Why use SORA to replace SIBOR?
SORA is purely derived from data – that of past overnight recorded interbank transactions – and is thus considered backwards looking. This makes it more predictable, especially since there is already sufficient history for market participants to conduct data analysis and model trends. SIBOR, on the other hand, is based on projections of the interbank funding markets by each bank and is considered to be forward looking. Each bank assesses its own future projections and the process is opaque, making SIBOR more unpredictable.
SORA is also more transparent as there is also no expert judgement required in the process since one just has to look at what transactions have taken place in the past. This makes it open to less subjectivity and easier for laymen to understand.
For SIBOR, since the banks are essentially asked to predict the future in determining a forward-looking term rate, it is more exposed to market factors. Looking at the past SIBOR trends may be less useful as it is more about what the banks think will happen.
Ultimately, SORA is of comparable volatility to SIBOR and it benefits both consumers and banks to adopt a uniform interest rate benchmark; the former can compare different loan packages more easily and the latter face lower risks than when offering different financial products based on different interest rates.