Singapore is aiming to build active derivatives trading off a transition benchmark rate - known as the Singapore Overnight Rate Average (Sora) - by the end of this year, as the Republic keeps on track to shift from the Sing-dollar Swap Offer Rate (SOR) that underpins the $3.5 trillion Singdollar (SGD) derivatives market.
Sora will become the new interest rate benchmark for the SGD cash and derivatives market.
Singapore is due to launch Sora-based loans by end-2020, while a pilot for Sora-based retail loans should also take off by then, according to an update yesterday by the steering committee behind this rates transition.
In August last year, it was announced that Singapore will transition from SOR to Sora over the next two years as the scandal-tainted Libor is expected to end its run by end-2021.
SOR - the benchmark for most interest rate swaps and currency rate swaps, and the key benchmark used to price derivatives and business loans here - will be impacted, as it uses the US-dollar Libor in its computation.
Its replacement Sora, the average rate of unsecured overnight interbank SGD transactions brokered in Singapore, was found to be the "most robust and suitable alternative", as it is a transaction-based benchmark underpinned by a deep and liquid overnight funding market.
Several banks here, including DBS Bank, Deutsche Bank, OCBC Bank, Standard Chartered and United Overseas Bank, have undertaken Sora derivatives transactions. Other major dealers are expected to undertake these transactions in the coming months.
Some key priorities this year include getting Sora market conventions and infrastructure ready to enable broad adoption by market participants. This includes publishing contract templates for Sora overnight indexed swaps, cross-currency swaps and the SOR-Sora basis swap. It also entails the launch of central clearing of Sora derivatives and the publishing of guidance on market conventions across Sora derivatives, floating rate notes and loans.
The steering committee's road map also sets out initiatives to build liquidity in Sora markets to support take-up by end-users, by encouraging key banks to start making markets in Sora derivatives so that quotes and prices are actively displayed on key financial market data platforms.
It is also exploring the issuance of Sora-based floating rate notes by the Monetary Authority of Singapore this year, to catalyse similar issuances from other corporations and financial institutions.
Regarding the transition of legacy SOR contracts, an industry guidance on appropriate fallbacks for cash market products will be developed, as well as guidance on a deadline for market participants to cease originations of new SOR contracts.
Mr Samuel Tsien, chairman of the Association of Banks in Singapore and the steering committee, said a smooth transition to Sora would require significant industry effort, coordination and collaboration involving stakeholders.
"The key priority is to ensure financial institutions and our end customers are well-prepared for this transition, and customers are able to make informed choices which will have an impact on their financing," said Mr Tsien, who is also chief executive of OCBC.
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