30 August 2018
On 24 July 2018, ABS Benchmarks Administration Co Pte Ltd (“ABS Co”) and the Singapore Foreign Exchange Market Committee (“SFEMC”) (jointly, “ABS-SFEMC”) issued a media release announcing that they have finalised the proposals to enhance the Singapore Interbank Offered Rates (“SIBOR”). This follows the ABS-SEFMC public consultation on proposals to enhance SIBOR which ran from 4 December 2017 to 5 February 2018. ABS-SFEMC have also released their Response to the feedback received from the public consultation.
One of the key proposals is to calculate SIBOR using the following waterfall methodology: (i) transactions in the underlying wholesale funding markets, (ii) transactions in related markets, and (iii) expert judgement. The inclusion of other wholesale funding transactions reflects the structural shifts in banks’ funding sources. This waterfall methodology will also provide greater clarity and facilitate consistency across panel banks that submit input for the calculation of SIBOR.
ABS-SFEMC expect the new SIBOR methodology to be implemented around end-2019 / early-2020, following a period of transitional testing. There will be no change to the current SIBOR methodology in the meantime.
The finalised proposals have taken into account the global guidance on interest rate benchmark reforms.
Calculating SIBOR using waterfall methodology
Set out below are some key points raised in the feedback provided and ABS-SFEMC’s response with regard to each level of the waterfall methodology:
- Level 1 (highest priority) - Transactions in the underlying market: Most respondents supported ABS-SFEMC’s proposal for Level 1 inputs to comprise a panel bank’s unsecured interbank and other wholesale funding transactions. To facilitate consistency of approaches across panel banks, a working group has been established by ABS Co to enhance the current ABS Co Code of Conduct for panel banks, which sets out industry best practices for benchmark submissions. ABS Co will consult panel banks on its revised Code of Conduct in the second half of 2018. As most panel banks may need to put in place system enhancements to support the SIBOR waterfall methodology, ABS-SFEMC will provide a 12-month period to allow banks sufficient lead-time to put in place the necessary system enhancements. To reduce operational complexity, ABS-SFEMC agree with respondents’ suggestion to set the minimum eligible transaction size at S$10 million for all types of transactions.
- Level 2 - Transactions in related markets: There was broad support among respondents for panel banks to use the movement in related transaction-based benchmarks to adjust its previous day’s rate submission, as such related market movements provide a useful reference when there is a lack of Level 1 transactions. The analysis of recent transaction data affirms respondents’ feedback that Level 2 adjustments based on a panel bank’s own transactions in related markets would have been sporadic. Taking this into account and to simplify the methodology, ABS-SFEMC will not proceed with the proposal for panel banks to reference own transactions in related markets. Level 2 inputs will hence only entail panel banks’ referencing of movements in related market transaction-based benchmarks to adjust their previous days’ submissions. Taking into account feedback received, the maximum number of consecutive business days that Level 2 inputs can be used will be aligned across all SIBOR benchmark tenors to 10 business days.
- Level 3 (lowest priority) - Expert judgement: There was broad support for the proposed list of inputs which expert judgment can be based on, and the proposed approach of allowing panel banks the flexibility to determine their own approach towards the exercise of expert judgement. While Level 2 already allows submitters to reference the FX swap market, ABS-SFEMC agree with the inclusion of FX swaps as a possible input to base expert judgement under Level 3. Nevertheless, panel banks should not mechanically submit rates observed in related markets, and should not mechanically extend the Level 2 submission approach to Level 3.
Discontinuing 12-month SIBOR
There was broad support for the proposal to discontinue the 12-month SIBOR, given low market usage and a lack of underlying transactions to support the production of this benchmark. One respondent highlighted that the discontinuation of the 12-month SIBOR could trigger a re-assessment of the Total Debt Servicing Ratio (“TDSR”) for retail clients with property loans referencing the 12-month SIBOR. The respondent asked if a request could be put to MAS to consider a waiver in such cases, of the TDSR re-assessment. Following the feedback received, ABS-SFEMC have brought the TDSR re-assessment issue to MAS’ attention.
The following materials are available on the ABS website www.abs.org.sg: