Frequently Asked Questions on IBOR Transition

General

Transition to alternative risk-free rates (RFRs)

An IBOR is a term rate that is set prior to the commencement of the interest period to which it relates. This enables a borrower to calculate at the outset of each interest period the amount of payable interest. As a forward-looking rate, an IBOR includes a spread reflecting the credit and term risks involved in lending money to customers.

A RFR is an overnight interest rate that is derived based on actual, observable transactions in active, liquid underlying markets. This contrasts with the scarcity of underlying transactions in the term interbank and wholesale unsecured funding markets from which some IBORs are constructed. As such, a RFR is considered to be more robust than an IBOR. As a RFR is an overnight rate, it does not include any spread that reflects credit and term risks.

The Bank is engaging regulators across various jurisdictions on the transition from IBOR-based interest rate benchmarks to appropriate alternatives in the banking products we offer to our customers. While some jurisdictions are more advanced in that review, the transition is expected to occur by end-2021.

We are committed to providing our customers advance notice before these changes take place to keep them updated on the changes that will impact them.

For customers with SOR-based products, we will contact them in the first half of 2021 to provide more information on the transition to SORA or other appropriate alternatives.

Any product using IBORs 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 IBORs.

The Bank may take into account market guidance and recommendations from industry bodies such as the International Swaps and Derivatives Association (ISDA) for derivatives, International Capital Market Association (ICMA) for bonds and repos, Loan Market Association (LMA) and Asia Pacific Loan Market Association (APLMA) for corporate loans where applicable, in our contract papering approach for this eventual transition from IBORs to replacement rates.

Transition to SORA

The need to transition from SOR arises from the global reform efforts to improve the robustness and integrity of financial benchmarks. As part of this shift, 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 US Dollar (USD) LIBOR in its computation, the cessation of LIBOR will directly affect the sustainability of SOR.

Arising from global efforts on interest rate benchmark reform, The Association of Banks in Singapore (ABS) and the Singapore Foreign Exchange Market Committee (SFEMC) have initiated the reform of SIBOR. They have assessed that it will be beneficial in the long run for Singapore Dollar (SGD) financial markets to shift to a SORA-centred SGD interest rate market. This will avoid market segmentation, facilitate transparency and easier comparison of loan pricing, and promote the development of deep and efficient SGD financial markets.

SORA has been published daily by the Monetary Authority of Singapore (MAS) since 1 July 2005. The rate is derived from taking the volume-weighted average of all the SG Dollar (SGD) rates of overnight cash transactions done in Singapore in the interbank market from 8.00 am to 6.15 pm. This rate is then published on the MAS website by 9.00am on the next business day.

Any product using 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 SOR.

SIBOR is more commonly used in the small- and medium-sized enterprise (SME) and retail loan markets. The discontinuation of 6-month and 12-month SIBOR is not expected to impact many customers given the low market usage of these rates.

SORA is an overnight rate for cash transactions in the overnight funding market while SOR is a foreign exchange (FX) swap implied interest rate derived rate for SGD interest rate derivative transactions in the USD/SGD FX swap market. SIBOR is pegged to interbank interest rates, based on the contributions by panel banks of the rate at which it could borrow funds, were they to do so by asking for and accepting the interbank offers in reasonable market size.

As SORA is based on actual transactions, the rate is more transparent and more reflective of market conditions. Financial products referencing SORA typically use an average of daily SORA readings over a period. This is in contrast to SOR/SIBOR-based products, which generally use only a single reading of SOR or SIBOR for each interest payment period.

  SIBOR SOR SORA
Definition Rate at which a panel bank can borrow SGD in the unsecured interbank market Effective rate of borrowing SGD synthetically, by borrowing USD and swapping for SGD Average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore
Methodology and inputs Trimmed average of input from a poll of 20 panel banks Volume-weighted average rate of USD/SGD FX swap transactions, with USD LIBOR as an input Volume-weighted average rate of transactions reported by reporting banks in Singapore to MAS
Administrator ABS ABS MAS
Tenor 1-month, 3-month, 6-month, 12-month Overnight, 1-month, 3-month, 6-month Overnight; 1-month, 3-month, 6-month for average compounded SORA

If you do not currently have or transact in financial products (e.g. loans, derivative products, bonds) that use SOR as the interest rate benchmark, the cessation of SOR will not impact you.

If you currently have or transact in financial products (e.g. loans, derivative products, bonds) that use SOR as the interest rate benchmark, the cessation of SOR means that these products will be using a new interest rate benchmark. The Bank will contact you in the first half of 2021 to provide more information on the transition to SORA or other appropriate alternatives.

For financial products referencing 12-month SIBOR, the Bank has contacted you to replace the reference rate with another alternative rate.

There is no immediate impact to existing contracts referencing 1-month, 3-month or 6-month SIBOR, as the transition of these contracts is expected to take place after the industry has substantially completed the transition from SOR to SORA. The Bank will engage customers in a timely manner to provide sufficient notice for them to consider other loan packages.

Customers need to be mindful that the industry has also proposed for the discontinuation of SIBOR by 2024 and SORA is proposed as the main interest rate benchmark for financial products.

For customers with SOR-based products, we will contact them in the first half of 2021 to provide more information on the transition to SORA or other appropriate alternatives.

The priority of the MAS and ABS is the integrity and functioning of the SGD financial markets. Hence, every effort is being made to ensure a smooth transition to SORA. Various industry work streams have been formed and are represented by relevant stakeholders from several key banks, as well as the MAS and ABS.

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 while others have concluded that it would not be possible for such term benchmarks to be constructed.

The Steering Committee for SOR Transition to SORA (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.

Customers are encouraged not to delay their transition plans in anticipation of the availability of term SORA benchmarks as there is no way to guarantee its development. Customers should instead prepare to transact in products that reference compounded SORA.

The use of 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 rates, in SGD as with the major currencies. Therefore it is important for institutions to have in place the systems to manage such backward-looking compounded rates.

In September 2020, UOB provided CapitaLand with a bilateral term loan facility that references both SORA and the Secured Overnight Financing Rate (SOFR), the first of its kind in Singapore.

We are working closely with the industry on the transition to SORA and will announce in due course new SORA-based products when available.

More FAQs

Here are some frequently asked questions by individual and business customers.

For Individuals

Property loans

SOR and SIBOR are key interest rate benchmarks in Singapore used to price various financial products including property loans.

For example, a SOR-linked or SIBOR-linked property loan package is calculated as follows:

SOR / SIBOR + customer spread (margin) = Property Loan Interest Rate

If you have a property loan that references SOR / SIBOR, we will contact you at the appropriate time to give you enough notice to consider switching to other loan packages with pricing options, including SORA, and guide you through the transition.

For property loans referencing 12-month SIBOR, the Bank has substituted the benchmark rate to 3-month SIBOR rate with effect from 1 October 2020.

As the offering of replacement property loan packages is a one-time industry wide exercise driven by the discontinuation of SOR, the Monetary Authority of Singapore (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 refinance with another financial institution), you may be subject to TDSR computation under the prevailing refinancing rules.

There is currently no guidance from the MAS on TDSR exemption in relation to the discontinuation of SIBOR.

Yes, you can opt to switch your property loan to a different pricing package during the industry-wide transition if you do not wish to take up the package that uses the replacement benchmark interest rate for SOR-pegged property loans.

SOR utilises the US London Inter-bank Offered Rate (LIBOR) in its computation. As LIBOR is expected to be discontinued after the end of 2021, the sustainability of SOR will be affected. As such, there will be a need to replace your property loan referencing SOR before the end of 2021.

For property loans referencing 12-month SIBOR, the Bank has substituted the benchmark rate to 3-month SIBOR rate with effect from
1 October 2020.

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 transition takes place. Please note that in such a repricing or restructuring scenario, you may be subject to TDSR computation under the prevailing refinancing rules.

