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Singapore banks to stop issuing Sibor-linked loans, SOR derivatives by September

Singapore banks to stop issuing Sibor-linked loans, SOR derivatives by September

Source: Straits Times
Article Date: 02 Apr 2021

With SOR to discontinue in mid-2023, this move addresses the risk of continued reliance on SOR derivatives.

Financial institutions will have to cease issuing Sibor-linked financial products and Swap Offer Rate (SOR) derivatives by the end of September.

The freshly announced timeline is to further push the industry towards the Singapore Overnight Rate Average (Sora) as the main interest rate benchmark.

Sibor is widely used for loans to retail customers and small and medium-sized enterprises.

The new timeline will have no immediate impact on existing Sibor loans, said the Steering Committee for SOR and Sibor Transition to Sora (SC-STS) on Wednesday.

It is consistent with the preparation for discontinuing the less widely used six-month Sibor by March next year, and the widely used one-month and three-month Sibor benchmarks by the end of 2024.

Banks will provide sufficient notice for customers to consider switching these loans to alternative loan packages. The report said most major banks have started offering Sora mortgages, and retail take-up has been encouraging, with over $1 billion of such loans extended as at the end of last year.

The new timeline will give market participants notice to prepare for changes, and is in line with the committee's targets for banks to wind down SOR derivatives exposures to 20 per cent by the end of September, said the committee.

SOR is used in pricing of bonds and loans to large institutions with hedging requirements.

The requirement to cease new transactions will exclude SOR derivatives transactions for risk management of and transition from legacy SOR positions.

Singapore is in the midst of its move from SOR and Sibor to Sora as the new interest rate benchmark. This comes on the back of news of the discontinuation of the scandal-tainted Libor (London Inter-Bank Offered Rate) at the end of 2023.

Sora was picked as the new interest rate benchmark as it was found to be the "most robust and suitable alternative", underpinned by a deep and liquid overnight funding market. As for Sibor, it will be discontinued by the end of 2024, in line with global reform efforts to improve the robustness and integrity of financial benchmarks.

Mr Samuel Tsien, chairman of the Association of Banks in Singapore and SC-STS, noted: "The industry has made significant progress over the past year to develop new Sora markets, including usage of Sora in a wide variety of cash market products and growing adoption in derivatives.

"With this latest move by the industry committing to cease issuance of SOR derivatives and Sibor-linked products by end-September 2021, we look forward to a single Sora-centred interest rate benchmark regime, which will be beneficial to both customers and financial institutions for a more transparent and efficient market."

Mr Leong Sing Chiong, deputy managing director of the Monetary Authority of Singapore and an SC-STS member, urged market participants to "take active steps to shift both new use and legacy exposures to Sora, so as to minimise financial and operational risks as liquidity in SOR derivatives markets is expected to decline in 2022".

The committee also reviewed its guidance around the fallback rate for SOR, which was designed only as an interim fallback solution for contracts that cannot be moved to Sora before SOR ceases. It was previously announced that the fallback rate would be published for a period of about three years following the expected discontinuation of SOR after end-2021.

But with SOR set to be discontinued in mid-2023, more existing legacy SOR transactions would be able to mature and the need for the extended fallback rate would be much lower, said the committee.

THE BUSINESS TIMES

Source: Straits Times © Singapore Press Holdings Ltd. Permission required for reproduction.

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