SINGAPORE: A consultation report released on Wednesday (Jul 29) has recommended that the SGD Singapore Interbank Offered Rates (SIBOR) be discontinued in three to four years, and that the Singapore Overnight Rate Average (SORA) be used instead as the main interest rate benchmark for SGD financial markets.
This change will result in “more transparent loan market pricing for borrowers, and more efficient risk management for lenders", according to 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) - the three bodies behind the report.
Titled SIBOR Reform and the Future Landscape of SGD Interest Rate Benchmarks, the report follows transition testing which was conducted from July last year to June this year to validate a new waterfall methodology for SIBOR.
At the same time, it was announced last August that Singapore would transition from the use of the Singapore Dollar Swap Offer Rate (SOR) to SORA over the next two years, following the likely discontinuation of the scandal-hit London Interbank Offered Rate globally by end-2021, which is used in the computation of SOR.
The SOR is a key interest rate benchmark underpinning the S$3.5 trillion derivatives market. It is also used in the pricing of business loans and some retail mortgages.
Banks here have stopped offering home loans pegged to the SOR since 2017, but there is a small group of retail consumers who are still serving SOR-pegged loans.
SIBOR – a rate at which banks lend funds to one another – is currently more commonly used to set mortgage levels. It is also commonly used in trade financing and working capital financing, among other things.
The authorities have been engaged in a long-running reform of SIBOR, testing the new waterfall methodology which expands the underlying market for SIBOR beyond the term unsecured interbank funding market, to include wholesale funding transactions such as large-sized corporate deposits.
However, the transitional testing carried out to validate the new methodology for SIBOR showed that the resulting rate - termed the new polled benchmark - was more volatile compared to SIBOR.
This would make it "more difficult for end-user acceptance", and also means the new polled benchmark could not directly replace SIBOR in existing financial contracts, said ABS, SFEMC and SC-STS.
As a result, Wednesday's report ultimately assessed that it would be better in the long run for SGD financial markets to shift to a SORA-centered SGD interest rate market, rather than transitioning SIBOR to the new polled benchmark.
"This will avoid market fragmentation, facilitate transparency and easier comparison of loan pricing, and promote the development of deep and efficient SGD financial markets," it said.
The shift to a single SORA-centred regime would benefit customers in two main ways, said ABS director Mrs Ong Ai-Boon. For one, it will be "much easier" to compare loan pricing, she pointed out.
"Today, when customers scout for loan packages, they will find packages based on board rates, SIBOR, and possibly SOR-based loans as well. With different loan packages referencing different benchmarks, it becomes harder to compare," Mrs Ong explained.
"When customers are able to compare across loan packages more easily, this transparency is beneficial, and can lead to a more competitive and efficient market."
For loan packages referencing compound SORA, customers will also benefit from more stable and predictable rates, she added.
In response to a question on whether this proposed switch will mean higher interest for customers, Mrs Ong said that within the context of a floating rate loan, the interest rate benchmark provides an independent reference rate that reflects market conditions and market level of interest rates.
"So as the market rates go up, this is reflected in the increase in the benchmark rate, and therefore the customer pays more under the floating rate loan," she said.
The full pricing of the loan - the all-in rate - will incorporate a few elements, including banks' cost of funding and the customer’s credit profile. The all-in rate is also subject to prevailing level of market interest rates, as well as competition between banks.
"The full cost of the loan package doesn’t necessarily change when customer chooses a different benchmark rate. The all-in rate matters and this is determined by the various factors explained earlier," she said.
A PHASED APPROACH
In order to ensure a smooth transition for existing SIBOR users, the report has recommended for the transition to SORA be done in a “phased approach”.
As such, transition of contracts referencing the more widely-used one-month and three-month SIBOR tenures will take place after the industry has substantially completed the transition from SOR to SORA.
This means that the one-month and three-month SIBOR will only be discontinued in three to four years, to provide sufficient time for the transition of existing SIBOR contracts.
The 12-month SIBOR will be discontinued by end-2020 as announced earlier by ABS, while for the six-month SIBOR, the report proposes to end this shortly after the 6M SOR is discontinued after end-2021.
The discontinuation of 6M and 12M SIBOR is not expected to impact many customers given low market usage of these rates, the release added.
“Major financial centres globally will be moving onto a risk-free rate (“RFR”)-centred approach or increasing the use of their RFRs. The SORA-centered approach will better position SGD financial markets for the future," said ABS Chairman Samuel Tsien, who heads the steering committee.
"It will allow users of SGD floating rate products, including retail consumers and SMEs with products that reference SIBOR today, to benefit from a deeper and more efficient market, and greater transparency," he said.
The Monetary Authority of Singapore (MAS) also signalled its support of the proposal to shift to a SORA-centered approach.
“This is an important step forward by the industry that will enhance liquidity and improve the overall functioning of SGD interest rate markets,” said Ms Jacqueline Loh, who is deputy managing director of MAS.
The parties involved in the report have called for stakeholders to provide feedback based on the recommendations listed. The deadline for submitting this feedback is Sep 30.