Help And Support

General - Transition of Benchmark Rates

Frequently asked questions
  • General

    Global Benchmark Reforms

    1. What is IBOR? Why is there a need for IBOR to transition to alternative benchmark rates?

      Interbank Offered Rates (“IBORs”), in particular, the London Interbank Offered Rates (“LIBORs”) are financial interest rate benchmarks used in various financial contracts, including but not limited to loan, derivative and bond documentation.

      LIBOR is currently set for five currencies (CHF, EUR, GBP, JPY and USD) and seven tenors. It is based on submissions from panel banks, which indicate the rate at which they could borrow from other banks.

      The need to transition from IBORs arises from the global reform efforts to improve the robustness and integrity of financial benchmarks. For general background regarding benchmarks transition from LIBOR, please refer to IOSCO’s Statement on Communication and Outreach to Inform Relevant Stakeholders Regarding Benchmarks Transition dated 31 July 2019.

      LIBOR is often calculated by reference to “expert judgement” by panel banks. As part of the global benchmark reforms, 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 a result, the FCA and other regulators are requiring banks to plan for the discontinuation of LIBOR by the end of 2021 and are encouraging market participants to transition to alternative benchmark rates.

    2. Which rates are likely to replace LIBOR?

      Alternative benchmark rates have been identified by the respective jurisdictions to replace LIBORs and are set out in the table below. These risk free rates (“RFRs”) are all overnight interest rate benchmarks, and are based on actual transactions which may be secured or unsecured.

      United Kingdom

      United States

      Euro Area

      Switzerland

      Japan

      Current Benchmark

      GBP LIBOR

      USD LIBOR

      EUR LIBOR

      CHF LIBOR

      JPY LIBOR

      New Benchmark

      SONIA

      SOFR

      ESTER

      SARON

      TONA

      Sterling Overnight Index Average

      Secured Overnight Financing Rate

      Euro Short-Term Rate

      Swiss Average Rate Overnight

      Tokyo Overnight Average Rate

      Based on transactions which are unsecured

      Based on transactions which are secured

      Based on transactions which are unsecured

      Based on transactions which are secured

      Based on transactions which are unsecured

    3. How does the alternative benchmarks (ie RFRs) differ from LIBOR?

      The alternative benchmarks (ie RFRs) differ from LIBOR in the following ways:

      1. RFRs are overnight rates (published retrospectively) while LIBOR is a forward looking term rate (published prospectively).
      2. Payments referencing RFRs are only known (in arrears) at the end of accrual period while that referencing LIBOR are known (upfront) at the start of accrual period.
      3. Unlike LIBOR, RFR contains little or no credit risk or term premium.

    Impact on Singapore’s Swap Offer Rate (SOR)

    1. What are the Singapore benchmark rates that will be affected?

      As USD LIBOR is expected to be discontinued after 31 December 2021 and given that Singapore’s Swap Offer Rate (SOR) utilises the USD LIBOR in its computation, the cessation of USD LIBOR will directly affect the sustainability of SOR.

      The Association of Banks in Singapore and Singapore Foreign Exchange Market Committee (“ABS-SFEMC”) have identified Singapore Overnight Rate Average (SORA) as the most suitable interest rate benchmark to replace SOR. On 30 August 2019, ABS-SFEMC released a consultation report that identified SORA as the alternative interest rate benchmark to SOR, and set out a roadmap for this transition. The consultation closed on 31 October 2019, and the response paper to the consultation was released in March 2020. Overall, there was broad support for the proposed transition approach to SORA, with many respondents noting that this was aligned with the global transition from LIBOR to RFR.

      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.

      To ensure a smooth transition from SOR to SORA, MAS has set up an industry-led Steering Committee for SOR Transition to SORA (“SC-STS”) comprising senior representatives from key banks, relevant industry associations and MAS. SC-STS will provide strategic direction on industry proposals to develop new products and markets based on SORA, and support this transition process in the coming quarters.

      Click here for the list of SC-STS members.

    2. What is SORA? Where can I get data on this benchmark?

      SORA is published daily by the MAS and is a robust benchmark underpinned by a deep and liquid overnight interbank funding market. It is published on the MAS website daily and has been accessible at no charge since 1 July 2005. The historical series can be downloaded from the MAS website.

    3. Why did ABS-SFEMC not replace SOR with SIBOR which will be enhanced soon?

      While SIBOR is well understood by the market, ABS-SFEMC assessed that there were significant risks in concentrating all SGD derivatives and cash market products on the SIBOR benchmark.

      First, the volume of transactions underpinning SIBOR is significantly smaller than the volume of transactions in the overnight interbank funding markets which underpins SORA.

      Second, even with the proposed measures to enhance SIBOR by anchoring panel submissions to eligible wholesale funding transactions, the enhanced SIBOR would be vulnerable to a discontinuation of USD LIBOR as it relies on SOR as an input in its waterfall methodology.

