My company has an existing loan that references LIBOR/ SOR and matures after end 2021. What should I do about this?

There is no immediate impact on your loan at this juncture, and we will be reaching out to you in due course to assist with the transition. However, to prepare for the upcoming transition, you are encouraged to review the terms and conditions of your loan contract to understand the implications and the actions required.

What will happen to my outstanding loan if I do not want to change my rate, even when LIBOR/ SOR is discontinued?

When LIBOR/ SOR is discontinued, we will no longer be able to calculate your interest payment using LIBOR/ SOR. Instead, your loan interest payment will be calculated using a ‘fallback’ rate or other alternative provisions specified in the terms and conditions of your loan contract. You should start preparing for the transition as early as possible by reviewing the terms and conditions of your loan contract to understand the consequential implications and actions required. We will reach out to you in due course to discuss the options that are available to you as a borrower in relation to the discontinuation of LIBOR/ SOR.

How will the change in benchmark affect my loan repayment?

The transition from LIBOR/SOR to another benchmark could lead to some changes to your loan repayment, depending on market conditions at that point in time. We will reach out to you in due course to discuss options that are available to you as a borrower.

If I have more than one loan pegged to LIBOR/ SOR, will I have to re‐sign every loan?

Yes, all LIBOR/ SOR‐pegged loans will be affected once LIBOR/SOR is discontinued. We will assist you to take the necessary actions in due course.

What if I had hedged my LIBOR/ SOR loan with a swap?

If you had hedged your LIBOR or SOR loan with a swap, your swap would also have been likely pegged to LIBOR or SOR, respectively. You should review the terms of your swap contract as early as possible to understand the consequential implications once LIBOR/SOR is discontinued. Notably, if the terms of your swap contract provide for a ‘fallback’ rate, there is a possibility of a hedging mismatch if the ‘fallback’ rate of your loan differs or kicks in at a different time. We will reach out to you in due course to discuss options.

In relation to the transition from SOR, an alternative would be to transition both your loan and swap to reference Adjusted SOR or other alternative rates, which will allow for hedge effectiveness to be maintained, SC-STS plans to provide market guidance on how users may undertake this process, and the Committee will provide further information on this matter in due course.

In other markets such as the US, borrowers, whose loans are pegged to LIBOR, have similarly been encouraged to transition both their loans and swaps to reference SOFR or other alternative rates in order for hedge effectiveness to be maintained.

What are the tax and accounting-related implications of the change in benchmark?

For the transitioning from SOR to SORA, Sub-group 7 of the SC-STS was formed to provide guidance on accounting and tax-related issues, including hedge accounting, and will be publishing guidance in due course.

For other markets such the US market, relevant bodies such as the ARRC, the Financial Accounting Standards Board and the US Internal Revenue Service have provided/may provide guidance from time to time on such issues pertaining to the transition from LIBOR to SOFR.

What if I had hedged my LIBOR/ SOR loan with a swap?

If you had hedged your LIBOR or SOR loan with a swap, your swap would also have been likely pegged to LIBOR or SOR, respectively. You should review the terms of your swap contract as early as possible to understand the consequential implications once LIBOR/SOR is discontinued. Notably, if the terms of your swap contract provide for a ‘fallback’ rate, there is a possibility of a hedging mismatch if the ‘fallback’ rate of your loan differs or kicks in at a different time. We will reach out to you in due course to discuss options.

In relation to the transition from SOR, an alternative would be to transition both your loan and swap to reference Fallback Rate (SOR) or other alternative rates, which will allow for hedge effectiveness to be maintained. SC-STS plans to provide market guidance on how users may undertake this process, and the Committee will provide further information on this matter in due course.

In other markets such as the US, borrowers, whose loans are pegged to LIBOR, have similarly been encouraged to transition both their loans and swaps to reference SOFR or other alternative rates in order for hedge effectiveness to be maintained.

I am looking to take up a new loan. Should I avoid entering into any new contracts that still reference LIBOR/ SOR?

If you wish to take up a new loan that references LIBOR/ SOR, you should review the proposed new loan contract for terms that set out, or permit a switch or fallback to an alternative rate from LIBOR/ SOR. We will discuss with you the appropriate terms to include to facilitate a smooth transition from LIBOR/SOR to an alternative rate.

Who should I contact if my company is keen to take up a new loan pegged to SORA?

You can contact your relationship manager if you are keen to take up a new loan pegged to SORA.

How will SORA be used to compute interest payments for corporate borrowers?

There are a few ways SORA could be used to calculate interest payments for corporate loans.

In other markets such as the US and the UK, banks have made loans to corporates based on a compounded or simple average of the alternative overnight interest rate benchmark. The SC-STS is studying various approaches and will provide an update in due course.

