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The Monetary Authority of Singapore (MAS) and the Steering Committee for SOR & SIBOR Transition to SORA
2 The conversion of a legacy SOR contract in wholesale markets to a SORA-based contract requires an adjustment spread, which represents the price that a SOR borrower transitioning to SORA would pay over the SORA benchmark rate. The adjustment spreads account for structural differences between SOR and Compounded SORA, such as the credit and term premia absent in SORA. In the past year, wholesale market participants were able to rely on a liquid SOR-SORA basis swap market
3 MAS has therefore endorsed SC-STS to make and finalise recommendations towards setting the MAS Recommended Rate, including the appropriate calculation methodology for the adjustment spreads to be used. This will apply as a fallback rate for outstanding SOR-based business loans and derivatives that mature after end-2024. Separately, the SC-STS will also provide supplementary guidance on adjustments spreads to apply for interest rate periods before end-2024, to support the industry’s on-going active transition of wholesale SOR contracts.
The SC-STS consults on adjustment spreads for conversion of legacy SOR contracts
4 The SC-STS issued a consultation paper Consultation on Adjustment Spreads for the Conversion of Legacy SOR Contracts to SORA , setting out the following key recommendations:
- The MAS Recommended Rate should be based on Compounded SORA, given that SORA is now the main interest rate benchmark for SGD financial markets.
- Adjustment spreads within the MAS Recommended Rate should be derived from the historical median spread between SOR and SORA. Such a methodology is transparent, verifiable and readily available, and simple to explain and implement. It also in line with market expectations of the SOR-SORA spreads after end-2024. Together with the linear interpolation outlined in the supplementary guidance, the historical median approach will serve to reduce inequity or unintended value transfer among different participants to the same contract, that may arise from a conversion from SOR to SORA.
- Adjustment spreads for the period before end-2024 should be based on a linear interpolation between a reference spread based on a recent shorter historical median (e.g. 6M) of the SOR-SORA spread and the adjustment spread within the MAS Recommended Rate. To provide certainty in transition outcomes while minimising valuation impact, the SC-STS has proposed flexibility in the application of its recommendations to the active transition of SOR-based derivatives-linked products.
5 Mr Wee Ee Cheong, Deputy Chairman and CEO of UOB Ltd, ABS Chairman and SC-STS Co-Chair, said, “The SC-STS’ consultation on the approach to set the MAS Recommended Rate will help to facilitate the industry’s final phase in transitioning out of legacy SOR contracts. This will provide more certainty to market participants with SOR contracts maturing after end-2024, while supporting the active transition of legacy SOR contracts in the coming quarters ahead of the discontinuation of SOR in mid-2023. Through this consultation process, we seek to ensure a robust and transparent approach for businesses and the industry”
6 Mr Leong Sing Chiong, MAS Deputy Managing Director (Markets and Development) and SC-STS Co-Chair, said, “MAS supports the SC-STS’ initiative to commence this consultation well in advance of the discontinuation of contractual fallbacks after end-2024. Setting the MAS Recommended Rate early will help to anchor expectations of transition arrangements and provide a pathway for market participants to continue with their SOR-SORA transition efforts. This will ensure that the momentum to transition to a SORA-centered interest rate regime is maintained.”
7 The consultation paper can be found here . The SC-STS invites stakeholders to provide feedback on the proposals using the feedback form here . For further queries related to the SC-STS consultation paper, please email ABS Co at SORTransition@abs.org.sg.
