The Steering Committee for SOR Transition to SORA (SC-STS) has made significant progress in front-loading the key technical preparation work required to support benchmark transition since its formation in August 2019. This includes establishing key market conventions and infrastructure, enhancing industry and system readiness as well as starting early public education and communication efforts.
The SC-STS will help lay important groundwork to facilitate banks to further drive early adoption and pilot new Singapore Overnight Rate Average (SORA) products in the second half of 2020, with the goal of a broader base transition starting in 2021.
Interest rate derivatives
The majority of the member banks in the SC-STS are ready to trade SORA derivatives, paving the way for greater market participation and increased liquidity.
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, will help build further liquidity in SORA markets.
This development underscores the SC-STS’s commitment to laying the groundwork to achieve a smooth transition from Singapore Dollar (SGD) Swap Offer Rate (SOR) to SORA in the derivatives market. In February 2020, the SC-STS published guidance on market conventions across SORA derivatives (Overnight Index Swaps (OIS), Cross-Currency Swaps and SOR-SORA Basis Swaps) to enable broader adoption by market participants.
Good progress has also been made to ensure that the key market infrastructure is available to facilitate the trading of SORA derivatives. On 19 May 2020, LCH (clearing house) 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 between OCBC Bank and Standard Chartered Bank. This will help catalyse interdealer activity in SORA derivative products and allow for broader adoption of SORA in financial products.
In addition, trade processing platforms such as MarkitWire also began supporting SORA derivatives in early May 2020, with Australia and New Zealand Banking Group Limited and Standard Chartered Bank booking the first bilateral SORA Interest Rate Swaps trade on their platform.
To facilitate legacy transitions, contractual fallbacks for SOR derivatives are scheduled to be published in the coming months in the International Swaps and Derivatives Association (ISDA) amended definitions and related protocol. The SC-STS also supports the ISDA February 2020 consultation to incorporate pre-cessation triggers.
To foster greater understanding of the fallback reference rate, ABS plans to publish Adjusted SOR in the third quarter of 2020. This is expected to come after Bloomberg publishes indicative Adjusted Secured Overnight Financing Rate (SOFR), which is the fallback rate for US Dollar London Interbank Offered Rate (USD LIBOR), and would be used as an input to the Adjusted SOR computation.
OCBC Bank and Standard Chartered Bank completed Singapore’s first OIS derivatives transaction using SORA as the interest rate benchmark in November 2019. Deutsche Bank and DBS Bank completed another trade in the same month. In February 2020, OCBC Bank and Standard Chartered Bank also booked the market’s first SGD SORA and USD SOFR Cross-Currency Swaps.
Bonds and perpetual securities
Good progress has also been achieved in the transition journey for bonds and perpetual securities as well as business and syndicated loans.
The existing SGD-denominated debt securities referencing SOR have been identified. These debt securities include floating rate notes, perpetual securities and capital instruments with features to reset interest rates based on SOR. Notices have been sent to the issuers of these securities, informing them the impending transition of SOR to SORA, and where necessary, to prepare for the transition by reviewing their deal documents and to seek professional advice on the appropriate actions to be taken.
Concurrently, to achieve a smooth transition, market convention for debt securities referencing to SORA and an industry standard fallback replacement language are being established. They are also expected to be finalised by the third quarter (3Q) of 2020. The potential impact of the transition on valuation as well as accounting and tax treatment of these instruments are being studied. Further market guidance on these will be provided where relevant.
DBS Bank issued the first floating rate notes referencing SORA in May 2020. The $14.4 million (SGD 20 million) notes is part of the financial sector’s overall drive to encourage corporations into an early adoption of SORA as the benchmark rate, with plans for more SORA issuances in 2020.
Business and syndicated loans
The transition pathway for existing SOR business and syndicated loans is being mapped out, which will include market guidance on an industry approach for banks to transition bilateral SOR loans to SORA before the end of 2021.
Recommendations on fallback language for existing SOR business and syndicated loans are expected to be published by 3Q 2020 as well.
To enable SORA loan adoption, the recommended key conventions and provisions for business loans referencing SORA are being finalised and will be made available in late 2020, with banks working on ensuring operational and systems readiness for the adoption of SORA in business loans.
The SC-STS has been engaging large corporates to be early adopters in the use of SORA as a benchmark rate for their business loans. To this end, in June 2020, OCBC Bank extended the first SORA-based loan to CapitaLand. The compounded average SORA will be calculated in arrears, using the ‘five-business day backward-shifted observation period’ methodology. The committee expects a further pickup by early adopters in the coming months.
The committee is also working with ABS to conduct a survey of corporate customers on the use of SGD benchmark rates in banking products. This is to ensure that various options on product structures and conventions for SORA loans can be provided and will be tailored to meet end customers’ needs. The survey is expected to be completed in July 2020.
Communications and public education
Recognising that public communication and outreach is crucial, given the wide-reaching implications of the transition, the SC-STS adopts a multi-layer strategy in executing its two-pronged communication and public education programme. The programme ensures that key stakeholders are kept informed and fully understand the impact and requirements of the transition.
Since late 2019, major banks have published various research articles about the transition on their websites for public access and will continue to provide members of the public up-to-date progress of the transition. Through various media engagement activities, members of the public are also kept informed of key milestones achieved by the SC-STS.
More targeted outreach events had also been held. In February 2020, the first industry-wide workshop was organised by ABS for its member banks and large corporates. This was followed by a webinar organised by Bloomberg and the Association of Corporate Treasurers (Singapore) in early June 2020, which was attended by more than 800 participants from banks, large- and mid-sized companies to discuss challenges, roadmaps, timelines and how the transition to risk-free rates would impact them. The committee has also reached out to major law firms and accounting firms in Singapore since April 2020 to support Singapore-based companies in their transition journey.
To support over 150 banks in Singapore in this transition, a dedicated online resource centre has been set up by ABS. Frequently Asked Questions and training materials as well as market convention guidance for derivatives have been uploaded onto this platform for easy access by all banks.
At the end-user level, the SC-STS has created client correspondence templates for banks to ensure consistency in their communication with individual clients. Banks have commenced sending out these letters to corporate clients whose bank facilities are impacted by the transition. Many frontline bank staff have been trained to handle customer queries and support affected corporate clients as they transition from SOR to SORA-pegged facilities.
Re-disseminated by The Asian Banker