Transition from Singapore Dollar Swap Offer Rate to Singapore Overnight Rate Average – An Update
Eye On IBOR Transition Blog
Hallam Chow
The Steering Committee for the Singapore Dollar Swap Offer Rate ("SOR") transition to the Singapore Overnight Rate Average ("SORA") has actively facilitated the transition from SOR to SORA. Singapore has been leading the charge in Asia on LIBOR transition matters, with many industry leaders making early shifts towards SORA as the new interest rate benchmark to replace US Dollar LIBOR-linked SOR, which traditionally has been used to price bonds and loans to large institutions.
The first SORA-linked business loan was a SGD150 million three year corporate loan issued by Oversea-Chinese Banking Corporation ("OCBC") to CapitaLand in June 2020. Since then, there have been at least six more SORA-linked loan facilities, including the first SORA-based loan in the energy sector (issued by OCBC to Sembcorp Financial Services), and the first SORA-pegged club loan coupled with a cross-currency swap (issued by DBS Bank ("DBS") and Industrial and Commercial Bank of China to Olam International Limited), both of which were closed in September 2020.
Reflecting both technical preparation and market collaboration, the Steering Committee has made key recommendations relating to benchmark transition, and has published market guidance for participants on the usage of SORA. On October 27, 2020, the Steering Committee announced recommended timelines to guide users in preparing for the transition to alternative reference rates. Key timeline dates include:
By end-April 2021, all lenders and borrowers to cease issuance of SOR-linked loans and securities that mature after year-end 2021.[1]
By end-September 2021, all banks to have substantially reduced gross exposure to SOR derivatives, including centrally cleared interbank transactions, with interim milestones with respect to outstanding contracts (as reported by banks to the Monetary Authority of Singapore in its May 2020 survey) as follows:
exposure reduce to 90% by end-2020;
to 70% by Q1 2021;
to 50% by Q2 2021; and
to 20% by Q3 2021.
On 25 January 2021, when ISDA's IBOR Fallback Protocol becomes effective, to incorporate contractual fallbacks in all existing SOR derivatives.
By end-Q2 2021, to incorporate contractual fallbacks in a majority of SOR-referencing cash market products (loans and floating rate notes) that mature after end-2021, and that would not be transitioned to alternative reference rates.
To better support and facilitate the transition to SORA, the Steering Committee also published a set of market guides that encourage market participants to take active steps to prepare for transition. The market guides provide an overview of the SORA market conventions, the benefits to the market, and the key steps necessary for market users, and include:
A report on customer segments and preferences – setting out how SORA can be used in loan transactions to meet the various needs of financial firms, large corporates, small and medium-sized enterprises, and retail customers;
A SORA market compendium – setting out the technical and legal specifications for the transition from SOR to SORA in loans and other products, and highlighting in particular the recommended fallback language, indicative terms for SORA bilateral and syndicated loans, and methodology for calculating the reference rates; and
An end-user checklist – providing nonfinancial entities, such as corporates, investment firms, insurers and other buy-side participants, a list of key steps needed to effectively implement the transition from SOR to SORA, and from LIBOR to alternative reference rates.
Samuel Tsien, Chairman of the Association of Banks in Singapore and the Steering Committee, announced that the guides would pave the way for an orderly and smooth transition from the legacy use of SOR to SORA as the new benchmark for Singapore Dollar markets. Market participants are therefore urged to take immediate steps, including operational and system changes, staff training and client outreach, to prepare to shift from reliance on SOR to SORA.
Although we expect to see an increase in the issuance of SORA-linked loan facilities following the publication of the SORA transition timelines and guides, there remains a lack of liquidity in the market for SORA-linked loans, which may slow the speed by which banks produce SORA-linked loans in the short term.
[1] Under the timelines, all lenders are required to cease the issuance of SOR-linked loans that mature after year-end 2021. The Domestic Systemically Important Banks (i.e. DBS, OCBC, United Overseas Bank, Citibank, Malayan Banking Berhad, Standard Chartered Bank, and The Hongkong and Shanghai Banking Corporation) are required to offer SORA-based products only from March 2021. Other banking institutions have until end of April 2021 to be ready to offer SORA-based products. It is expected that from 1 May 2021, SORA will be used as the de-facto benchmarking rate.
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