Friday, 2 December 2022

Adjustment to SORA strengthens Singapore’s position in APAC

5 min read

By Alex Rad

The discontinuation of the London Interbank Offered Rate caused major changes in the international financial markets forcing participants and supervisory authorities to jointly consider alternative resolutions.

Numerous regions such as the European Union and countries such as Hong Kong, Singapore, and the United Kingdom have set up more rigid structures and processes for the setting of benchmark interest rates.

Over the last four decades, the Association of Banks in Singapore (ABS) has worked with the mission to enable better communication between its members, which currently include 155 local and international banks. For these financial market participants, deep liquidity in the market along with increased volumes and improved risk management facilities are important features of a leading financial market.

The Association of Banks in Singapore (ABS) set up the ABS Benchmarks Administration in 2013. Since then, ABS has developed and managed several benchmark rates including SGD Spot FX, THB Spot FX, Singapore Interbank Offered Rate (SIBOR), and Swap Offer Rate (SOR).

In the Asian Pacific region, SIBOR has been used widely for regulating the price of loans. After consultation with market participants, the Monetary Authority of Singapore (MAS) announced in August 2019 that SIBOR shall be entirely replaced by Singapore Overnight Rate Average (SORA), given a transition period (end-2024).

ABS has the mandate to make minor and major changes to interest rates with the aim to ease financial transactions. It announced on 20 May 2022 the extension of the central clearing for over-the-counter (OTC) SORA derivatives by LCH (the former London Clearing House), from 21 years to 31 years.

LCH comprises a group of companies offering post-trade clearing and risk management services covering a wide range of asset classes such as OTC, fixed income, foreign exchange (FX), credit default swap (CDS), equities, and commodities.

The calculation of SORA is based on the volume-weighted average rate of borrowing. The daily calculations start with the MAS receiving reports from 24 reporting banks while making considerations to the number of transactions that have occurred between 8:00 am and 6:15 pm local time in Singapore. MAS has worked out the conditions for what counts as qualified transactions and presented several requirements for the daily data processing. In this process, MAS has appointed Refinitiv, as the calculating agent.

Singapore’s responsiveness to market needs ensures its market position

The tenor adjustment supports ABS and MAS which work to maintain the perception of Singapore’s own benchmark rates calculations as solid and can be necessary to display responsiveness to market needs such as deeper liquidity.

By relying on the function of LCH, financial institutions can avoid counterparty credit risk. Moreover, the expected operational efficiencies reached by using the central clearing house can lead to more trade opportunities that could speed up the economic recovery of Singapore in the post-pandemic period.

In the longer perspective, by removing minor barriers to transactions between financial institutions Singapore can strengthen its position in the region. During the last two decades, Singapore’s economic developments as far as the gross domestic products (GDP) are concerned have been positive in comparison with Hong Kong.

Hong Kong has lost some of its steam due to the negative effects of the almost decade-long political uncertainties and the more than two years period of restrictive health and safety measures triggered by the pandemic.

LIBOR out and SORA in the midst of negative economic outlooks for bank funding

The LIBOR discontinuation came after the revelation of the CDS scandals during the global financial crisis and connect with the American International Group (AIG). But it was also a result of the 2012 calls for investigations of LIBOR manipulations.

Purposefully, benchmarks like the SORA, Hong Kong Overnight Offered Rate (HIBOR), or Sterling Overnight Index Average (SONIA) are designed to provide better transparency to market participants that seek to reach agreements on price, performance, and amounts payable.

The better transparency the better transactions between financial market participants. In its May 2022 report, the Steering Committee for SOR and SIBOR Transition to SORA (SC-STS) concluded that the uptake of SORA was satisfactory. The report referred to several January 2022-based numbers, such as the $800 billion in outstanding stock of SORA derivatives, the $25 billion in outstanding stock of SORA corporate loans and the eight SORA-OIS linked bonds that were issued.

While new benchmark rates are being introduced and adjusted, central banks around the world have hiked up interest rates to reduce the high inflation levels and fend off the impact of other negative macroeconomic and geopolitical developments. 

Being a small economy implies that Singapore is vulnerable to changes to both local and international market conditions. The current market conditions may lead to credit crunches like the ones which occurred during the global financial crisis.

In such a situation, financial institutions may revert to their own practices for counterparty risk assessments to avoid additional information asymmetries caused by complexities introduced by the organisation set up for benchmark rate development and administration.

Besides, the function of clearing houses, local benchmark calculation methods, and all of the unique conditions for transactions and the requirements on reporting that ABS and the MAS have stipulated may receive their own dose of criticism.

In the wake of LIBOR discontinuation, Singapore has set up its own local organisation for benchmark rate-setting purposes. In the context of the current market conditions, the work of such an organisation, needs to be considered along with the prospect of strengthening the position of Singapore and developments that negatively impact financial markets.



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