MAS Sets Up Committee to Drive Interest Rate Benchmark Transition

SOR is a key interest rate benchmark in Singapore that is used in the pricing of SGD interest rate derivatives, commercial and retail loans, and other financial products. As the likely discontinuation of USD LIBOR will impact sustainability of SOR, ABS and SFEMC have assessed that financial contracts that reference SOR, particularly SGD interest rate derivatives, should transition to reference SORA. ABS and SFEMC envisage 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. This will entail strong industry-wide cooperation and coordination on a range of initiatives, such as developing industry best practices and market conventions to promote the take-up of SORA-based products in financial markets and conducting outreach and education across various end-users to raise awareness. Thus, the Steering Committee was formed to engage with stakeholders to obtain feedback and raise awareness on issues related to the transition from SOR to SORA.

ABS-SFEMC had studied various options and found SORA to be the most robust and suitable alternative benchmark to SOR, particularly for the SGD interest rate derivatives market, as it is a transaction-based benchmark underpinned by a deep and liquid overnight funding market. Given that SORA has been published by MAS since July 2005, this also provides a long historical time series that facilitates analysis for risk management and pricing purposes by market participants. 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 (for example, loans) that currently reference SOR, ABS-SFEMC recommends that such 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. USD LIBOR, which is used in the computation of SOR, would likely be discontinued following the announcement by the UK authorities that the benchmark will not be sustained by regulatory powers after the end of 2021.

Keywords: Asia Pacific, Singapore, Banking, Securities, Swap Offer Rate, Steering Committee, LIBOR, Interest Rate Benchmarks, SOR, SORA, MAS