Singapore – The Steering Committee for SOR Transition to SORA (SC-STS or the Committee)outlined its views on the role played by Fallback Rate (SOR) 1 in the ongoing transition from SOR to SORA, and reiterated its support for the use of Fallback Rate (SOR) as the primary fallback reference rate for SOR derivatives.
This comes as the International Swaps and Derivatives Association (ISDA) prepares to launch its IBOR Fallback Protocol, which is expected soon.
Under the SOR-to-SORA transition roadmap set out by the Committee, market participants should transition from SOR to SORA well ahead of end-2021. This will ensure that parties to outstanding SOR transactions have good control over the timing and execution of their transition plans. There could, however, be scenarios where market participants are unable to complete the transition for all their contracts despite best efforts. Having robust contractual fallbacks in place will thus be important to address the risks of contractual frustration and settlement issues following the discontinuation of SOR.
The Committee has worked closely with ISDA to incorporate Fallback Rate (SOR) as the primary fallback reference rate for SOR derivatives, with SORA-based reference rates ranking lower in the hierarchy of fallbacks and applying if Fallback Rate (SOR) is unavailable.
Market participants can incorporate the hierarchy of fallbacks into existing SOR contracts by adhering to the ISDA’s IBOR Fallback Protocol, which is expected to be launched soon.
Nevertheless, the Committee also emphasised that Fallback Rate (SOR) is intended solely as a fallback reference rate, and is not intended for usage in new derivative contracts. As the SGD derivatives market has adopted SORA as its key reference rate, contracts referencing Fallback Rate (SOR) will likely become illiquid, challenging to value, and difficult to transition from.
To limit the reliance on Fallback Rate (SOR) and pre-empt any possible bifurcation of the market between SORA and Fallback Rate (SOR), the Committee announced that Fallback Rate (SOR) will only be published for about three years following the fallback trigger, after which time Fallback Rate (SOR) is expected to be permanently discontinued.
Re-disseminated by The Asian Banker