Interest Rate Benchmark Reform
The need to transition away from LIBOR and SOR arises from the global reform to improve the robustness and integrity of financial benchmarks. As part of this shift, the UK Financial Conduct Authority (“FCA”), the supervisory authority of LIBOR, has stated that it will no longer compel banks to submit rates used to calculate LIBOR after 31 December 2021. This means that LIBOR is expected to be discontinued after end-2021.
Additionally, because SOR utilises the USD LIBOR in its computation, the cessation of LIBOR will directly affect the sustainability of SOR.
What’s Replacing SOR
The Association of Banks in Singapore and Singapore Foreign Exchange Market Committee (“ABS-SFEMC”) released a consultation report that identified the Singapore Overnight Rate Average (“SORA”) as the alternative interest rate benchmark to SOR and set out a roadmap for this transition. The consultation closed on 31 October 2019, and the response paper to the consultation was recently released in March 2020.
What’s Replacing SIBOR
On 29 July 2020, 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) issued a consultation report, titled SIBOR Reform and the Future Landscape of SGD Interest Rate Benchmarks. The report recommends the discontinuation of the SGD Singapore Interbank Offered Rate (SIBOR) in three to four years, and a shift to the use of the Singapore Overnight Rate Average (SORA) as the main interest rate benchmark for SGD financial markets. The announcement can be read here, while the report can be read here.
What’s Replacing LIBOR
LIBOR is expected to be replaced with overnight risk-free rates (“RFRs”). For example, in the UK, the Bank of England’s Working Group on Sterling Risk Free Reference Rates has recommended the GBP LIBOR replacement to be the Sterling Overnight Index Average (“SONIA”).
|SGD ||Singapore Overnight Rate Average (SORA)||Click here|
|USD ||Secured Overnight Financing Rate (SOFR)||Click here|
|GBP ||Sterling Overnight Index Average (SONIA)||Click here|
|EUR ||Euro Short-Term Rate (€STR)||Click here|
|CHF ||Swiss Average Rate Overnight (SARON)||Click here|
|JPY ||Tokyo Overnight Average Rate (TONA)||Click here|
What Do I Need to Do?
Because LIBOR and SOR are used to calculate interest payments on loans, investments and derivative contracts, all these products will be impacted by the discontinuation of LIBOR and SOR.
If you have not already done so, it is important that you make your own assessment of the LIBOR and SOR exposures and contracts you have as it is likely these will need to be transitioned to RFRs in due course.
We encourage you to share this information with other colleagues in your organisation you believe should be kept apprised of these changes.
If you have at least one product with DBS that references LIBOR or SOR and matures after 2021, please be assured that there is no immediate impact on your product at this juncture, and we will be contacting you in due course to assist with the transition.
If you have any further questions, please feel free to call or contact your Relationship Manager.
Frequently Asked Questions
We know that you will have questions on the transition. We’ll keep you updated as more information becomes available.
Risk Free Rates (RFR) like SORA are essentially “backward looking” overnight interest rates derived from actual transactions which may be secured or unsecured. This is contrasted SOR, which are published for different time periods (e.g., 3, 6, 12 months SOR) and are “forward looking”, i.e., published prospectively. Payments referencing RFRs are only known at the end of an accrual period while those referencing terms rates like LIBOR are known upfront at the start of an accrual period.
As such, RFRs are risk free because they neither include a term structure nor an interest offeror’s credit risk, both of which are factors in determining Term Rates.
Industry working groups around the world are exploring how RFRs may be used to replace the outgoing IBORs, including the use of such RFRs as possible fallbacks to existing products referencing such Term Rates.
DBS will be in touch at the appropriate juncture to update you on the alternative rates that will be used to replace SOR and existing IBORs, where applicable, in your existing products and services, when these alternative rates are finalised eventually.
DBS is actively engaged on various fronts to ensure a smooth transition away from IBORs (such as LIBOR) and rates referencing or linked to IBOR (such as SOR), in line with the expected discontinuation of such rates after 2021.
As this transition is happening at a different pace in each jurisdiction, DBS is actively monitoring and where possible, participating in such initiatives.
In Singapore, DBS participates in and leads several workstreams within the Steering Committee for SOR Transition to SORA, a steering committee established by the Monetary Authority of Singapore to oversee the industry-wide interest rate benchmark transition from SOR to SORA.
Internally, DBS is also adapting our products, systems and people to transition to the use of Risk Free Rates.
As the situation concerning this transition is still evolving and fluid, DBS is closely watching developments in this space and will, when appropriate, provide further updates on impact.
Will IBORs, or rates linked to or refencing IBORs (including SOR) still be used in existing or new products after 31 December 2021?
Assuming that there is no change to the cessation deadline, it is unlikely that IBORs such as LIBOR, and rates referencing to or are linked to IBOR, such as SOR, will continue to be used in existing products after 31 December 2021.
This is because IBORs such as LIBOR are expected to be discontinued after 2021 given that banks will no longer be compelled to submit rates used for the calculation of such rates.
For SOR, the cessation of LIBOR will directly affect the sustainability of SOR as USD LIBOR is used in SOR’s computation.
You should therefore be prepared to shift towards the use of Risk Free Rates in respect of your existing or new products as soon as practicable.
The need to transition from SOR arises from the global reform efforts to improve the robustness and integrity of financial benchmarks. As part of this shift, the UK Financial Conduct Authority (FCA), the supervisory authority of LIBOR, has stated that it will no longer compel banks to submit rates used for the calculation of LIBOR after 31 December 2021. This means that LIBOR is expected to be discontinued after end-2021. As SOR utilises the USD LIBOR in its computation, the cessation of LIBOR will directly affect the sustainability of SOR.
In light of these developments, the Association of Banks in Singapore and Singapore Foreign Exchange Market Committee (ABS-SFEMC) released a consultation report that identified the Singapore Overnight Rate Average (SORA) as the alternative interest rate benchmark to SOR, and set out a roadmap for this transition. The consultation closed on 31 October 2019, and the response paper to the consultation was recently released in March 2020. Overall, there was broad support for the selection of SORA as the alternative interest rate benchmark to SOR, and the proposed transition roadmap.
SORA is published daily by the MAS and is a robust benchmark underpinned by a deep and liquid overnight interbank funding market. It is published on the MAS website daily and has been accessible at no charge since 1 July 2005. The historical series can be downloaded from the MAS website at https://secure.mas.gov.sg/dir/domesticinterestrates.aspx
For more FAQs, please visit the ABS website at:https://abs.org.sg/benchmark-rates/faq
For more FAQs on LIBOR Transition, please click here.
Interest Rate Benchmark Reform
Interest Rate Benchmark Reform
Interest Rate Benchmark Reform
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