 

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

The issuer of such investment products (including but not limited to floating rate notes, structured notes, etc) will notify you in due course of the actions that you may be required to take as part of the transition.

For Businesses

Loans

There is no immediate impact on your loan at this juncture. We will be contacting you in the first half of 2021 with details of how you may be impacted and provide you with options to consider other loan packages that do not reference SOR. 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 that may be required.

It is expected that SIBOR will be discontinued three to four years, potentially by 2024, in lieu of wider adoption of SORA. A convergence of the SOR and SIBOR markets towards one that is centred on SORA is anticipated to bring significant long-term benefits for market efficiency and price transparency.

We will be contacting you in the first half of 2021 to provide more information on the transition to SORA or other appropriate alternatives. You will be able to choose your preferred loan package that best meets your needs. You will also need to consider if replacing a SOR loan with other benchmarks impacts your related transactions (e.g. hedges) and the corresponding accounting and tax implications.

We will no longer be able to use SOR as a benchmark rate in calculating your interest payment when the rate is no longer being published. 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 can start preparing for the transition as early as possible by reviewing the terms and conditions of your loan contract to understand the implications and actions that may be required.

We will be contacting you in the first half of 2021 to provide more information on the transition to SORA or other appropriate alternatives. You will be able to choose your preferred loan package that best meets your needs.

Depending on market conditions at that point in time and the pricing package that you opt for, there could be some changes in your repayments. We will be contacting you in the first half of 2021 to provide more information on the transition to SORA or other appropriate alternatives. You will be able to choose your preferred loan package that best meets your needs.

The global transition to using alternative risk-free rates (RFRs) in replacement of interbank offer rates (IBORs) is ongoing. Certain IBORs are currently being reformed and in some instances, may also be discontinued or used alongside relevant RFRs. This may impact the value of contracts concerned that reference IBORs. Hedging arrangements may also be affected.

The Bank is working closely with the industry-led SC-STS established by the MAS and other industry groups, with a collective aim to achieve an orderly transition from the SOR to SORA in Singapore.

We are also preparing for the discontinuation of LIBOR by identifying products where LIBOR is being used, actively engaging with customers on the consequences of LIBOR’s discontinuation, considering fallback provisions, contract repapering and other migration options, in taking steps for this eventual transition to RFRs.

We will communicate further with you in time to come as when there are developments, such as in market conventions and industry solutions. In the interim, we advise you to seek independent professional advice on the potential impact from the discontinuation of LIBOR and other IBORs, including SOR, on your products and trades with the Bank and on your business in general.

We may also contact you to discuss contingency and transitional arrangements.

All loans that reference SOR as a benchmark rate will be impacted. We will be contacting you in the first half of 2021 to provide more information on the transition to SORA or other appropriate alternatives. You will be able to choose your preferred loan package that best meets your needs.

If you had hedged your SOR loan with a swap, your swap is likely to be pegged to SOR. You should review the terms of your swap contract as early as possible to understand the implications once 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.

An alternative would be to transition both your loan and swap to reference SORA, which will allow for hedge effectiveness to be maintained. The SC-STS plans to provide market guidance on how users may undertake this process and will provide further information on this matter in due course.

The SC-STS announced on 27 October 2020 that issuances of new SOR-linked loans and securities that mature after end-2021 are to cease by end-April 2021.

If you wish to take up a new loan that references SOR, you should review the proposed loan contract for terms that set out or permit a switch or fallback to an alternative rate from SOR.

You may also wish to read the Bank’s Notice of Changes to Interest Rate Benchmarks (Corporate) for more information.

Should you be interested in a SORA-based loan, please get in touch with your relationship manager for further discussions.

There are a few ways SORA could be used to calculate interest payments for corporate loans. The SC-STS is studying various approaches and will provide an update in due course.

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.

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. As such, SORA does not have 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, it is likely that an adjustment spread over SORA would be included. This is to make up for the economic difference between SOR and SORA. We will take reasonable steps to minimise the economic impact and will work with you on the transition.

