What is the background of the transition?

The London Interbank Offered Rate (LIBOR), which serves as an interest rate benchmark across a number of financial products, is expected to be discontinued by the end of 2021. LIBOR (in all its underlying currencies) is expected to be replaced with overnight risk-free rates (RFRs).

The transition from LIBOR to RFRs arises from the global shift to improve the robustness and integrity of financial benchmarks. As part of this shift, the UK Financial Conduct Authority, which acts as the supervisory authority for LIBOR, stated that it would no longer compel banks to submit rates used for the calculation of LIBOR after 31 December 2021.

Alternative benchmark rates have been identified by the respective jurisdictions/countries to replace LIBORs and are set out in the table below. These risk free rates are all overnight interest rate benchmarks, and are based on actual transactions which may be secured or unsecured.

What is Singapore doing about the transition?

As the Singapore Dollar Swap Offer Rate (SOR) utilises USD LIBOR in its computation, the expected discontinuation of LIBOR by end-2021 would impact the sustainability of SOR. The Association of Banks in Singapore and the Singapore Foreign Exchange Market Committee (ABS-SFEMC) has identified the Singapore Overnight Rate Average (SORA) as the most suitable interest rate benchmark to replace SOR.  SORA has been published by the Monetary Authority of Singapore since 2005.
 

How does this impact our customers?

Should our customers have loan(s) or derivatives contracts with us that reference LIBOR or SOR maturing after December 2021, this transition will impact them. This will require them transiting the LIBOR or SOR reference rate to the relevant RFRs of either SOFR for USDLIBOR or SORA for SGDSOR.

Our Bank’s representative or Relationship Manager will contact customers to assist customers with this transition, taking into account the industry’s guidance.

Customers may refer to the following websites to understand the current global reform, as well as the frequently asked questions on MAS and ABS’s websites for more information on the transition of SOR to SORA.

• Monetary Authority of Singapore’s website on Interest Rate Benchmark Transitions:

  https://www.mas.gov.sg/regulation/interest-rate-benchmarks-transition

• UK Financial Conduct Authority’s website on transition from LIBOR:

  https://www.fca.org.uk/markets/libor

• The International Organisation of Securities Commissions’s website on a general background regarding benchmarks transition from LIBOR

  https://www.iosco.org/library/pubdocs/pdf/IOSCOPD636.pdf

• The Association of Banks in Singapore’s (ABS) website on SOR to SORA transition:

  https://abs.org.sg/benchmark-rates/sor-to-sora
  
  https://www.iosco.org/library/pubdocs/pdf/IOSCOPD636.pdf

Industry Announcements on Timelines for SOR and SIBOR Cessation

The Steering Committee for SOR & SIBOR Transition to SORA (SC-STS) and MAS have announced the following new industry timelines:

• By the end of April 2021, all financial institutions and their customers are to cease usage of SOR-linked loans and securities that will mature after end 2021
• All Domestic Systemically Important Banks (D-SIBs) are expected to offer a full-suite of SORA-based products to their customers by end February 2021. All non-DSIB banks should be ready to offer new SORA-based products by end April 2021
• By the end of September 2021, all financial institutions and their customers should cease usage of SOR in new derivatives contracts AND all financial institutions and their customers should cease usage of SIBOR in new contracts.
• By the end of March 2022, 6-month SIBOR will be discontinued.
• By mid of 2023, all SOR benchmark will be discontinued.
• By the end of 2024, all SIBOR benchmark will be discontinued.
• For USD LIBOR, it will cease by end June 2023.

FREQUENTLY ASKED QUESTIONS

[LOANS – EXISTING]

Q1. My company has an existing loan that references SOR/LIBOR and matures after end 2021. What should I do about this?

There is no immediate impact on your loan at this juncture. We will be reaching out to you in due course to assist with the transition. However, to prepare for the upcoming transition, you are encouraged to review the terms and conditions of your loan contract to understand the implications and the actions required.

Q2. Can RHB replace my SOR/LIBOR loan pricing to SIBOR (or enhanced SIBOR)?

We will be sending an official letter at the appropriate time for you to consider different options. You will also need to consider if replacing a SOR loan with other benchmarks impacts your related transactions (e.g. hedges) and the corresponding accounting and tax implications.

