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SORA: A more transparent and robust interest rate benchmark for loans

Singapore borrowers will need to transition to the new Singapore Overnight Rate Average.

SORA: A more transparent and robust interest rate benchmark for loans

Contact your bank for information on how to convert your loan to SORA. Photos: Shutterstock

Singapore is in the midst of moving towards a new interest rate benchmark that will be used to price floating rate loans for all borrowers. The Singapore Overnight Rate Average (SORA) will replace the existing benchmarks, the Singapore Dollar Swap Offer Rate (SOR) and the Singapore Interbank Offered Rate (SIBOR).

In line with global interest rate benchmark reforms, SOR will be discontinued after Jun 30, 2023. For SIBOR, the lesser-used six-month SIBOR will be discontinued after Mar 31, 2022, while the more commonly-used one-month and three-month SIBOR will be discontinued after Dec 31, 2024.

Following the transition, SORA will be the only interest rate benchmark for Singapore-dollar (SGD) financial markets, with wholesale markets similarly pricing floating rate bonds, loans and derivatives using SORA.

THE BENEFITS OF SORA

Published by the Monetary Authority of Singapore (MAS) since 2005, SORA is a transparent, robust and reliable benchmark that is based on overnight interbank SGD transactions in Singapore.

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Infographics: Mediacorp Brand Studio


SORA was selected as it is a robust and suitable alternative, underpinned by a deep and liquid overnight interbank funding market. The industry-led Steering Committee for SOR & SIBOR Transition to SORA was established by the MAS in August 2019 to oversee the industry’s interest rate benchmark transition efforts.

The move to SORA will result in more transparent loan market pricing for borrowers as they can compare different loan packages more easily with a uniform interest rate benchmark.

Globally, international financial markets are similarly shifting towards the use of interest rates that are backed by overnight interbank transactions, similar to SORA.

LESS VOLATILE, MORE PEACE OF MIND

Banks typically offer SORA loan packages using compounded SORA rates. Compounded SORA is computed using the compounded average of the daily published SORA rate over a historical period of time, usually for one, three or six months.  

To facilitate ease of use by the financial industry, MAS has been calculating and publishing the one-month, three-month and six-month compounded SORA rate daily since Aug 5, 2020.

Loans that are based on compounded rates tend to be more stable compared to loans based on SOR, which relies on a single day’s reading of the rate to compute interest amounts and exposes borrowers to abrupt fluctuations on the date when the interest rate resets.  

PREPARING FOR CONVERSION

To help retail borrowers who have existing SOR loans, banks in Singapore are offering a SORA Conversion Package to them at no additional fee or lock-in from Sep 1, 2021 onwards.

The package switches a borrower’s existing SOR loan to a SORA loan by retaining the borrower’s original SOR loan margin and applying a standardised Adjustment Spread (Retail). This spread is applied as SOR factors in term and credit risk premiums while SORA does not, which results in SORA typically being lower than SOR.

The Adjustment Spread (Retail) is computed based on the average difference between SOR and three-month SORA compounded-in-advance over the last three months, subject to a floor of zero. It is published by ABS Benchmarks Administration Co (ABS Co) on a monthly basis for transparency.

Borrowers also have the option of converting to any prevailing loan package offered by the bank, though this option could be subject to prevailing fees and terms such as an applicable lock-in period.  

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With the impending transition to SORA, SOR property loan borrowers should contact their bank early to find out more about the SORA Conversion Package or alternative loan packages. This will provide them with enough time to consider their options and select a package that best suits their needs.

As SIBOR will only be discontinued later, banks will contact these borrowers in due course.

As for businesses with SOR-linked loans, they can prepare for a smooth transition by identifying their risk exposures, ensuring their systems' readiness, understanding the features of new SORA products, and contacting their banks to explore options to switch out of their existing SOR loans. 

Find out more about the transition to SORA.

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