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

We may reference SOFR and SONIA for floating rate USD and GBP LIBOR loans. Interest can be calculated based on a compounded average of the overnight interest rate benchmark plus an applicable margin. We will be contacting you in due course to assist you with the transition of such products.

In September 2020, UOB provided CapitaLand with a bilateral term loan facility that references both SORA and the Secured Overnight Financing Rate (SOFR), the first of its kind in Singapore.

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.

 

Derivatives

If you have outstanding derivative contracts referencing SOR that mature beyond end 2021, the smoothest transition would be to replace or to amend contracts referencing SOR to reference SORA, by way of either adhering to the ISDA 2020 IBOR Fallbacks Protocol or entering into a bilateral amendment agreement, before end-2021.

Based on the results of the International Swaps and Derivatives Association (ISDA) consultation and the recommendation of the SC-STS, ‘Fallback Rate (SOR)’ (formerly referred to as Adjusted SOR) has been identified as the primary fallback reference rate for SOR derivatives.

Similar to SOR, Fallback Rate (SOR) is a foreign exchange (FX)-implied rate, based on actual transactions in the USD/SGD FX swap market. It is available in overnight, 1-month, 3-month and 6-month tenors. Fallback Rate (SOR) will use the fallback for USD LIBOR, i.e. ‘Fallback Rate (SOFR)’, which is calculated by compounding USD SOFRplus a spread adjustment.

Unlike SOR, Fallback Rate (SOR) is a backward-looking rate. This is similar to Fallback Rate (SOFR)and the rate will be known and published at the end of the calculation period.

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.

ABS Co, in collaboration with ISDA, published a Fallback Rate (SOR) Factsheet in conjunction with the commencement of the Fallback Rate (SOR) publication on 30 September 2020.

Fallback Rate (SOR) is provided by the ABS Co. and is intended as an interim measure to provide users with additional time to transition their derivatives contracts to reference SORA. The contractual fallback to Fallback Rate (SOR) serves mainly to address the risk for contracts that have not been transitioned to SORA despite the best efforts of market participants to do so.

Fallback Rate (SOR) is not intended for use in new contracts and it will be discontinued after about three years following the fallback trigger.

The ISDA has amended the 2006 ISDA Definitions to incorporate the fallback trigger and fallback rates for LIBOR and other major IBORs, including the fallback to Fallback Rate (SOR) for SOR derivatives.

The ISDA launched the IBOR Fallbacks Supplement to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol on 23 October 2020. The supplement and the amendments made by the protocol will take effect on 25 January 2021. On this date, all new derivative contracts that incorporate the 2006 ISDA Definitions and reference one of the covered IBORs will contain the new fallbacks.

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.

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.

The transition from SOR to SORA will be a phased approach. The trading of SORA derivatives in the interbank markets has commenced and the SC-STS will develop active trading of SORA derivatives over time.

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 has developed and published confirmation templates for standard SORA 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.

You should assess your affected contracts, products and services, and familiarise yourself with the developments of this transition.

If you wish to enter into new derivative contracts that reference SOR, you should consider adopting appropriate fallbacks in your contracts. If you wish to enter into new derivatives contracts that references SORA, please contact your relationship manager for more information.

No, the continued use of SOR is not likely to be feasible after 31 December 2021 as one of its components is USD LIBOR. The UK Financial Conduct Authority, 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 prepare to shift towards SORA derivatives well in advance of end 2021.

All SGD interest rate derivatives, including cross-currency swaps and all structured products referencing SOR will be impacted.

The first SORA OIS trades were transacted in the interbank market in November 2019. SORA-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 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.

 

Corporate bond issuances

Given that SOR will be impacted by the expected discontinuation of USD LIBOR after the end of 2021, issuers should start preparing for the change now.

For issuers with existing debt securities which reference SOR, which will mature beyond the end of 2021, you should start preparing for the transition as early as possible. Issuers are encouraged to review the terms and conditions of the affected debt securities to understand the implications and the actions that may be required.