      Third, given the direction of global benchmark reforms, structural shifts in banks’ key sources of funding, and the move to have derivatives markets reference overnight interest rate benchmarks, ABS-SFEMC viewed that adopting SORA as the benchmark for the SGD derivatives market would align the SGD market with international conventions and best practices. This will support the continued participation of global institutions and investors in the SGD market.

    4. Is the usage of overnight interest rates common in the financial markets? How does SORA compare to SOR? Is it more volatile?

      The use of overnight interest rate benchmarks in financial products is increasing in other major currency areas. These include futures and Overnight Indexed Swaps (OIS) referencing SOFR and SONIA. Market participants that have experience with such products should find the adoption of SORA-based derivatives to be relatively easy.

      Globally, the use of overnight interest rate benchmarks (i.e. risk-free rates or RFR) has been gaining traction in many key jurisdictions, including the UK and US. While there were some initial concerns around the volatility of SORA on a daily basis, it was recognised that financial products which reference overnight rates typically use an average rate over a period, and not a single day’s rate. For example, a SGD OIS or loan contract could be settled against the 3-month or 6-month compounded average SORA. As seen in the chart below, this compounded average SORA which financial contracts would reference, is more stable than the 6-month SOR, which most SGD derivatives currently reference.

      There are also several key benefits in using compounded SORA in cash markets:

      • Such rates constructed from deep underlying overnight funding markets, are very robust and not susceptible to manipulation.
      • The averaging effect of compounded SORA rates would result in more stable rates, compared to forward-looking term rates, which are exposed to idiosyncratic market factors on a single day’s fixing, such as quarter/year-end volatility.
      • With the SORA derivatives market moving towards compounded rates (in line with derivatives markets globally), having cash products pegged to compounded rates allows for more effective hedging as the basis risk between cash and derivatives markets is minimised.

    Impact of the benchmark reforms

    1. Which product types will be affected by the transition?

      Any product using LIBOR and SOR as a reference rate will be affected. This could include derivatives, cash market products (e.g. business loans, syndicated loans, retail mortgages, floating rate notes, perpetual bonds and banks’ capital instruments), as well as outstanding debt securities with resettable interest rate features referencing LIBOR and SOR.

    2. 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.

    3. Will the value of my products be impacted?

      A change in benchmark from LIBOR or SOR to the relevant fallback replacement rate may potentially affect the value of the product (i.e. the mark-to-market value) so that it may be worth more than or less than it would otherwise have been. If the value of a product changes following such transition, this could cause accounting or tax implications for you.

    4. 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.

  • Loans

    1. I currently have a property loan referencing SOR. How does the discontinuation of SOR affect my property loan? Do I have to take any action now?

      If you have a property loan that references SOR, your bank will contact you at the appropriate time, giving you enough notice to consider switching to other loan packages which do not reference SOR, and guide you through the transition. There is no immediate action required from you.

    2. When the transition happens, will I be subject to re-computation of the Total Debt Servicing Ratio (TDSR) to switch my property loan referencing SOR to another loan package?

      As the offering of replacement property loan packages is an industry wide exercise driven by the discontinuation of SOR, MAS will not require financial institutions to re-compute the TDSR for affected customers who switch to replacement loan packages.

      Please note that under other refinancing scenarios (for example, should you initiate a refinancing with another financial institution), you may be subject to TDSR computation under the prevailing refinancing rules.

    3. Can I choose not to replace my property loan referencing SOR?

      SOR utilises USD LIBOR in its computation. As USD LIBOR is expected to be discontinued after the end of 2021, the discontinuation of USD LIBOR will directly affect the sustainability of SOR. As such, there will be a need to replace your property loan referencing SOR before the end of 2021.

    4. Would my other retail loans be affected by this transition?

      If you have other retail loans referencing SOR, the loans will similarly 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.

    5. What is the possibility of using SIBOR (or enhanced SIBOR) as a replacement rate for retail loans referencing SOR?

      ABS Benchmarks Administration Pte Ltd (ABS Co) is conducting a transitional testing for the enhanced SIBOR, and will provide an update after the transitional testing is completed in 2H 2020. The results of the transitional testing will be considered by the Steering Committee for SOR Transition to SORA (SC-STS), which will issue industry guidance in due course.

  • Investment products (e.g. bonds and structured notes)

    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.

  • Disclaimer

    This communication is solely for information purposes only and should not be construed as an offer or solicitation for the subscription, purchase or sale of any products, securities or financial instruments or to participate in any particular trading strategy. Whilst the information contained herein has been compiled from sources believed to be reliable and we have taken all reasonable care to ensure that the information contained in this communication is not untrue or misleading at the time of publication, we cannot guarantee and we make no representation as to its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or view contained in this communication is subject to change without notice. We are under no obligation to update or keep current the information contained herein.

    We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of any customer, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting on such information or opinion or view.

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