SORA and SIBOR are different SGD benchmarks that are determined on a different basis. In relation to the usage of SIBOR, ABS Benchmarks Administration Pte Ltd (ABS Co) is conducting a transitional testing for the enhanced SIBOR, and will provide an update after the transitional testing is completed in 2H 2020. The results of the transitional testing will be considered by the Steering Committee for SOR Transition to SORA (SC-STS), which will issue industry guidance in due course.

While SORA is not commonly used in the loan market, it is not new and has been published daily by the MAS since 2005. Over time, just like any new benchmark, e.g., when SOR was introduced, borrowers will become familiar with SORA, and its use in loans and other cash or derivatives products will increase.

Q3. What will happen to my outstanding loan if I do not want to change my rate, even when SOR/LIBOR is discontinued?

When SOR/LIBOR is discontinued, we will no longer be able to calculate your interest payment using SOR. Instead, your loan interest payment will be calculated using a ‘fallback’ rate or other alternative provisions specified in the terms and conditions of your loan contract. You should start preparing for the transition as early as possible by reviewing the terms and conditions of your loan contract to understand the consequential implications and actions required. We will be reaching out to you in due course to assist in the transition, including, where not provided for in your current contract, updated terms and conditions. You are encouraged to review these updated terms and conditions and seek any clarification you need from our Bank representative or your Relationship Manager.

Q4. How will the change in benchmark affect my loan repayment?

The transition to a RFR could lead to changes to your loan repayment, which impacts the calculation methodology of the loan repayment amount, besides this, it will also depend on market conditions at that point in time.

Q5. If I have more than one loan pegged to SOR/LIBOR, will I have to re-sign every loan?

Yes, all SOR/LIBOR-pegged loans will be affected once SOR/LIBOR is discontinued. We will be reaching out to you in due course to assist in the transition, including, where not provided for in your current contract, updated terms and conditions. You are encouraged to review these updated terms and conditions and seek any clarification you need from our Bank representative or your Relationship Manager.

Q6. What if I had hedged my SOR/LIBOR loan with a swap?

If you had hedged your SOR/LIBOR loan with an interest rate swap under ISDA, your interest rate swap would also have been likely pegged to SOR/LIBOR. You should review the terms of your interest rate swap contract as early as possible to understand the consequential implications once SOR/LIBOR is discontinued. There could be a hedging mismatch as the ISDA protocol for the replacement of SOR/LIBOR may not be in alignment with your loan. We will be reaching out to you to assist in the transition, including, where not provided for in your current contract, updated terms and conditions. You are encouraged to review these updated terms and conditions and seek any clarification you need from our Bank representative or your Relationship Manager.

Q7. What are the tax and accounting-related implications of the change in benchmark?

You need to consult your tax adviser to advise you on the implications of the change in the benchmark once the Steering Committee Sub-group that was formed to provide guidance on accounting and tax-related issues, including hedge accounting, have published their guidance in due course.

[LOANS – NEW]
 

Q8. I am looking to take up a new loan. Should I avoid entering into any new contracts that still reference SOR/LIBOR?

If you wish to take up a new loan that references SOR/LIBOR, you should review the proposed new loan contract for terms that set out, or permit a switch or fallback to an alternative rate from SOR/LIBOR.

Q9. Who should I contact if my company is keen to take up a new loan pegged to SORA?

If you are keen to take up a new loan pegged to SORA, kindly contact your assigned Relationship Manager.

Q10. How will SORA be used to compute interest payments for corporate borrowers?

There are a few ways SORA could be used to calculate interest payments for corporate loans.

In other markets such as the US and the UK, banks have used the RFR rates calculated based on a compounded or simple average of the alternative overnight interest rate benchmark. Further update will be provided once the Singapore Steering Committee for SOR Transition to SORA (SC-STS) have issued their guidance on the matter.

Q11. Will RHB continue to offer fixed rate loans? Will these be affected by the transition?

The expected discontinuation of SOR only affects contracts that reference SOR, e.g. SOR floating rate loans. RHB will continue to offer other types of loans that fit customer needs, including fixed rate loans.

Reference:
SORA - Singapore Overnight Rate Average
SOR – Singapore Swap Offer Rate
LIBOR – London Inter-Bank Offered Rate

SIBOR TRANSITION TO SORA

FAQs FOR CONSUMERS

1. What is SORA (Singapore Overnight Rate Average)?

SORA has replaced the Singapore Interbank Offered Rate (SIBOR) and Swap Offer Rate (SOR) as the key interest rate benchmark for Singapore dollar (S$) interest rate contracts.

SORA is calculated and administered by the Monetary Authority of Singapore (MAS). It is published as a daily rate and a series of 1-month, 3-month and 6-month compounded rates on the MAS website at https://eservices.mas.gov.sg/statistics/dir/DomesticInterestRates.aspx. The Compounded SORA rates are calculated as the compounded average of daily SORA readings over the relevant 1-month, 3-months or 6-months periods before each publication date, reducing the effects of rate volatility.

SORA is a robust and transparent benchmark anchored on actual market transactions and underpinned by a deep and liquid overnight interbank funding market. It is determined based on the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank Singapore dollar cash market in Singapore between 8.00am and 6.15pm.

2. Can I choose to retain my property loan referencing SIBOR, and not switch out of it?

As SIBOR will be discontinued after 31 December 2024, you are strongly encouraged to contact your bank early to explore available options:

• Option 1: Prevailing property loan package offered by your bank
• Option 2: SORA Conversion Package (“SCP”) at the spot-spread
• Option 3: Wait for automatic conversion to the SCP in June 2024 at the historical median spread

If you do not switch out your SIBOR-based property loan to an alternative loan package by 30 April 2024, your bank will automatically convert it to the SCP at the historical median spread in June 2024, 6 months ahead of SIBOR discontinuation (i.e. Option 3). This is to allow time for an orderly transition out of SIBOR loans by banks and customers, and to ensure that all outstanding SIBOR loans are converted before SIBOR is discontinued.

3. What is the SORA Conversion Package?

Banks are offering customers with existing SIBOR loans a switch to the SORA Conversion Package at no additional fees and no additional lock-in period.

The SCP seeks to directly convert your existing SIBOR-based loan to a SORA-based loan. The key components of the SCP are:

• Your existing SIBOR loan margin will remain unchanged;
• 3-month Compounded SORA, is a floating interest rate benchmark published by MAS (see above FAQ);
• Adjustment Spread will be added to account for the difference between SIBOR and 3-month compounded SORA.

Diagram 1: Illustration of SORA Conversion Package (SCP)

You should note that there are differences in the computation of the Adjustment Spread, depending on the timing of your transition.

1. Active Transition Phase (1 September 2023 to 30 April 2024)

              The interest payment on your loan will be calculated based on:

3-month Compounded SORA + Your existing SIBOR loan margin + Adjustment Spread (spot-spread)

where the Adjustment Spread (spot-spread) is computed as the average difference between the applicable SIBOR and 3-month Compounded SORA in the preceding three-month period.[1] The Adjustment Spread (spot-spread) is floored at zero.

The Adjustment Spread (spot-spread) is published by ABS Benchmarks Administration Co (“ABS Co”) on the first business day of each month[2], and will apply for customers transitioning to the SCP in that particular month. E.g. the spot-spread published on 1 December 2023 will be used for customers who actively transition to the SCP in December 2023. After the transition, the adjustment spread remains fixed in your loan, for the remaining tenure of the loan.

2. Automatic Conversion (In June 2024)

The interest payment on your loan will be calculated based on:

3-month Compounded SORA + Your existing SIBOR loan margin + Adjustment Spread (historical median)

where the Adjustment Spread (historical median) is computed as the historical median between the applicable SIBOR and 3-month Compounded SORA over the period 30 June 2018 to 30 June 2023.

4. Why is there an adjustment spread in the SORA Conversion Package?

An adjustment spread is necessary when converting a SIBOR loan to a 3-month Compounded SORA reference because of inherent differences between SIBOR and compounded SORA. The adjustment spread accounts for differences in the level of SIBOR and 3-month Compounded SORA, to maintain parity when switching from SIBOR to 3-month Compounded SORA.

SIBOR represents unsecured term (1-month or 3-month) lending rates, and hence includes term and credit risk premiums, which account for the uncertainty in the level of interest rates over a future period as well as the risk of providing unsecured credit over a 1-month or 3-month period. In contrast, SORA and Compounded SORA represent overnight lending rates, and exclude such term and credit risks.

Consequently, as reflected in Diagram 2 below, 3-month Compounded SORA has also typically been significantly lower than 1-month and 3-month SIBOR.

Diagram 2: Historical comparison of 1-month SIBOR, 3-month SIBOR and 3-month Compounded SORA

5. Why is there a different approach in Adjustment Spread (Retail) between Active Transition Phase and Automatic Conversion Phase?

The Steering Committee for SOR & SIBOR Transition (“SC-STS”) has recommended for the SCP to apply the spot-spread approach (floored at zero) during the period of active transition, and the 5-year historical median at automatic conversion. This approach has the following benefits:

1. Provides customers with choice during active transition – to either switch via the spot-spread, allowing customers to lock in possibly favourable spreads (should spot-spreads be low), switch to banks’ prevailing packages, or do nothing and be converted in June 2024 at the 5-year historical median spread.

2. Provides customers with certainty on automatic conversion outcome – As the 5-year historical median has been set and fixed upfront, customers would be made aware early of the adjustment spread that would apply should they do nothing and be converted automatically on the industry timeline in June 2024. On a month-to-month basis, customers would be able to compare among (i) bank’s prevailing package, (ii) the current month’s spot-spread that would apply during the active transition period, and (iii) the 5-year historical median that will apply at automatic conversion, which will help customers make an informed decision on whether they should actively transition in that month.

Given these benefits, the approach of offering customers three options for transitioning of SIBOR retail loans was also supported by respondents to the SC-STS consultation on adjustment spreads for the conversion of legacy SIBOR loans to SORA[3].

6. Why is the 5-year historical median spread between SIBOR and Compounded SORA used as the applicable adjustment spread for the automatic conversion of SIBOR loans?

The 5-year historical median spread – rather than the spot spread – is used for the automatic conversion of SIBOR loans, as this can be determined beforehand, providing customers with early certainty on the terms of automatic conversion that will apply to their loan should they do nothing and be converted in June 2024.

The 5-year historical median spread is a fair estimate of the average spread between SIBOR and Compounded SORA as a 5-year period is sufficiently long to smooth out the effects of idiosyncratic market events over past years, and reasonably estimates where spreads could converge towards in the long run. The use of a 5-year historical median spread is also aligned to international convention adopted for the transition of similar interest rate contracts, as well as the transition of SIBOR and SOR wholesale contracts, and was supported by respondents to the SC-STS consultation on adjustment spreads for the conversion of legacy SIBOR loans to SORA.

7. Will the Adjustment Spread change throughout the tenure of my loan?

The Adjustment Spread that is applied by your bank in its SORA Conversion Package, as would be stated in the contract agreement, will stay the same for the remaining tenure of your loan. There will not be any change, even though the Adjustment Spread (spot spread) published by the ABS Co in subsequent months may move higher or lower due to fluctuations that are inherent in floating interest rates.

You can refer to the ABS Co’s website for the prevailing Adjustment Spread (spot spread) that will be applied in the SORA Conversion Package at the point when you switch your loan.

8. How will my interest payments change throughout the tenure of my loan?

If you have converted to the SORA Conversion Package at an adjustment spread (spot-spread) of 0.3012%:

• The adjustment spread of 0.3012% will remain unchanged throughout the tenure of your loan.
• If your loan has a step-up tier rate, the loan after switching to the SCP will similarly have a step-up tier rate.

9. My loan is currently on fixed rate and will only be changing to a SIBOR reference rate after the fixed tenure ends. How will the transition impact my loan?

Your loan will remain on fixed rate until the fixed tenure ends. You may decide if you would like to switch to a prevailing property loan package offered by your bank or to switch the floating part of your loan (e.g. loan might reference SIBOR in the fourth year, after the fixed rate period ends) to the SORA Conversion Package.

If you decide to switch to a prevailing property loan package offered by your bank, no administrative or prepayment fee will be charged for the conversion, but a lock-in period may apply depending on the package you choose.

If you decide to switch to the SORA Conversion Package and:

• you apply during the active transition period to be converted to a SORA Conversion Package, the SORA Conversion Package with an Adjustment Spread (spot-spread) will apply after the end of the fixed tenure; or
• you wait for the automatic conversion to the SORA Conversion Package, the SORA Conversion Package with an Adjustment Spread (historical median) will apply after the end of the fixed tenure.

10. How do I decide which is the “best package” for me?

There is no “best package”, as the financing needs and preferences would differ across customers. As such, we encourage you to contact your bank early to discuss your options.

As a general guide, you may wish to consider some of these factors (non-exhaustive):

• Comparison between the Adjustment Spread (retail) during active transition and automatic conversion: In deciding whether to switch to the SCP during active transition (between 1 September 2023 to 30 April 2024) or to wait for automatic conversion to the SCP (in June 2024), you may wish to compare the applicable adjustment spread that would be applied to your loan.