For issuers looking to issue debt securities before the end of 2021, kindly refrain from referencing SOR and instead consider referencing SORA. You may wish to discuss this with your relationship manager.

Please refer to the terms and conditions of the debt securities you have issued and look out for any reference to SOR.

Perpetual debt securities, floating rate notes or debt securities with ‘make-whole’ features are likely to reference SOR. Please review sections with the headers such as ‘Payment’, ‘Interest Rate’, ‘Distribution’, ‘Swap-Offer Rate’, ‘Reset Date’, ‘First Call Date’, ‘Call Date’ and ‘Benchmark’. Please determine how SOR or the benchmark reference rate is being determined in the debt securities you have issued.

Please review the terms and conditions to assess if they provide for the discontinuation of SOR or an interest rate benchmark. This is also known as ‘Fallback Replacement Language’ (refer to the question on Fallback Replacement Language). Key headers include ‘Benchmark Discontinuation and Replacement’, ‘Independent Advisor’, ‘Benchmark Events’, ‘Adjustment Spread’ and ‘Benchmark Amendments’.

If the terms and conditions address the discontinuation of SOR or benchmark, you will not need to take further action. However, if the terms and conditions do not address the discontinuation of SOR or benchmark, you should assess the implications and actions required in respect of such debt securities. As this is an important consideration, you should consult your relationship manager and other advisers and consultants (such as in-house counsels, external law firms or professional firms who supported you in the issuance of debt securities) accordingly.

The terms and conditions of debt securities will set out, among other things, whether certain terms (such as the benchmark setting) may be amended. If so, please check the terms and conditions to see if the change requires the consent of the bondholders, the bond trustee or otherwise. You may wish to consult your advisers and consultants.

If the terms and conditions of the debt securities provide for a call option (which is a common feature in perpetual debt securities), you may call the debt securities on the designated redemption date without having to amend the terms and conditions to cater for the SOR to SORA transition.

If the debt securities are not subject to a call option and the coupon of the securities has a reset feature based on SOR and the debt securities mature after the end of 2021, you should discuss with your advisers and consultants if and how the terms and conditions should be amended (including considering consent solicitation exercises).

The transition is an industry-wide exercise and all banks would be aware of the change. Issuers may approach any one or more of the banks on the transition.

Issuers are strongly encouraged to refer to the SORA market compendium, published by the SC-STS on 27 October 2020, for recommended conventions and fallback provisions for SORA.

Issuers may approach any of the banks for further information.

Coupons on fixed rate debt securities will be unaffected by the SOR to SORA transition as there is no re-fixing of the coupons over the tenor of the debt securities. For debt securities with any ‘make-whole’ feature, the issuer should ensure that any reference to SOR for the ‘make-whole’ calculation also contains transition provisions. This will ensure that the ‘make-whole’ clause can continue to be applied, if required, after end 2021.

If the swap references SOR and extends beyond the end of 2021, the issuer should contact its swap counterparty to understand better how the SOR to SORA transition will impact the swap transaction.

There were two approaches being studied and assessed by the SC-STS to determine which was more suitable for the SGD bond market. The first was the appointment of an Independent Adviser to identify a fallback benchmark rate. The other was the US Alternative Reference Rates Committee (ARRC) waterfall approach, which was more prescriptive. The approach for the SGD bond market is a combination of the two approaches.

The fallback replacement approach for SORA is now set out in the SORA market compendium the SC-STS published on 27 October 2020. Please refer to the compendium for more information.

Currently, the coupon of a floating rate note referencing SORA will be based on a daily overnight rate to be compounded over an agreed period of time, say, 1 month or 3 months. A term rate is currently being explored and therefore, it is not available.

During the transition period (now till the end of 2021) where SOR remains available, secondary bond prices can be quoted on SOR plus an appropriate spread. Alternatively, bonds can be quoted on a yield basis.

The SC-STS and market participants are working towards further developing the SOR-SORA basis swap market.