Transition of interest rate benchmarks

LIBOR and SOR are expected to be discontinued after 31 December 2021.
Here’s how you may be affected.

GLOBAL BENCHMARKS TRANSITION

Interbank offered rates (IBORs) are widely used interest rate benchmarks for various financial products, including but not limited to loans, bonds and derivatives. IBORs rely on rates submitted by panel banks. To improve the robustness and integrity of financial benchmarks, regulatory authorities around the world have announced the transition from IBORs to overnight risk-free rates (RFR) underpinned by actual transactions. LIBOR — the London Interbank Offered Rate — is expected to be discontinued after 31 December 2021.

The benchmarks transition is a complex process. Regulatory authorities and financial institutions involved in the transition are committed to ensuring a smooth transition for all end-users, given the impact it has on existing and new financial products.

These are the new benchmarks that have been identified:

IMPACT ON SINGAPORE DOLLAR SWAP OFFER RATE (SOR)

SOR is a commonly used benchmark in Singapore. It is defined as the synthetic rate for deposits in SGD, which represents the effective cost of borrowing the SGD synthetically by borrowing USD for the same maturity, and swapping out the USD in return for the SGD. Given that SOR utilises the USD LIBOR in its computation, the cessation of USD LIBOR after 31 December 2021 will directly affect the sustainability of SOR.

The Association of Banks in Singapore (ABS) and Singapore Foreign Exchange Market Committee (SFEMC) have identified the Singapore Overnight Rate Average (SORA) as the most suitable interest rate benchmark to replace SOR. SORA has been published by the Monetary Authority of Singapore (MAS) since 2005, and is a robust benchmark that is underpinned by a deep and liquid overnight interbank funding market.

WHAT DOES IT MEAN FOR YOU

How will payments under my products be affected?

If payments under a product is calculated by reference to LIBOR or SOR and if such rate is permanently discontinued, the relevant contract needs to be reviewed to assess if the relevant consequences are specified in the terms of the contract. If not, parties will have to agree to apply a new benchmark or a “fallback” replacement rate in place of LIBOR or SOR upon its discontinuation so that the contract can continue to be effective.

Will I be disadvantaged because of the new benchmarks?

We are working to ensure that the transition is of minimal impact to you, financially or otherwise. Depending on the product being affected, the transition approaches may differ according to market developments and industry guidance. We will contact you to assist with the transition in due course.

Depending on how the fallback replacement rate compares to LIBOR or SOR, payments under that contract may be more or may be less than they would otherwise have been.

frequently asked questions

For Individuals

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I hold investment products which reference LIBOR/ SOR. What action is required?

There is no immediate action required. We will be notifying you in due course of the actions that you may be required to take as part of the transition. Please also look out for relevant notices from the issuer.

Would my retail loans be affected by this transition?

If you have retail loans referencing SOR, the loans will be affected by this transition. There is no immediate action required from you unless you wish to reprice or restructure these loans before the industry wide exercise where your bank will contact you to transition to other loan packages which do not reference SOR.

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For Businesses

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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.

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.

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Articles

The impact of COVID-19 on the IBOR-to-RFR transition

In Singapore, the transition from the SOR to SORA, and the reform in SIBOR, has continued to see good progress from both the regulators and the banking sector.

Learn more

A primer on new benchmark rates

Meet the replacement rates and get an understanding of what is being done in the US, UK, Europe and Singapore summary.

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SOR to SORA: Looking through the pain to see the positives

There will be teething issues making the transition, but these should not last long. Read on to see the three positive implications of the change.

Learn more

Authors
Selena Ling

Head of Treasury Research and Strategy, OCBC Bank

Terence Wu

FX Strategist, OCBC Bank

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