The Monetary Authority of Singapore (MAS) has set up a steering committee to oversee an industry-wide interest rate benchmark transition from the Singapore dollar (SGD) Swap Offer Rate (SOR) to the Singapore Overnight Rate Average (SORA), in response to the discontinuation of the use of Libor (London Inter-bank Offered Rate) in Dec 2021.Â
While the SOR relies on the US dollar-Libor in its computation methodology, the SOR is a key interest rate benchmark in Singapore used in the pricing of SGD interest rate derivatives, commercial and retail loans, and other financial products.
In addition, the three-month SOR is a benchmark for pricing corporate loans.
As a result, the discontinuation of USD Libor will impact SOR’s sustainability.
The change will take place over the next two years, said MAS.
Regulators have set the 2021 deadline for ending the use of Libor after banks were fined billions of dollars for trying to rig the benchmark.
Libor is the rate at which banks can borrow from each other, for up to a year, in dollars and other currencies including sterling, Swiss francs, yen and euro.
The rate is calculated from daily submissions of panels of 11 to 16 banks.
The US's Federal Reserve and Britain’s Financial Conduct Authority started to urge Libor users earlier this year to expedite transitions to alternative rates.
The discontinuation of Libor also impacts organizations when it comes to accounting as they buy Libor-based contracts to hedge against unexpected moves in interest rates.
The existing IASB rule requires assessment of future cash flows from the contracts, which’d become difficult for organizations to calculate when there’s no clarity on which alternative rate will be referenced in a contract that spans multiple years.
In response to that, the IASB issued a proposal earlier this year for public consultation. IASB proposes that organizations can assume their cash flows will be unchanged as a result of the interest rate benchmark reform.
The accounting standard body said that it will assess if further changes to its standards are necessary once it has clarity about what the new rates are.
