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We are approaching the final stages of a multi-year process that has transformed the way that global interest rate benchmarks are determined. Interbank Offered Rates (IBORs) – such as LIBOR – are on the way out.
Regulators and financial market participants have for some time reached a consensus that Alternative Reference Rates (ARRs) will replace the old IBORs, offering key improvements over their predecessors. However, the sheer scale of the transition is – not unreasonably – intimidating to many in the industry who must now make the jump. LIBOR has been widely described as “the world’s most important number”, used as the benchmark to, amongst other things, price and value interest rate swaps, determine funding costs and investment returns for an enormous range of financial products. As recently as 2021, estimates suggested that $200-300 trillion in financial contracts depended on LIBOR worldwide. A crucial prerequisite for financial firms is to have access to data that will allow them to continue to do business and unlock insights into these new benchmark rates.
The Asia Pacific region is no exception to the global shift from IBORs to ARRs, though countries have taken varying approaches. Japan, for example, will allow both types of rates to co-exist as plausible replacements for its outgoing benchmark over the coming years.
Singapore’s financial supervisors have prioritised building liquidity for a single Singapore Overnight Rate Average (SORA) to replace its two formerly dominant IBOR benchmarks: the Singapore Swap Offer Rate (SOR), and the Singapore Interbank Offered Rate (SIBOR).
Potential transition frictions notwithstanding, the shift from IBORs to ARRs is good news for financial market participants in Singapore. A fundamental weakness in legacy IBORs is rooted in how they are gauged: their judgement-based determination is especially vulnerable to manipulation, as the example of LIBOR demonstrated. There is a compelling argument to be made that such a fundamentally important benchmark in financial markets demands a higher level of transparency.
By contrast, ARRs are based on actual financial transactions, make use of a transparent calculation methodology, and are highly liquid. SORA is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore which ought to provide a greater level of trust and assurance to market participants but it does mean that financial institutions need to pay very close attention, for instance, to distinctions in how financial instruments are valued when switching over, particularly when evaluating existing contracts.
Getting to grips with these challenges has somewhat stymied the pace of transition away from IBORs, but regulators and supervisors all over the world are pressing financial participants not to wait until the last moment. In 2021, the Monetary Authority of Singapore called for banks in the country to advise their corporate customers to proactively embark upon legacy transition by the end of the year, because SOR liquidity would decline as liquidity in derivatives shifted to SORA and key banks would no longer be able to undertake new SOR derivatives transactions. Then, last year, the committee responsible for steering this transition urged banks to actively switch out of, or otherwise insert appropriate contractual fallbacks, into SOR contracts – as gross exposures to SORA derivatives for the first time overtook the size of the SOR derivatives market, rising to more than S$1.1 trillion.
The cessation dates for the old rates are now upon us. SOR is to be discontinued by the end of June 2023. Meanwhile, the 6-month SIBOR was withdrawn last year, and its 1-month and 3-month versions will not be published after 2024 – while all financial institutions have now ceased usage of SIBOR in new loans.
By embracing their benefits, financial services professionals can use ARRs such as SORA and THOR in a multitude of ways – for example, for pricing financial products and instruments, determining interest rates on loans and deposits, benchmarking fund performance, and hedging against interest rate risk.
Crucial though, is having access to data that unlocks insights into these new benchmark rates. In this regard, TraditionData has comprehensive data coverage across global markets and is poised to assist you. We recently released a full suite of THOR Market data, including a THOR overnight index swaps (OIS) curve, which is sourced from both our locally based broking desks and built by our global analytics team. This enables our customers to better view the changing Thai Baht market. It builds upon the tireless work we’ve being doing over the past few years to provide Global Alternate Reference Rate data to customers, as LIBOR is phased out for good.
This year, we’ve continued to expand our presence in the APAC region. Our analytics group brings intimate knowledge of local markets to Tradition’s global reach – enabling it to shed light on otherwise opaque marketplaces. The market data team then works to package and present these insights in a digestible form. Thanks to our presence in 40+ offices across 30 countries, we’re confident that we offer an accurate source of information to financial markets participants that can be trusted due to the integrity of the Tradition Groups global reach and local market expertise.
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