SORA benchmark gets teeth against financial misconduct

Thu, Aug 06, 2020

Vivien Shiao

https://www.businesstimes.com.sg/ban...ial-misconduct

THE Monetary Authority of Singapore (MAS) will prescribe the Singapore Overnight Rate Average (SORA) as a financial benchmark under the Securities and Futures Act (SFA), as well as enhance its transparency and data availability, as part of a slew of measures to support the adoption of the MAS-administered SORA.

These initiatives aim to catalyse greater activity in SORA markets, safeguard the benchmark's integrity and enhance market confidence in SORA, given its growing importance as a key interest rate benchmark in Singapore dollar (SGD) financial markets, said MAS in a statement on Wednesday.

They aim to complement the industry-led transition roadmap, set out by the Steering Committee for SOR Transition to SORA (SC-STS) to develop "vibrant and robust" SORA markets.

Singapore is in the process of transitioning from the Swap Offer Rate (SOR) to SORA, which is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore.

SOR - the current benchmark used to price derivatives and business loans here - will be replaced by SORA, given the end of the scandal-tainted Libor (London Interbank Offered Rate) after end-2021, as the SOR uses US dollar Libor in its computation.

Among the new initiatives by MAS is the issuance of SORA-based floating rate notes (MAS FRN) on a monthly basis, starting from Aug 21, 2020. This will broaden MAS's suite of money market instruments used to manage banking system liquidity. It will also facilitate the adoption of SORA as a floating rate benchmark, provide a pricing reference for SORA cash products, and spur hedging activities through the SORA derivatives market, said MAS.

MAS will also enhance transparency and data availability on SORA. It will publish, on a daily basis, key statistics involving SORA, compounded SORA rates for one-month, three-month and six-month tenors, and a SORA Index that will facilitate calculation of compounded SORA over specified periods.

The SORA Index is a daily data series representing the returns from earning compounded interest each day at the daily SORA rate.

MAS said the compounded SORA rates and the SORA Index will provide market participants with a standardised and transparent basis to derive rates for given tenors, which can be easily referenced in new SORA products.

Singapore's financial regulator has also prescribed SORA as a financial benchmark under the SFA, to ensure that regulatory and enforcement powers, including criminal and civil actions, can be taken against any market misconduct related to SORA.

Providing a false or misleading appearance to the price, value, performance or rate of SORA, or providing or disseminating any information, or expressing any opinion that is false or misleading to the benchmark administrator, are examples of market misconduct.

Prescribing SORA as a financial benchmark under the SFA will safeguard the integrity and robustness of SORA, given its growing role as a key interest rate benchmark for SGD financial markets, said MAS.

MAS has also issued a Statement of Compliance with the IOSCO Principles for Financial Benchmarks (IOSCO Principles) for SORA, which follows recent enhancements to the methodology of SORA to broaden its representativeness.

Previously, SORA was based only on brokered unsecured overnight interbank SGD cash transactions provided by brokers. It now captures both brokered and bilateral interbank transactions provided by reporting banks to MAS.

Compliance with IOSCO Principles means that the administration of SORA meets international best practice relating to benchmarks administration, which is expected to generate broader market confidence by both domestic and international market participants in the use of SORA.

Jacqueline Loh, deputy managing director, MAS, said: "These initiatives mark an important milestone in supporting broad-based adoption of SORA in SGD financial markets. They complement the recently announced industry proposal to shift to a SORA-centred SGD interest rate market, by enhancing the robustness of SORA and supporting the development of deep, liquid and efficient SORA markets."

In August 2019, the Association of Banks in Singapore and the Singapore Foreign Exchange Market Committee identified SORA as the most suitable interest rate benchmark to replace SOR as it was found to be the "most robust and suitable alternative", underpinned by a deep and liquid overnight funding market.

Several banks here have already undertaken SORA derivatives transactions, including DBS, Deutsche Bank, OCBC, Standard Chartered and United Overseas Bank. OCBC has also launched Singapore's first home loan referencing the SORA.

Banks in Singapore are expected to pilot more new SORA products in the second half of the year.