Will the loan margin be revised given that the floating rates will be different?

Unlike SOR, which is quoted in 1-month, 3-month and 6-month tenors, SORA is an overnight rate and quoted only in an overnight tenor. Hence, SORA lacks a term and a credit risk premium, which results in it typically being lower than SOR. In order for SORA to be referenced for lending over a fixed term, an adjustment spread over SORA would likely need to be included.

During the transition of the reference rate from SOR to SORA, will there be measures to ensure that there will not be a material gap between the two? This could lead to significant price changes to the detriment of borrowers.

We would like to assure our clients that we are not taking advantage of the transition to raise borrowing costs but are applying an adjustment spread to make-up for the economic difference between SOR and SORA rates. We will take reasonable steps to minimise economic impact to clients and will work with clients to address their specific concerns.

How about non-SGD loans denoted in USD or GBP LIBOR? Will banks in Singapore be using SOFR or SONIA respectively for those loans? And if so, where can we reference term SOFR and SONIA?

LIBOR is expected to be replaced with overnight risk-free rates (RFRs). The Secured Overnight Financing Rate (SOFR), selected by the Alternative Reference Rate Committee which was put together by the US Federal Reserve, will replace the USD LIBOR, while the Sterling Overnight Index Average (SONIA), recommended by the Bank of England’s Working Group on Sterling Risk Free Reference Rates, will replace the GBP LIBOR. We may reference SOFR and SONIA for floating rate USD LIBOR and GBP LIBOR loans. 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.

There are a few ways such overnight rates, like SOFR and SONIA, could be used to calculate interest payments for loans. Interest can be calculated based on a compounded average of the overnight interest rate benchmark, plus an applicable margin.

Term SOFR or Term SONIA can only be developed if there is deep and liquid trading of underlying SOFR and SONIA-linked derivatives, e.g. SOFR Overnight Indexed Swaps (OIS) transactions. These Term benchmarks do not exist today, and there is no guarantee of the development of such term benchmarks in the future.

How far has the industry come along in its adoption of alternative reference rates and what are the key challenges?

Singapore banks have made significant progress in the journey toward adopting Alternative Reference Rates (ARRs) in banking products, but there is still further to go. The key challenges are to educate customers on LIBOR and SOR discontinuation, and the new product offerings that reference ARRs, and to build the infrastructure and processes, as well as relevant new documentation terms, required to apply ARRs to banking products.

For more information on the progress the industry has made, please refer to the latest announcement by the SC-STS: www.abs.org.sg/docs/library/sora-industry-press-release-rinal-v3.pdf.

What should I look out for in multi-currency loan facilities?

The same issues and challenges will need to be dealt with for the IBOR transitions of multi-currency loan facilities, albeit in respect of several different currencies and alternative reference rates.

Why would hedging with compounding in arrears be cheaper/easier than in advance?

The standard market convention for derivatives referencing SOFR, SONIA, and other alternative reference rates will follow Overnight Indexed Swap (OIS) conventions, where the floating leg index is a compounded overnight rate. Therefore, hedging with such derivatives is likely to be cheaper / easier than doing so with bespoke products, e.g. one with compounded in advance rate.

Will the SC-STS be working on a suggested common approach for transition of SOR loans?

The transition pathway for existing SOR business and syndicated loans is being mapped out which will include market guidance on an industry approach for banks to transition bilateral SOR loans to SORA before end-2021.

Will banks continue to offer fixed rate loans? Will these be affected by the transition?

The expected discontinuation of LIBOR/SOR only affects contracts that reference LIBOR/SOR, e.g. LIBOR/SOR floating rate loans. We will continue to offer other types of loans that fit customer needs, including fixed rate loans.

In respect of SOR loans, should borrowers wait for a term SORA rate to be developed?

In Singapore, term SORA can only be developed if there is deep and liquid trading of SORA derivatives, e.g. SORA Overnight Indexed Swaps (OIS) transactions. Specifically, this would require frequent and sizeable daily transactions in the specific benchmark tenors of interest (e.g. 1-month OIS). The experience in other jurisdictions globally shows that it would take time for this to be achieved. Some other jurisdictions have concluded that it would not be possible for such term benchmarks to be constructed.

The SC-STS will continue to monitor the development of the SORA derivatives market and will explore the feasibility of developing such benchmarks when the market is sufficiently developed.

As there is no way to guarantee the development of such term SORA benchmarks before end 2021 , borrowers should not delay their transition plans in anticipation of this rate, and should instead prepare to transact in products that reference compounded SORA or other alternative rates offered by the Bank.

What is the industry solution to address cessation of benchmarks in swap and derivatives documentation?

ISDA, which is the global leading industry body for swaps and derivatives, is in the process of updating and amending the 2006 ISDA Definitions to include new fallback provisions to apply in the event of cessation of certain benchmarks, including benchmarks such as LIBOR and SOR.