• • The adjustment spread at automatic conversion is known upfront:
    • The Adjustment Spreads (historical median) will be applied to customers converting from a 1-month SIBOR and/or 3-month SIBOR loan respectively to the SCP at automatic conversion in June 2024.

• • The adjustment spread during active transition is published for the current period, but unknown for future periods:
    • ABS Co will publish the Adjustment Spreads (spot-spread) on the first Singapore business day of each month. The Adjustment Spreads (spot-spread) will be applied to customers converting from a 1-month SIBOR and/or 3-month SIBOR loan respectively to the SCP during the active transition phase.
    • The published Adjustment Spreads (spot-spread) at the start of the month will be used for customers who apply to actively transition to the SCP in that month.

• • The earlier you start to think about your options, the better. Starting early will give you a wider range of options in terms of when and at what spreads you could transition your loan to.

• All-in interest rate: In addition to the adjustment spread, you may wish to compare the all-in interest rate which you are currently paying on your existing SIBOR loan vs the all-in interest rate of the alternative loan packages offered by your bank.
  • For example, the all-in interest rate would comprise of the following:
    • For existing SIBOR loan: (i) the SIBOR reference rate (which is a floating rate) and (ii) your existing loan margin.
    • For SCP: (i) the 3-month compounded SORA reference rate (which is a floating rate), (ii) your existing loan margin, and (iii) the applicable Adjustment Spread (retail).
    • For prevailing packages: Varies across different packages.

• • The comparison of all-in interest rate is particularly important for customers considering to switch to banks’ prevailing packages. Unlike the SCP, which allows customers to retain their existing loan margin, this may not happen under banks’ prevailing packages.
    • For a customer whose loan margin on their existing SIBOR loan is low, the all-in interest rate of the SCP could be lower than the prevailing loan packages, as the SCP will allow the customer to retain the existing low loan margin.
    • Conversely, for a customer whose loan margin on their existing SIBOR loan is high, the all-in interest rate on the prevailing loan packages may be more attractive.

• Financing preferences: You may wish to take into consideration your financing preferences when deciding between the prevailing packages offered by your bank, which may include both fixed and floating rate packages. For example, if you prefer certainty in interest rate payments, a fixed rate package may suit your preference. As prevailing packages would come with different terms and conditions (e.g. lock-in periods), you may also wish to take them into consideration in your decision.

We encourage you to speak to your bank early, who will be able to provide further advice on your options.

11. How do I switch to a SORA Conversion Package or another loan package?

Please call your bank or contact your relationship manager.

12. Will I be charged any fees for making a switch now?

There are no fees for switching out of your SIBOR-based loan to the SCP or any prevailing packages offered by your bank. However, fees will apply according to the terms of your existing loan package should you decide to refinance your loan with another financial institution.

For specific scenarios, please see further details below.

13. Will I be subject to a fresh lock-in period if I switch to a prevailing package?

For the switch to the prevailing package, you may be subject to the terms and conditions of your bank’s prevailing package, including a fresh lock-in period.

14. Will I be subject to re-computation of the Total Debt Servicing Ratio (TDSR), Loan-To-Value (LTV), and Mortgage Servicing Ratio (MSR) requirements when I switch from my SIBOR loan to an alternate package offered by the same bank?

As the need to replace the SIBOR-based property loan with an alternative loan package is necessitated by the discontinuation of SIBOR on 31 December 2024, MAS will not require financial institutions to re-compute the TDSR, LTV, and MSR requirements for affected customers, including investment property loan borrowers, making the switch with the same financial institution. This is a one-time exception as part of the industry-wide exercise to facilitate customers’ switch to alternative loan packages offered by the same bank, and extends to customers utilising the one-time fee-free switch from the SCP to the prevailing package.

If you initiate a refinancing of your property loan with another financial institution, you will be subject to the prevailing property loan rules (e.g. TDSR, LTV, and MSR). However, you should check with that financial institution if you are eligible for any of the existing exemptions that are provided. For example, currently, borrowers are exempted from TDSR when refinancing their owner-occupied housing loans.

15. Will I be subject to re-computation of TDSR if I switch out to a prevailing loan package and at the same time:

1. apply for a (new or additional) mortgage withdrawal loan, and/or
2. request for the loan tenure to be extended

For request(s) other than the switching out of your SIBOR-based loan to a prevailing loan package, you would be subject to credit assessment and thus, the re-computation of TDSR shall apply. You are recommended to speak with your bank if you have requests beyond package switching.