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) have issued a consultation report, SIBOR Reform and the Future Landscape of SGD Interest Rate Benchmarks (Report).

The Report recommends the discontinuation of the SGD Singapore Interbank Offered Rate (SIBOR) in three to four years and a shift to using the Singapore Overnight Rate Average (SORA) as the main interest rate benchmark for SGD financial markets. This shift will support the deepening of SORA markets.  It will also provide greater pricing transparency for borrowers and more efficient risk management for lenders.

Rather than implementing two transitions for each of SGD Swap Offer Rate (SOR) and SIBOR to separate interest rate benchmarks (that is, SOR-to-SORA and SIBOR-to-Reformed SIBOR or New Polled Benchmark, respectively), the Report assessed that it will be beneficial in the long run for SGD financial markets to shift to a SORA-centered  SGD interest rate market.  Benefits include avoidance of market fragmentation, facilitating transparency and easier comparison of loan pricing and promoting the development of deep and efficient SGD financial markets.

Previous consultation/reform and findings

The ABS and SFEMC have previously initiated a reform of SIBOR and an industry transition from SOR to SORA.

SIBOR Reform and findings

A new waterfall methodology for SIBOR was identified with transitional testing to validate this new methodology taking place from July 2019 to June 2020.  Findings from the transitional testing showed that whilst the resulting rate, the New Polled Benchmark was relatively robust, it was more volatile compared to SIBOR. Volatility of the New Polled Benchmark would make it more difficult for end-user acceptance.  The different characteristics of the New Polled Benchmark also mean that in practice, it cannot be a direct substitute for SIBOR in existing financial contracts.

SOR to SORA Transition

SORA was identified as the replacement interest rate benchmark to SOR, which will be discontinued together with the USD LIBOR benchmark after end-2021. There has been good progress in developing SORA markets over the last 6 months. This includes establishing key SORA market conventions and infrastructure, enhancing industry and system readiness and piloting new SORA products (e.g. derivatives and cash products).

Phased approach of transition from SIBOR

Smooth transition is key for existing SIBOR users.  The Report proposes a phased approach:

  • 1M SIBOR and 3M SIBOR – these are more widely used and transition will take place after the industry has substantially completed the transition from SOR to SORA. These will only be discontinued in three to four years, to provide sufficient time for the transition of existing SIBOR contracts.
  • 12M SIBOR – given the low usage, transition and discontinuation is not expected to impact many customers.  This will be discontinued by end-2020 as earlier announced by ABS
  • 6M SIBOR – similarly, given the low usage, transition and discontinuation is not expected to impact many customers.  This will be discontinued when or shortly after the 6M SOR is discontinued after end-2021 .

Consultation and Feedback

Given the recommendation of the SORA-centered approach, ABS-SFEMC and SC-STS welcome stakeholders to provide feedback by 30 September 2020.