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Bloomberg and Indian Banks’ Association Report Singapore passes LIBOR milestone with $128 billion at stake Singapore passes LIBOR milestone with $128 billion at stake
Singapore banks are pressing on in their transition away from the discredited London interbank offered rate as financial centers around the world are facing deadlines to move off LIBOR-priced loans and securities.
Since early May 2021, lenders and borrowers have been disallowed from using the Singapore dollar swap offer rate (SOR), computed using LIBOR, for new loans and other so-called cash products, and are now using a new benchmark. This was based on guidance put in place since last year from a steering committee formed by the city-state’s central bank.
The amount of such financial instruments — including business and syndicated loans as well as retail mortgages — stood at about S$170 billion ($128 billion), according to a survey conducted by the Monetary Authority of Singapore in the first half of last year. While banks don’t yet need to migrate any of those outstanding contracts to a new pricing benchmark they will ultimately need to do so, unless the contracts expire before SOR is axed for good. There were also some S$2.1 trillion in derivatives tied to SOR, and the committee proposed last year that banks substantially reduce exposure to them by the end of September 2021.
Policy makers around the world are developing new gauges to replace LIBOR after European and U.S. banks were found to have manipulated it for their own gain. LIBOR is deeply embedded in markets. Some $200 trillion of derivatives are tied to the U.S. dollar benchmark alone and major global banks will spend more than $100 million this year preparing for the switch.
Different countries have different key deadlines. The global LIBOR administrator late last year said it was consulting to extend the retirement date for some U.S. dollar rates until late June 2023, after the pandemic stoked fear markets weren’t ready for the seismic shift.
Singapore, which is moving to replace SOR with the Singapore overnight rate average (SORA), has been one of the faster adapters. It was among the first nations to auction debt linked to an alternative benchmark when it sold notes linked to SORA in August.
2 Singapore passes LIBOR milestone with $128 billion at stake
The Southeast Asian financial center still faces challenges in the transition to a LIBOR alternative, given the limited historical use of the domestic interbank funding market, said Philip McNicholas, Asean FX and rates strategist at Bloomberg Intelligence.
However, as SORA is based on an average of past overnight lending rates, it may bolster the interbank lending market depth and liquidity, producing better and more efficient price discovery.
A spokesperson for the Association of Banks in Singapore said that the banks represented in the steering committee subgroups on business/syndicated loans and consumer products are on track to meet the timelines.
Singapore’s central bank said it sees progress in the transition to SORA. “Market participants should take active steps to shift both new use and legacy exposures to SORA, so as to minimize financial and operational risks as liquidity in SOR derivatives markets is expected to decline in 2022,” the Monetary Authority of Singapore said.
Here’s what some of the big banks in the country are saying:
Oversea-Chinese Banking Corp. OCBC was the first to extend a loan tied to SORA, a S$150 million deal signed last June for Singapore’s top developer CapitaLand Ltd.
Since the end of February, OCBC has been offering a full range of SORA-based products, said Koh Ching Ching, head of brand and communications.
DBS Group Holdings Ltd. DBS, along with Industrial & Commercial Bank of China Ltd., last year signed a club loan of S$200 million with agricultural commodity trader Olam International Ltd. that was the first such facility pegged to SORA.
By the of last year, DBS had closed more than S$1 billion in loans referencing the alternative risk-free benchmark rates, said Philip Fernandez, group corporate treasurer.
United Overseas Bank Ltd. UOB and CapitaLand in in September entered into a pact for a two-year S$200 million term loan. The dual-tranche loan referenced both SORA and the secured financing rate, the first of its kind in Singapore.
More than 60% of property loan customers say they are drawn to the stability of SORA- based interest rates, UOB said in a press release earlier this month.
3 Singapore passes LIBOR milestone with $128 billion at stake
ARRC identifies market indicators to support a recommendation of a forward-looking SOFR term rate
On May 6, 2021, the Alternative Reference Rates Committee (ARRC) published a set of market indicators that it will consider in recommending a forward-looking Secured Overnight Financing Rate (SOFR) term rate. The ARRC has long recognized that a forward-looking term SOFR rate will be a useful tool to support the transition away from LIBOR. The publication of the indicators is expected to provide clear guidance that would allow the ARRC to recommend a SOFR-based term rate relatively soon. The indicators are designed to measure progress in establishing deep and liquid SOFR derivatives and cash markets — which are essential to a robust and stable term rate.
The market indicators the ARRC will consider in order to recommend a term rate are:
1. Continued growth in overnight SOFR-linked derivatives volumes
2. Visible progress to deepen SOFR derivatives liquidity, consistent with ARRC best practices: a. Offering electronic market-making and execution in SOFR swaps and swap spreads b. Changing the market convention for quoting USD derivative contracts from LIBOR to SOFR c. Making markets in SOFR-linked interest rate volatility products (including swaptions, caps, and floors)
3. Visible growth in offerings of cash products, including loans, linked to averages of SOFR, either in advance or in arrears.
These outlined steps should help further establish SOFR derivatives markets, and provide borrowers a range of choices based on SOFR.
The ARRC has not yet recommended any forward-looking SOFR term rate or administrator, and will continue to consider the proposals submitted to its RFP in order to do so. Given U.S. Supervisory Guidance, the ARRC continues to encourage market participants not to wait for a term rate and to make use of current SOFR conventions available now.
This is an important development, given that one of the main concerns of market participants was that U.S. LIBOR has term rates while SOFR does not. Those countries linking their alternate benchmark with SOFR will need to monitor this closely.
India takes steps to incorporate Adjusted MIFOR and Modified MIFOR in ISDA definitions and protocol
Financial Benchmarks India Pvt Ltd (FBIL) and Indian Banks’ Association (IBA) have initiated steps to incorporate Adjusted MIFOR and Modified MIFOR in ISDA Definitions and Protocol. ISDA has communicated that they have plans to publish a supplement to the 2006 ISDA definitions and a protocol for a few additional IBORs, including MIFOR, by the end of this year. ISDA expects to complete this project by Q3 or early Q4. Incidentally, India’s timeline of publishing the Adjusted MIFOR (mid-June 2021) and Modified MIFOR (end-June 2021) matches with the ISDA timeline of the second IBOR fallback protocol.
4 Singapore passes LIBOR milestone with $128 billion at stake
Inter-disciplinary group constituted by the Department of Economic Affairs (DEA), Government of India to enable smooth transition to post-LIBOR regime
With LIBOR transition developments discussed at the G-20 level, the DEA put together a core inter-disciplinary team of officials from the RBI, IBA, FBIL and other government departments to enable smooth transition to a post-LIBOR regime well before December 2021. The group is expected to regularly report to the Financial Stability and Development Council (FSDC) and the FSDC subcommittee on transition progress and raise any challenges it faces. The group has deliberated on the following topics over the past few months:
• Clarity on LIBOR exposures • Fall-back arrangements • Changes needed in supporting systems • Alternative reference rates in new and existing contracts • Identifying legislative and regulatory changes including notifications and circulars • Awareness-building activities • Identifying and finalizing changes in accounting practices • Finalized recommendations for ensuring a smooth transition to a post-LIBOR regime for both direct and indirect taxes • Plan for communicating with end users of LIBOR referencing products • Identify other dependencies on LIBOR outside of its use in financial contracts
The Group has now finalized its report and recommendations for ensuring a smooth transition to a post-LIBOR regime.
5 Singapore passes LIBOR milestone with $128 billion at stake
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6 Singapore passes LIBOR milestone with $128 billion at stake
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