By the end of 2020, Singapore is looking to set up active derivatives trading off a transition benchmark rate that is known as the Singapore Overnight Rate Average (SORA). This is an effort to move away from the Sing-dollar Swap Offer Rate (SOR) that supports the S$3.5 trillion derivatives market.
SORA will be the new interest rate benchmark for SGD derivatives and cash market. While the launch of SORA-based loans will be done by the end of this year, the pilot for SORA-based retail loans should be taken off by that time frame, as per the update by the steering committee overseeing this rates transition on Thursday (19 March).
Singapore announced in August 2019 that it would transition from SOR to SORA over the next two years in the midst of the scandal-tainted Libor that was expected to resolve by the end of 2021. Most currency rate swaps and interest rate swaps are supported by the benchmark that is SOR.
The pricing of business loans and derivatives in the country was done with SOR as the key benchmark, and it will be impacted because the calculation includes US-dollar Libor.
SORA, the successor to SOR, is the average rate of unsecured overnight interbank SGD transactions brokered in the country. Because SORA is a transaction-based benchmark buttressed by a deep and liquid overnight funding market, it is the “most robust and suitable alternative”.
Banks such as United Overseas Bank, Standard Chartered, Deutsche Bank, and DBS have already conducted SORA derivatives transactions. In the coming months, other major dealers are also expected to do the same.
In 2020, the key priorities will be to ready up SORA market conventions and infrastructure in order to allow broad adoption by market players. The priorities include publishing contract templates for SOR-SORA basis swap, cross-currency swaps, and overnight indexed swaps. This will also mean introducing the publishing of guidance on market conventions across SORA loans, floating rate notes and derivatives, alongside the central clearing of SORA derivatives.
The steering committee’s roadmap also implements initiatives such as making markets in SORA derivatives by pushing key banks to start venturing into SORA derivatives so that prices and quotes are actively reflected on key data platforms and financial market. This will help build liquidity in SORA markets so that take-ups by end-users can be facilitated. To promote similar issuances from other financial and corporate institutions, the committee will also work on the issuance of SORA-based floating rate notes by MAS in this year.
Furthermore, the committee’s update will deal with the transition of legacy SOR contracts through (1) guidance on a deadline for market participants to stop producing new SOR contracts and (2) industry guidance on appropriate fallbacks for cash market products.
The Chairman of ABS and the steering committee, Samuel Tsien, remarked that significant industry effort, coordination, and collaboration involving various stakeholders will be needed to allow for a smooth transition to SORA.
“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,” added Mr Tsien.
Also, 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”, said Jacqueline Loh, MAS’ Deputy Managing Director and steering committee member.
She added, “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.”
On Thursday (19 March), the steering committee for the rates transition was established by MAS and the committee highlighted the “broad support” for SORA to be used as the new interest rate benchmark as well as recognised as aligning with the global transition to overnight risk-free markets from Libor.
This was a response to the feedback obtained from the consultation report regarding the transition that was published by the Singapore Foreign Exchange Markets Committee and the Association of Banks (ABS) on 30 August last year.