Interbank Offer Rates (IBOR) transition

  • SOR to SORA transitionSOR to SORA transition

    Changing benchmark rates globally

By the end of 2021, the London Interbank Offer Rate (LIBOR), one of the global benchmark rates for financial products ranging from loans and bonds to derivatives, will be replaced.

UOB is working with regulators and industry bodies around the world on effecting a smooth transition to the new benchmark rates. As and when replacement benchmark rates are confirmed, we will keep our customers updated so you can make informed decisions and take any action if required.

Background

In 2014, the Financial Stability Board released a report recommending the replacement of the LIBOR. LIBOR is one of the Interbank Offer Rates (IBOR) used globally to set the benchmark rate for a wide range of financial products, from loans and bonds to derivatives and mortgage-backed securities.

Regulators are now working through an IBOR transition process to identify and to develop risk-free reference rates (RFRs). RFRs are overnight interest rate benchmarks based on actual transactions and hence are more transparent and more reflective of market conditions.

The transition from IBOR to RFRs is expected to occur by end-2021. Regulators and market participants, including UOB, are working toward effecting a smooth transition. We encourage you to stay up to date on industry developments in relation to IBOR, including referring to
UOB’s Rates Strategy reports on developments of the IBOR transition.

Singapore’s transition to RFRs

The Singapore Dollar (SGD) Swap Offer Rate (SOR), which is used as a benchmark rate for financial products such as bonds, derivatives, loans, mortgages and structured notes, is affected by this change.

The Singapore Overnight Rate Average (SORA) has been identified by The Association of Banks in Singapore (ABS) and the Singapore Foreign Exchange Market Committee (SFEMC) 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. You may wish to visit the ABS website for more details on SORA.

To ensure a smooth transition from SOR to SORA, the MAS has set up an industry-led Steering Committee for SOR Transition to SORA (SC-STS). The SC-STS, comprising senior representatives from key banks, relevant industry associations and MAS, provides strategic direction on industry proposals to develop new products and markets based on SORA while supporting this transition process.

Next steps

If you have outstanding contract(s), for example loan(s) or derivative transaction(s) that reference(s) SOR, we will be contacting you with details of how you may be impacted.

We will provide you with ample notice to consider your options before the transition takes place.

For more information on Singapore’s transition from SOR to SORA, you can refer to the ABS website. You can also contact us through our Customer Service hotline or speak with your relationship manager or client adviser for further assistance.

 

Frequently Asked Questions

General

IBOR-related questions

In 2014, the Financial Stability Board released a report recommending that London Inter-bank Offer Rate (LIBOR) be replaced rather than reformed. The LIBOR is one of the Inter-bank Offer Rates (IBOR) used around the world to price financial products, from loans and bonds to derivatives. Regulators around the world are now working through an IBOR transition process to identify and to develop risk-free reference rates (RFRs).

RFRs are overnight interest rate benchmarks that are derived based on actual transactions. The transition to the new reference rates is expected to occur by end-2021.

The transition is expected to occur by end-2021. UOB is currently working with regulators across various jurisdictions on the transition from IBOR-based interest rate benchmarks to proposed alternatives and will keep customers updated on the changes that will impact them.

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 the interest period the amount of payable interest. As a forward-looking rate, an IBOR includes a spread reflecting the credit risk involved in lending money to banks.

A RFR is an overnight interest rate benchmark that is derived based on actual transactions and is published the day after the period to which the rate relates. A RFR is considered to be more robust than an IBOR as it is based on 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.

Yes, several other major economies have transitioned to alternative benchmark rates as follows:

  United States United Kingdom Euro Area Switzerland Japan
 
Alternate Rate SOFR SONIA ESTER SARON TONA
Administrator FRBNY BIE ECB SIX Swiss Exchange BOJ
Secured
Overnight Rate

In 2013, Singapore authorities started the process of enhancing SIBOR. The process of enhancing SIBOR is governed by The Association of Banks in Singapore (ABS) and the Singapore Foreign Exchange Markets Committee (SFEMC).

In December 2017, the ABS-SFEMC issued a public consultation to seek feedback on proposals to enhance SIBOR. Following this, the ABS-SFEMC finalised proposals to enhance SIBOR in July 2018. The key recommendations aimed to increase reliance on market transactions by using the following waterfall of inputs for submission:

  • transactions in the underlying wholesale funding markets;
  • transactions in related markets; and
  • expert judgement.

On 1 July 2019, ABS Benchmarks Administration Co Pte Ltd (ABS Co.) commenced transitional testing of the new enhanced waterfall methodology for SIBOR. The testing of the new methodology is being conducted in parallel with the daily ongoing production of SIBOR, and the existing SIBOR submission and publication process will remain unchanged until further notice.

