committee on Thursday laid out an updated roadmap with key milestones and initiatives, such as readying market conventions and infrastructure to enable broad adoption by market participants, and building liquidity in SORA markets to support take-up by end users.

READ: The end of Libor: The biggest banking challenge you’ve never heard of

How does this affect consumers:

LIBOR AND SOR – WHAT ARE THEY?

The LIBOR is a US-dollar interest rate benchmark used to price as much as US$340 trillion worth of financial contracts globally from home loans and credit cards to complicated derivatives.

Once dubbed “the world’s most important number”, its reputation as the market standard was tainted after the 2008 global financial crisis when authorities in the United States and United Kingdom found traders had manipulated it to make a profit.

The move away from the LIBOR is under way in some countries, such as the UK where regulators have set a 2021 transition deadline for financial firms. Other major markets, including the US and Japan, have selected their alternative rates as well.

In Singapore, the LIBOR is used in the computation of SOR, which is a key interest rate benchmark underpinning the S$3.5 trillion derivatives market.

The SOR is also used in the pricing of business loans and some retail mortgages. Banks here have stopped offering home loans pegged to the SOR since 2017 but there is a small group of retail consumers who are still serving SOR-pegged loans.

The Singapore interbank offered rate (SIBOR) – a rate at which banks lend funds to one another – is currently more commonly used to set mortgage levels.

WHY CHANGE TO SORA?

Published by the MAS, the SORA reflects the volume-weighted average rate of all Sing-dollar overnight cash transactions brokered in Singapore during business hours. It is published daily on the MAS website.

It is seen as a sound replacement of the SOR given that it is a transaction-based benchmark underpinned by a “deep and liquid” overnight interbank funding market, according to the consultation report issued last August.

It has also been around since July 2005 and is commonly monitored by money market participants as a reflection of daily conditions in the Sing-dollar money markets.

The use of an overnight interest rate benchmark in the Sing-dollar derivatives markets will also be in line with similar developments in key global markets, the report said.

WHAT’S GOING TO HAPPEN?

Respondents who responded to the call for feedback highlighted that SORA rates will have to be made easily accessible to all market participants, including less sophisticated customer groups.

They also suggested the need to facilitate a broader understanding of the market that underpins the SORA benchmark, as well as develop SORA derivatives and cash markets, among other things.

The committee said on Thursday that it will work on achieving a smooth transition and laid out several goals ahead.

For instance, by the first half of 2020, it wants to have market conventions and infrastructure ready with the publishing of guidance on market conventions across the product classes of derivatives, floating rate notes and loans.

Other goals include the building of an active derivatives market trading off SORA by the end of the year, alongside the launch of SORA-based bilateral and syndicated loans. It also wants to pilot SORA retail loans by end-2020.

The committee also aims to ensure a smooth transition of legacy SOR contracts. It will develop industry guidance on appropriate fallbacks for cash market products, as well as guidance on a deadline for market participants to cease originations of new SOR contracts by the end of this year.

Mr Samuel Tsien, chairman of ABS and the steering committee, said that a smooth transition to SORA is “critically important” for Singapore’s financial industry and would require “significant” industry effort, coordination and collaboration involving various stakeholders.

MAS deputy managing director and steering committee member Jacqueline Loh 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”.

This will include setting up a robust internal governance framework to provide oversight for the transition of operational functions and business lines to SORA, enhancing treasury and loan systems, and ensuring sufficient resources to facilitate staff training and customer engagement, she said.

WHAT DOES IT MEAN FOR YOU?

This industry-wide transition will impact retail consumers with SOR-pegged financial products, such as home mortgages, floating rate notes and perpetual bonds, said UOB’s managing director and head of group business banking Lawrence Loh.

A survey is being conducted by the steering committee to find out the usage of these SOR-pegged consumer products but it is understood to be a small minority as most banks have stopped offering these products.

“The committee is right now reviewing the right package and the right benchmark for customers to transition towards and we will approach it from a fair dealing perspective,” said Mr Loh, who heads a sub-group that focuses on consumer products within the steering committee.

With retail consumers being unfamiliar with SORA, there may also be inertia for some to switch to a financial product based off the new interest rate benchmark, he added.

“We need to make sure that we give consumers alternatives. If they are not comfortable (with SORA), we will have to give alternatives for them to go into fixed-rate loans or SIBOR-loans … There will also be a lot more communication out into the market to make sure they are comfortable,” said Mr Loh, noting that the step-up in outreach efforts will happen from the second half of 2020.

Mr Tsien, who is also the chief executive of OCBC, said: “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.”