The SC-STS have issued the Timelines to Cease Issuance of SOR Derivatives and SIBOR-Linked Financial Products and recommended the end-September 2021 as the timeline for all banks to cease issue of SOR derivatives and SIBOR-linked cash products. The SC-STS also took the opportunity to issue guidance on dealing with the limited cases of SOR loans which have been signed or agreed on before the end-April 2021 deadline but with disbursements taking place past the deadline.
SOR-to-SORA transition – further implementation guidance for banks
The SC-STS previously issued the Timelines to Cease Issuance of SGD Swap Offer Rate (SOR) linked Financial Products in October 2020. Pursuant to that, by end-April 2021, all financial institutions and their customers should cease use of SOR in new loans and securities that mature after end-2021. To support this, most D-SIBs begun offering a full-suite of SORA-based products to their customers from February 2021 (including SORA mortgages from March 2021). All non-DSIB banks are similarly required to offer new SORA-based products by end-April 2021.
In response to queries from market participants on how to deal with the limited cases where SOR loans have been signed or agreed on before the end-April 2021 deadline, but where disbursements may occur only after end-April 2021, the SC-STS have issued helpful implementation guidance to deal with such specific and limited scenarios – see Annex A of Timelines to Cease Issuance of SOR Derivatives and SIBOR-Linked Financial Products.
New timeline to cease use of SOR in new derivative contracts
By end-September 2021, all financial institutions and their customers are to cease usage of SOR in new derivatives contracts. With SOR discontinuation in end-June 2023, the rationale for this timeline is to mitigate the risk of continued reliance of SOR derivatives into 2022 which could increase operational and financial risks for market participants.
This timeline provides sufficient advance notice to market participants and supports the SC-STS’ targets for banks to wind-down SOR derivatives exposures to 20% by end-September 2021. However, it is recognized that market participants would still need to undertake SOR derivatives transactions to risk manage legacy positions and facilitate transition from SOR to SORA. Accordingly, there are exemptions for SOR derivatives transactions for risk management of and transition from legacy SOR positions – see Annex B of Timelines to Cease Issuance of SOR Derivatives and SIBOR-Linked Financial Products for details of the exemptions.
Cessation of use of SIBOR in new contracts
SC-STS recommends that financial institutions and their customers cease usage of SIBOR in new contracts by end-September 2021. This would go towards reducing the legacy SIBOR contract and support transition to SORA.
The SC-STS’s timeline for the cessation of use of SIBOR was to be dependent on the level of adoption of SORA loans by retail and SME segments, given that they are the key users of SIBOR. This timeline has now been issued given the significant progress in the adoption of SORA loans by retail and SME, with more than S$1 billion of such loans extended as of end-2020.
SC-STS strongly encourages all market participants to actively explore converting or replacing outstanding SOR cash market contracts with SORA contracts. Considering the development and expected trajectory of the SOR-SORA basis markets, banks should aim to substantially reduce their SOR exposures (both cash and derivative) to corporates to 20% by end 2022. All contracts that continue to reference SOR as at end-2022 should at the very least, incorporate appropriate contractual fallbacks.
To further develop and consolidate the transition process in Singapore, the SC-STS and ABS will launch a public education campaign in mid-2021 to increase public awareness and support wider adoption of retail SORA products.