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SINGAPORE (THE BUSINESS TIMES) – The Monetary Authority of Singapore (MAS) will intensify supervisory commitment to ensure that Republic banks are well prepared for the transition to the swap offer rate (SOR), a key benchmark index of the interest rate, to Singapore. Average nightly rate (Sora) by the end of 2021, a senior official said.
Ms Jacqueline Loh, MAS’s Deputy Managing Director of Markets and Development, warned on Wednesday (September 9) that banks that do not keep pace with industry transition timelines are potentially exposed to additional market, liquidity, operational, technological and legal, and can expect to have a “more intensive supervisory engagement” at the top management level.
She spoke at the Singapore Banking Association (ABS) virtual roundtable session on the changes in the SGD interest rate landscape, which was attended by more than 1,500 participants from the financial industry, businesses and investors. media.
Singapore is in the midst of its shift from SOR to Sora as the new interest rate benchmark, due to the discontinuation of the London Interbank Offer Rate (Libor) in late 2021, which would affect the SOR as it uses the US dollar. Libor in your calculation.
The SOR is used in the pricing of bonds and loans to large institutions with hedging requirements, as it is also the benchmark in SGD derivatives.
Sora was selected as the new benchmark interest rate as it was deemed the “most robust and appropriate alternative”, backed by a deep and liquid overnight financing market.
In her speech, Ms Loh noted that the transition from legacy contracts will be a “key part” of the industry-led Steering Committee on Transition from SOR to Sora Work (SC-STS) in the remaining months.
As it stands, about $ 1.4 trillion of notional value of outstanding SGD derivative contracts referencing SOR, and about 12,000 SOR contracts in SGD cash markets worth $ 95 billion will expire after the end of 2021 , and they will need to transition.
Focusing on achieving a smooth and well-coordinated transition is a key pillar, but the main challenge is how to encourage market participants to move from an SOR-based market that is still deep and liquid, to the nascent but developing market based on Sora. . she said.
To do so, MAS will expand its inaugural issuance of SORA floating rate notes worth $ 500 million following “strong market response” by increasing issue sizes and expanding the range of maturities. More details will be announced before the end of the year.
Additionally, to inject further impetus to market participants to switch from SOR to Sora, MAS and the steering committee will outline guidance on specific deadlines to stop using SOR in new financial products in October this year.
“It is important to provide guidance on this matter, so that banks and end customers can move in concert towards a smooth transition. This ensures that our financial system is well prepared before the end of 2021,” said Ms Loh.
Preparing early at the individual company level is another key pillar he listed for a smooth transition. This includes identifying risk exposures, implementing appropriate contractual alternatives, ensuring systems readiness, understanding the characteristics of new Sora products, and ultimately transacting on these products, Ms. Loh said.
Several of these loans are already on the market, such as the three local banks that complete Sora business loans with early adopters like CapitaLand and Wilmar.
“Building on these successful pilot programs, we expect more banks to start generating new Sora loans in the broader industry,” he said.
On the other hand, a bank that adopts a wait-and-see attitude and leaves things for next year will likely find itself with too much on its plate before the late 2021 deadline, and this is something to be avoided, added Ms. Loh. .
Finally, communication between banks and clients is key for a smooth transition, he said, noting that MAS expects lenders to engage clients in a clear, timely and transparent manner.
When engaging clients in the referral transition, banks should be aware of MAS’s Fair Dealing Guidelines, which include presenting clients with sufficient options, providing sufficient time and information for clients to evaluate available options, and helping them to make informed decisions, he added.
MAS, ABS, and SC-STS will also work together with relevant industry associations and MoneySense to implement industry-wide public education programs on Sora’s products and markets later in the year.
Singapore is now at a “critical juncture” in its benchmark interest rate reform, Ms Loh concluded.
“The sooner we take steps to advance this change management process, the more likely we can create a virtuous cycle, facilitating a smooth transition to Sora,” he said. “Conversely, if we delay the change until it is too late, this would have implications for future market efficiency and financial stability at the industry level, and greater risks at the individual company level.”
Panelists at the roundtable included Mr. Samuel Tsien, ABS President and OCBC Group Chief Executive Officer (CEO), Mr. Piyush Gupta, DBS Group Chief Executive Officer, and Mr. Patrick Lee, Executive Director of the Standard Chartered Bank (Singapore) in Singapore.
During the half-hour discussion, the three heads of the bank shared their experience testing Sora products and their perspectives on Sora’s market development.
The session was moderated by Professor Annie Koh, Vice President, Professor of Practice and Business Development in Finance at Singapore Management University.
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