The proposed fallback provisions shall state that upon the occurrence of the specified event (i.e. the cessation of the relevant benchmark), references to the affected benchmark will be replaced with references to an identified replacement rate in the same currency. The fallback provisions are still in consultation and drafting phase.

What is the market’s transition plan for existing and new swap and derivatives contracts referencing benchmarks such as LIBOR and SOR, which shall permanently cease in end 2021?

Once details on the fallback rates and calculation methodology are finalised, ISDA will publish one or more supplements to the 2006 ISDA Definitions (Revised 2006 ISDA Definitions).

New swap and derivatives contracts entered into on or after the effective date of the Revised 2006 ISDA Definitions shall be deemed to have applied the fallback rates by incorporating by reference the Revised 2006 ISDA Definitions into the swap and derivatives contracts.

ISDA will also publish a related protocol (ISDA Protocol) that market participants can adhere to amend legacy swap and derivatives transactions entered into prior to the effective date of the Revised 2006 ISDA Definitions.

How will my outstanding swap or derivatives contracts be affected by the transition?

If you have outstanding swap and/or derivatives contracts referencing LIBOR and/or SOR that mature beyond end 2021, the smoothest transition would be to replace or amend such contracts referencing LIBOR and/or SOR to reference the fallback replacement rates set out in the Revised 2006 ISDA Definitions before end-2021.

What is the possible fallback for swap and derivatives transactions that currently reference SOR?

Based on the ISDA’s consultation results and the recommendation of the SC-STS, ‘Adjusted SOR’ has been identified as the contractual fallback for legacy SOR swap and derivatives.

'Adjusted SOR' follows the same calculation formula as SOR except that the USD LIBOR in the calculation is replaced by the fallback rate for USD LIBOR, which is the daily compounded Secured Overnight Financing Rate (Adjusted SOFR) plus a spread adjustment.

The spread in relation to Adjusted SOFR will be calculated, and published, by Bloomberg based on a methodology that was selected after a series of public consultations by ISDA. There is no further spread adjustment to be calculated in relation to Adjusted SOR.

Unlike SOR, ‘Adjusted SOR’ will be a backward-looking rate like Adjusted SOFR, and the rate will be known and published at the end of the calculation period.

What is SOFR?

SOFR is the secured overnight financing rate administered, and published, by the Federal Reserve Bank of New York and it is the recommended alternative to USD LIBOR selected by the Alternative Reference Rate Committee (ARRC). ARRC is a group of private market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York.

How long will Adjusted SOR be in effect?

Adjusted SOR, like the SOR, will be administered by the Association of Banks in Singapore Benchmarks Administration Co., and is intended as an interim measure to buy time for users to transition their affected swap and derivatives contracts to reference SORA. It is not intended as a reference benchmark for the SGD swap and derivatives market, which should transition to reference SORA. As such, Adjusted SOR will eventually be discontinued. The SC-STS is reviewing this issue of how long Adjusted SOR is needed to fulfil its function as an interim measure, and will provide further information on this matter in due course.

Is there legal documentation setting out the new fallback to Adjusted SOR?

ISDA will be amending the 2006 ISDA Definitions to incorporate the fallback trigger and fallback rates for LIBOR and other major IBORs, including the fallback to Adjusted SOR for SOR derivatives. By incorporating the amended 2006 ISDA Definitions for new derivatives entered into on or after the effective date, market participants can adopt the new fallbacks. ISDA will also publish a related IBOR Fallbacks Protocol which market participants can use to amend legacy derivatives entered into prior to the effective date of the amended 2006 ISDA Definitions.

To facilitate legacy transitions, contractual fallbacks for SOR derivatives are scheduled to be published in 3Q 2020, in the ISDA amended definitions and related protocol. SC-STS also supports the ISDA February 2020 consultation to incorporate pre-cessation triggers.

Contractual fallbacks should be adopted only as a safety net. It is recommended that contracts that reference SOR should be replaced or amended to SORA before fallback provisions are triggered.

How will the market transit from SOR to SORA for derivatives trading?

The transition from SOR to SORA will be a phased approach. SC-STS plans to develop active trading of SORA derivatives from the first half of 2020, and trading of SORA derivatives has already commenced in the inter-bank markets. Market participants should consider referencing SORA instead of SOR in new contracts. As SORA derivatives increase in usage, they will become an alternative to SOR-based derivatives and will eventually replace SOR as the benchmark for SGD derivatives.

To facilitate wider use of SORA derivatives, the SC-STS in February 2020 developed and published guidance on market conventions across SORA derivatives (OIS, SOR-SORA basis swaps, and SGD SORA USD SOFR cross currency swaps).

