Phase out Sibor in 3-4 years and replace with Sora, consultation report recommends

SINGAPORE (THE BUSINESS TIMES) – A consultation report has recommended that the Singapore Interbank Offered Rate (Sibor) be discontinued in three to four years, and that the Singapore Overnight Rate Average (Sora) be used as the main interest rate benchmark for Singapore’s financial markets.

The proposed shift will support the deepening of Sora markets, resulting in more transparent loan-market pricing for borrowers, and more efficient risk management for lenders, said the report, titled “Sibor Reform and the Future Landscape of SGD Interest Rate Benchmarks”.

Once finalised, this would mean that both Sibor and the Swap Offer Rate (SOR) will be phased out and be replaced by Sora.

Sibor, a polled rate by banks that contribute to the rate at which they could borrow funds from one another, is commonly used in home loans, commercial and syndicated loans, trade financing and working-capital financing.

About a quarter of borrowers on housing loans are pegged to either the Sibor or SOR, MAS data showed.

The report by The Association of Banks in Singapore (ABS), the Singapore Foreign Exchange Market Committee (SFEMC), and the Steering Committee for SOR Transition to Sora (SC-STS) follows the long-running reform of Sibor, with the adoption of a new waterfall methodology and transition testing that was conducted from July 2019 to June 2020 to validate it.

Under this new methodology, the underlying market for Sibor was expanded beyond the term unsecured interbank funding market, to include wholesale funding transactions, such as large corporate deposits.

The final verdict on the fate of Sibor is likely to come in November, following the end of the consultation process.

However, the Sibor transitional testing carried out in the past year showed that while the resulting rate, termed the new polled benchmark, was “relatively robust”, it displayed noticeable differences in volatility and levels compared to Sibor, said the report.

The more volatile nature of the new polled benchmark would make it more difficult for end-user acceptance, and the different characteristics will also mean that it cannot directly replace Sibor in existing financial contracts.

Compounded Sora rates, which are backward-looking overnight rates, are thought to offer more stability than forward-looking term rates commonly used for floating home loan packages in Singapore, such as Sibor. Forward-looking term rates are more exposed to market factors on a single day’s fixing, such as quarter or year-end volatility.

The report thus assessed that rather than transitioning Sibor to a new polled benchmark, it would be beneficial in the long run for SGD financial markets to shift to a Sora-centred SGD interest rate market. This will avoid market fragmentation, facilitate transparency and easier comparison of loan pricing, and promote the development of deep and efficient SGD financial markets, said the report.

This comes as the industry is gearing up to transition fully from SOR to Sora, which is the average rate of unsecured overnight interbank SGD transactions brokered in Singapore.

SOR – the current benchmark used to price derivatives and business loans here – will be replaced by the Sora, given the end of the scandal-tainted Libor after end-2021, as the SOR uses USD Libor in its computation.

To ensure a smooth transition for existing Sibor users, the report proposed for the transition to be done in a phased approach. Transition of contracts referencing the more widely-used 1M and 3M Sibor will take place after the industry has substantially completed the transition from SOR to Sora, which would essentially be in three to four years.

Samuel Tsien, ABS and SC-STS Chairman, noted in a statement that major financial centres globally will be moving onto a risk-free rate (RFR)-centred approach or increasing the use of their RFRs.

“The Sora-centred approach will better position SGD financial markets for the future,” he said. “It will allow users of SGD floating rate products, including retail consumers and SMEs (small and medium-sized enterprises) with products that reference Sibor today, to benefit from a deeper and more efficient market, and greater transparency.”

Jacqueline Loh, deputy managing director, Monetary Authority of Singapore and SC-STS member, added that this shift to Sora is “an important step forward by the industry that will enhance liquidity and improve the overall functioning of SGD interest rate markets”.

Sibor, which tracks the US Fed’s rate movements, has fallen sharply since the Fed cut rates in March. As at Wednesday, 3M Sibor stood at 0.438, down sharply from 1.627 per cent on March 3, before the earlier Fed announcement.

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