The outcome of the transitional testing will help determine if further refinements to the proposed methodology are necessary. After the completion of the transitional testing, the ABS-SFEMC plans to provide an update in the second quarter of 2020, including the targeted implementation date for the new waterfall methodology for SIBOR. For more information on the enhancement of SIBOR, please visit: https://abs.org.sg/benchmark-rates/sibor-enhancements.

SOR transition

As SOR utilises the USDollar (USD) LIBOR in its computation, the cessation of LIBOR will directly affect the sustainability of SOR.

The Singapore Overnight Rate Average (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 inter-bank market from 9.00 am to 6.15 pm. This rate is then published on the MAS website at around 6:30 pm. The historical series can be downloaded from the MAS website at: https://secure.mas.gov.sg/dir/domesticinterestrates.aspx.

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.

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. As SORA is based on actual transactions, the rate is more transparent and more reflective of market conditions.

  SIBOR(current) 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 unsecured overnight interbank SGD transactions brokered 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 brokers 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

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. Banks are working to ensure that the transition from SOR to SORA is smooth and with minimal impact to you, financially or otherwise. We will contact you in due course to consider alternative option(s), including SORA, before the transition takes place at the end of 2021.

The priority of the MAS and ABS is the integrity and functioning of the markets which depend on SOR. Hence, efforts are being made to ensure a smooth transition. Various industry work streams have been formed and are represented by relevant stakeholders from several key banks, as well as the MAS and ABS. We will contact you in due course with details on the transition requirements.

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; it is important for institutions to have in place the systems to manage such backward-looking compounded rates.

For individuals

SOR-pegged mortgages

SOR is a key interest rate benchmark in Singapore used to price various financial products including property loans.

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

SOR + Interest Spread = Property Loan Interest Rate

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

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 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.

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 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.

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.

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 the second half of 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)

The Bank will notify you in due course of the actions that you may be required to take as part of the transition.

For businesses

SOR-pegged loans

There is no immediate impact on your loan at this juncture. We will be contacting you in due course with the various options, including other loan package(s) that do not reference SOR, for consideration. 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. 

SORA and SIBOR are different SGD benchmarks that are determined on a different basis. In relation to the usage of SIBOR, 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 the second half of 2020. The outcome of the transitional testing will be considered by the SC-STS, which will issue industry guidance in due course.

We will be contacting you in due course with different loan package(s) for your consideration. You will be able to choose your preferred loan package that best meets your needs.

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 getting in touch in due course to discuss the options that are available to you as a borrower.

Depending on market conditions at that point in time and the loan package that you opt for, there could be some changes in your repayments. We will be contacting you in due course with different loan package(s) for your consideration.

All loans that reference SOR as a benchmark rate will be impacted. We will be contacting you in due course to inform you of the necessary actions to take.

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.

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. 

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

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.  

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.

For companies that use 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 before end-2021.

Based on the results of the International Swaps and Derivatives Association (ISDA) consultation and the recommendation of the SC-STS, ‘Adjusted SOR’ has been identified as the contractual fallback for legacy SOR 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. This 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.

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.

Adjusted SOR, like the SOR, will be administered 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. It is not intended as a reference benchmark for the SGD derivatives market, which should transition to reference SORA. As such, Adjusted SOR will eventually be discontinued. The SC-STS is reviewing the issue of how long Adjusted SOR will be maintained to fulfil its function as an interim measure and will provide further information on this matter in due course.

The 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.

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 SC-STS plans to develop active trading of SORA derivatives from the first half of 2020. The trading of SORA derivatives in the inter-bank markets has also commenced.

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 between November and December 2019. SORA cross-currency swaps and SOR-SORA basis swaps have also been transacted since then. The industry is working towards making prices for SORA derivatives more widely available on market data platforms by the second half of 2020.

For corporate bond issuers

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’ etc. Please ascertain 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 a 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 determination, you should consult your advisers and consultants (such as banks, 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), the issuer 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, 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.

The industry is in the midst of developing the relevant SORA-based market conventions and language to document new issuance based on this benchmark. This is likely to be ready by mid-2020.

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 are two approaches being studied and these will be assessed further by the SC-STS to determine which is more suitable for the SGD bond market. The first is the appointment of an Independent Adviser to identify a fallback benchmark rate. The other is the US Alternative Reference Rates Committee (ARRC) waterfall approach, which is more prescriptive. The SC-STS will issue industry guidance on this in due course.

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.