The further deepening of SORA-based markets would also facilitate market participants’ transition of legacy SOR contracts to SORA.

As a market participant, what do I need to do to prepare for this transition?

You should assess your impacted swap and derivatives contracts and familiarise yourself with the developments of this transition.

You may wish to consider either adhering to the ISDA Protocol or bilaterally amending your impacted swap and derivatives contracts to include the revised fallbacks. The ISDA Protocol will provide for standard amendments to include the revised fallbacks and is an efficient method to multi-laterally amend contracts with other adhering parties. Bilateral amendments could be used to amend contracts individually with counterparties on terms that are mutually agreeable.

Please visit www.isda.org for information on ISDA’s efforts on benchmarks reform.

Can I still keep using SOR after 31 December 2021?

No. 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. You should transition towards SORA swap and derivatives well in advance by end 2021.

Are all swap and derivatives transactions impacted by this change?

All interest rate swap and derivatives products, including, but not limited to, cross currency swaps, swaptions and all structured products referencing discontinuing benchmarks such as LIBOR and SOR will be impacted.

Have SORA derivatives trades been executed in the market?

The first SORA Overnight Indexed Swaps (OIS) trades were transacted in the interbank market in November 2019. SGD SORA USD SOFR cross currency swaps, and SOR-SORA basis swaps have also been transacted since then.

The recent increase in SORA derivatives pricing being actively quoted by dealers and made available on key financial market data platforms, including Bloomberg, Refinitiv, and broker screens (BGC, ICAP, Tradition, Tullett Prebon, GFI, Nittan), will help build further liquidity in SORA markets.

In addition, trade processing platforms such as MarkitWire also began supporting SORA derivatives in May 2020, booking the first bilateral SORA Interest Rate Swaps (IRS) trade on their platform.

Good progress has also been made to ensure key market infrastructure is available to facilitate trading of SORA derivatives. In May 2020, LCH launched the central clearing of over-the-counter SORA instruments including SORA OIS and SOR-SORA basis swaps, and also cleared the first SORA swaps. This will help catalyse interdealer activity in SORA derivative products, and allow for broader adoption of SORA in financial products.

Will there be a non-subscription live page to show SORA derivatives pricing for price discovery?

SORA derivatives pricing is increasingly being actively quoted by dealers and made available on key financial market data platforms, including Bloomberg, Refinitiv, and broker screens (BGC, ICAP, Tradition, Tullett Prebon, GFI, Nittan). This will help build further liquidity in SORA markets.

Is OCBC Bank ready to trade SORA?

Yes, we are able to trade SORA derivatives. As of June 2020, the majority of the member banks in the SC-STS, including ourselves, Australia and New Zealand Banking Group Limited, Barclays Bank PLC, BNP Paribas, Citibank NA, DBS Bank Ltd, Deutsche Bank AG, Singapore Branch, HSBC, JP Morgan Chase Bank, N.A., Standard Chartered Bank, and United Overseas Bank Limited are ready to trade SORA derivatives, paving the way for greater market participation and increased liquidity.

How does the SC-STS intend to build up liquidity in SORA products as Singapore dollar instruments by itself does not have much liquidity?

Progress has been made in several domains to encourage greater market participation and enhance liquidity. There has been an increase in SORA derivatives pricing being actively quoted and made available on key financial market data platforms, including Bloomberg and Refinitiv, broker screens. Good progress has also been made to ensure key market infrastructure is available to facilitate trading of SORA derivatives. On 19 May 2020, LCH launched the central clearing of over-the-counter SORA instruments, including SORA OIS and SOR-SORA basis swaps, and also cleared the first SORA swaps between OCBC Bank and Standard Chartered Bank. SC-STS continues to work closely with member banks to facilitate the transition in other products such as bonds and loans to build demand for SORA-linked derivatives (for hedging etc.) in the market.

When will SORA futures be launched and on which exchange? How long will it run parallel to SOR to determine its stability?

While there are no immediate plans to launch SORA futures, discussions are ongoing to determine the relevant products for the market as liquidity deepens.

The derivative markets will be using the compounded-in-arrears SORA. Will it apply across all banks?

ABS SC-STS said in its press release dated 29 June 2020that SC-STS published in February 2020 guidance on market conventions across SORA derivatives (Overnight Index Swaps, Cross-Currency Swaps, SOR-SORA Basis Swaps) to enable broader adoption by market participants.

Should firms start building or investing systems to products referencing the new benchmarks?

The use of new benchmarks such as SOFR and SORA in your financial contracts will require changes in systems, operations, accounting and other processes. It is important that firms start reviewing the changes needed, as these will take time to implement. The industry is trending towards the use of compounded overnight rates. It is therefore important for institutions to have in place the systems to manage such backward-looking compounded overnight rates.