SINGAPORE, July 30 — The Singapore Interbank Offered Rates (Sibor) — the benchmark interest rate in Singapore — could be discontinued in the next three to four years and replaced by the Singapore Overnight Rate Average (Sora).

This was the recommendation by three financial industry groups that released a consultation paper yesterday.

Their suggestion comes after a year of transitional testing in a quest to reform Sibor to a new benchmark rate — termed the new polled benchmark in the report — and the results showed that a seamless transition would not be possible.

Given that another widely used rate known as the Singapore dollar Swap Offer Rate (Sor) was to be replaced by the Sora when it is discontinued by the end of 2021, the report recommended adopting a single rate for the Singapore dollar financial markets with Sora as the new benchmark rate, instead of having multiple rates.

The consultation paper, which was put together by the Association of Banks in Singapore (ABS), the Singapore Foreign Exchange Market Committee and the Steering Committee for Sor Transition to Sora, is seeking feedback from the industry until September 30.

They are aiming to finalise the changes and to confirm the discontinuation date for the one-month and three-month Sibor — which are widely used interest rates in many loans — by the end of this year.

TODAY explains why the consultation paper proposed the change from Sibor to Sora as Singapore’s benchmark interest rate, and how consumers will be affected.

Why the need for change?

Plans to reform Sibor to a new benchmark rate started in December 2017, when it was found that the practice of banks borrowing from each other declined in importance as a source of funding, due to regulatory changes imposed on banks after the 2008-2009 global financial crisis.

Instead of basing it on how banks are lending each other, the team that started Sibor’s reform in 2017 came up with a methodology that included corporate deposit transactions as part of the design of Sibor’s successor. It still relied on the banks’ use of expert judgement, though of a lesser degree.

However, after a year of testing, they found that this supposed new benchmark rate was more volatile than Sibor and did not track as closely to Sibor’s movements as anticipated.

Hence, the new polled benchmark would not be able to replace Sibor seamlessly and there would be extensive amendments to existing Sibor contracts, a process that would be "significantly more complicated and resource intensive”, the report said.

Given that the industry was already transitioning from Sor to Sora as the benchmark rate in the derivatives market and it was achieving "good progress”, the report said, it recommended moving Singapore-dollar financial markets to a single rate regime focused on Sora.

As the US dollar London Interbank Offered Rate (Libor) will cease at the end of 2021, it means that Sor will have to be discontinued as well given how it is computed with US Libor. Sora was identified to replace Sor in August 2019.

Sora is the rate of unsecured overnight interbank Singapore-dollar transactions in Singapore and its rates have been published on the website of the Monetary Authority of Singapore (MAS) since 2005.

Why choose Sora?

The report stated that shifting to Sora will result in more transparent loan market pricing for borrowers, and more efficient risk management for lenders.

It made its recommendation based on the following five reasons: