What you need to know about SORA, the new benchmark for interest rates in Singapore, Banking News & Top Stories
Over the next three years, thousands of multi-billion dollar variable rate home loans will need to be replaced with a new loan program.
Indeed, they are based on two old interest rate benchmarks, the Singapore Dollar Swap Offer Rate (SOR) and the Singapore Interbank Offered Rate (SIBOR), both of which are being phased out.
Singapore banks have started the process of converting all existing home loans based on the SOR. They plan to complete this process by October 31, 2022, with a view to shutting down the SOR after June 30, 2023. Borrowers with loans tied to SIBOR will also need to convert their loans on time, as major SIBOR reference rate will be stopped after December 31, 2024.
Going forward, the Singapore Overnight Rate Average (SORA), administered by the Monetary Authority of Singapore (MAS), will become the main benchmark interest rate in Singapore’s financial markets. As of April 30, 2021, S $ 4.2 billion1 SORA-indexed retail and institutional loans have been issued and adoption is expected to accelerate in the coming months.
What are SOR and SIBOR?
SOR and SIBOR have served as the primary benchmark for variable rate loans in Singapore for the past 20-30 years. Both rates are administered by the Association of Banks of Singapore Benchmarks Administration Co. (ABS Co.).
SOR, which is mainly used in commercial lending, represents the effective cost of borrowing Singapore dollars (SGD) synthetically, borrowing US dollars (USD) and converting them to SGD in the forex market. As SOR uses the London Interbank Offer Rate (LIBOR) in USD in its calculation, it will be discontinued after June 30, 2023 with LIBOR in USD.
SIBOR represents the average cost that a bank expects to pay another bank to borrow DGS. It is calculated based on daily submissions from a panel of contributing banks and may not always be fully transaction-backed.
Thus, in line with global reforms aimed at improving the robustness and integrity of financial benchmarks, the Steering Committee for the SOR & SIBOR to SORA Transition (SC-STS), an industry-led steering committee established by MAS, has felt that it would be appropriate to move away from SOR and SIBOR, towards SORA.
As of May 1, 2021, banks have stopped using SOR in new loans and securities maturing after the end of 2021. Banks will also stop using SIBOR in new loans as of October 1, 2021.
To help existing retail borrowers abandon their SOR-based loans, banks will offer these borrowers a SORA conversion package designed to minimize interest payment differences at the time of conversion.
Besides the SORA conversion package, borrowers can also choose to convert their SOR loans into fixed rate loans or loans indexed to other benchmarks such as interest paid on fixed deposits.
Ms. Ong-Ang Ai Boon, Director of ABS, said: âBanks have prepared over the past two years to ensure a smooth transition of benchmark interest rates from SOR to SORA for all clients. We hope it will be a seamless transition to SORA for most customers. “
Global benchmark interest rate reforms
Regulators and banks in major economies are also moving towards alternative benchmark interest rates similar to the SORA.
In the United States, banks will switch from using USD LIBOR to the Secure Overnight Funding Rate (SOFR), which is based on transactions in the overnight repo (repo) agreement market. In the UK, banks will switch from using LIBOR in pounds sterling (GBP) to the Sterling Overnight Index Average (SONIA), which is based on overnight market transactions in pounds sterling.
What is SORA?
SORA, which has been administered by MAS since 2005, is the volume-weighted average borrowing rate in Singapore’s overnight unsecured interbank cash market. Unlike SIBOR, which is based on estimates from Singaporean banks, SORA is based on transaction data.
âThe SORA is a reliable, robust and transparent rate because it is fully backed by interbank overnight cash market transactions,â adds Ms. Ong-Ang.
Interest payments based on compound SORA rates tend to be less volatile because the calculation is based on interest rates over a period of time. Since banks’ SORA-based loan packages typically use such compound SORA rates, customers will experience more stable and predictable loan management costs from month to month. In contrast, loans based on SIBOR and SOR are determined by the rates on a particular day and could be exposed to sudden changes if the rates for that particular day fluctuate.
Ms. Ong-Ang says, âBenchmark interest rates are a good benchmark for setting the cost of credit and pricing products, among others. SORA is a robust rate that customers can trust and count on.
What are SOR, SIBOR and SORA, and how are they different?
The numbers used in these charts and examples are simplified and are intended for illustration purposes only.
This is the first in a four-part series on Singapore’s transition to SORA, the new benchmark for interest rates in Singapore.