29 September 2020

On 1 September 2020, the Association of Banks in Singapore (“ABS”) issued a media release, on the Steering Committee for SOR Transition to SORA (“SC-STS” or “Committee”) outline of its views on the role played by Fallback Rate (SOR), in the on-going transition from SOR to the Singapore Overnight Rate Average (“SORA”). Fallback Rate (SOR) is an ABS-administered FX-implied rate like Swap Offer Rate (“SOR”), but it uses the fallback for USD LIBOR (i.e. compounded Secured Overnight Financing Rate (SOFR) plus spread adjustment) instead of USD LIBOR as input. ABS reiterated its support for the use of Fallback Rate (SOR) as the primary fallback reference rate for SOR derivatives. This is in anticipation of the soon-to-launch International Swaps and Derivatives Association’s (“ISDA”) IBOR Fallback Protocol.

Under the SOR-to-SORA transition roadmap set out by the Committee, market participants should transition from SOR to SORA well ahead of end-2021 to ensure that parties to outstanding SOR transactions have good control over the timing and execution of their transition plans. There are possible scenarios where market participants are unable to complete the transition for all their contracts despite best efforts. Putting robust contractual fallbacks in place will address the risks of contractual frustration and settlement issues after SOR is discontinued.

The Committee has worked closely with ISDA to incorporate Fallback Rate (SOR) as the primary fallback reference rate for SOR derivatives, with SORA-based reference rates ranking lower in the hierarchy of fallbacks and applying if Fallback Rate (SOR) is unavailable. The Committee had considered a primary fallback reference rate based on SORA. However, given the unique nature of SOR as an FX-implied benchmark, industry feedback indicated that the use of Fallback Rate (SOR) as a fallback reference rate would significantly reduce the risk of inadvertent value transfer when fallback arrangements are triggered. Market participants can incorporate the hierarchy of fallbacks into existing SOR contracts by adhering to ISDA’s IBOR Fallback Protocol.

The Committee also emphasised that Fallback Rate (SOR) is intended solely as a fallback reference rate, and is not intended for usage in new derivative contracts. As the SGD derivatives market has adopted SORA as its key reference rate, contracts referencing Fallback Rate (SOR) will likely become illiquid and challenging to value and transition from.

The Committee announced that Fallback Rate (SOR) will only be published for about three years following the fallback trigger to limit the reliance on Fallback Rate (SOR) and pre-empt any possible bifurcation of the market between SORA and Fallback Rate (SOR). Fallback Rate (SOR) is expected to be permanently discontinued thereafter.

Reference materials

The following materials are found on the ABS website www.abs.org.sg: