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SOR-linked financial products to stop by April 2021 as Singapore gears up for Sora

ISSUANCE of loans and securities linked to the Swap Offer Rate (SOR) that mature after end-2021 will need to cease by April next year, in a push by a financial industry-led committee to shift away from the use of SOR to the Singapore Overnight Rate Average (Sora) in financial products.

To support this, all domestic systemically important banks (D-SIBs) should be ready to offer new Sora-based products to customers by end-February. The rest of the banks have until end-April 2021.

By the end of September 2021, all other banks are to have substantially reduced gross exposures to SOR derivatives, including centrally cleared interbank transactions.

These series of industry timelines, as announced on Tuesday, aim to steadily reduce exposures to SOR before end-2021, in preparation for US dollar (USD) Libor and SOR discontinuation while ensuring that Sora-based products are available to meet financing needs.

Singapore is in the midst of its move from SOR to Sora as the new interest rate benchmark, on the back of the discontinuation of the London Interbank Offered Rate (Libor) at end-2021, which would affect SOR as it uses the USD Libor in its computation.

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SOR is used in pricing of bonds and loans to large institutions with hedging requirements, as it is also the reference benchmark in Singapore dollar (SGD) derivatives.

Close to S$1.4 trillion notional value of outstanding SGD derivatives contracts referencing SOR, and around 12,000 SOR contracts in SGD cash markets amounting to S$95 billion will mature after end-2021, and will need to transition.

Sora was selected as the new interest rate benchmark as it was found to be the "most robust and suitable alternative", underpinned by a deep and liquid overnight funding market.

After end-April 2021, Sora is expected to be the de facto floating rate benchmark for all institutional SGD financing activity.

On Tuesday, the Steering Committee for SOR Transition to Sora (SC-STS) - consisting of industry, associations and the Monetary Authority of Singapore (MAS) - also published a set of market guides to help users prepare for the shift away from SOR, and for adoption of Sora across a range of financial products including derivatives, floating rate notes, business and retail loans.

They include a report on customer segments and preferences, setting out how Sora can be used in loans to meet the various needs of financial firms, large corporates, small and medium-sized enterprises and retail customers. Another is a Sora market compendium, providing market participants with a comprehensive overview of Sora market conventions across derivatives, floating rate notes, business and retail loans, and outlining considerations for contractual and technical specifications of Sora products and contractual fallbacks for relevant SOR contracts.

An end-user checklist will also provide non-financial corporates, investment firms, insurers and other buy-side participants with a list of key steps needed to effectively implement the transition from SOR to Sora, and from Libor to alternative reference rates.

A Sora guide targeted at corporate users and a pamphlet for retail customers will also be published with links to relevant other information for these user groups.

Samuel Tsien, Association of Banks in Singapore and SC-STS chairman, said that the committee has "largely completed" the key technical preparation work and laid the foundation for widespread adoption of Sora in a full range of financial products.

"This will pave the way for an orderly and smooth transition from the legacy use of SOR to Sora as the new benchmark for SGD markets," said Mr Tsien, who is also the group chief executive officer of OCBC.

He urged market participants to take immediate steps including operational and system changes, staff training and client outreach, to prepare for the shift from SOR to Sora.

Jacqueline Loh, deputy managing director, MAS, and SC-STS member, said that the central bank expects all market participants to reduce their exposures to SOR, and to actively promote the understanding of and migration to Sora financial products.

"This will ensure that our financial system is well-prepared for the transition to Sora, through the development of a deep and efficient Sora-centred SGD market," she said.

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