Singapore Interbank Offered Rates (SIBOR) – the current benchmark interest rate in Singapore – is slowly being discontinued in favour of the Singapore Overnight Rate Average (SORA) within the next few years.

SORA is already slated to replace another widely used rate, the Singapore dollar Swap Offer Rate (SOR), by the end of 2021 due to the discontinuation of the USD London Interbank Offered Rate (LIBOR). The further transition to a single interest rate benchmark for the Singapore financial market is thus an approach that makes sense.

However, the changes that will be brought about by the transition from SIBOR to SORA may be more keenly felt as the interest rates for many housing/mortgage loans are currently SIBOR-pegged. That being said, commercial loans pegged to SORA have been offered by the banking industry for some time now, and the use of SORA in the derivatives market has also been viewed positively.

SORA is the volume-weighted average rate of all unsecured SGD overnight interbank cash transactions brokered in Singapore. A daily overnight rate is calculated by taking all the transactions of interbank loans involving unsecured funds recorded by brokers for the day and taking the average. SORA is then further derived by taking the average daily overnight rate over a certain number of days.

As a mode of calculation, SORA is not new; the Monetary Authority of Singapore (MAS) has been publishing, and updating daily, this rate on its website since 2005. So both the financial industry and the banking industry have some experience with its methodology.

SIBOR is the rate that Singaporean banks borrow from each other on the interbank market. Every business day, each bank in Singapore submits a borrowing rate which they have assessed for themselves individually. The average of these rates, after removing outliers, is then set as the SIBOR.

Why use SORA to replace SIBOR?

Predictability

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.

Transparency

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.

Win-win situation

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.

SORA-pegged loan options are already beginning to be more common as banks embark on the smooth transition from SIBOR to SORA. SIBOR will be fully phased out and replaced by SORA by the end of 2024, with the transition taking place in phases.

Interest rates pegged to 12-month SIBOR was discontinued at the end of 2020, and the 6-month SIBOR will also be abolished by 2022. The 3-month and 1-month SIBOR will be the last ones to go as they are the most popular rates that are currently in use, especially for home loans.

If you are a customer who currently has a SIBOR-pegged home loan or business loan, you will have plenty of time to examine your options before switching to a different loan package