SC-STS Consults on Adjustment Spreads for the Conversion of Legacy SIBOR Loans to SORA

17 March 2023

On 15 March 2023, the Steering Committee for SOR & SIBOR Transition to SORA (“SC-STS”) published a consultation paper on its recommendations for the setting of adjustment spreads to convert legacy loans referencing the Singapore Interbank Offered Rate (“SIBOR“) to a Singapore Overnight Rate Average (“SORA”) reference.

As the transition from Singapore Dollar (SGD) Swap Offer Rate (“SOR”) to SORA nears completion, the industry will focus on the SIBOR transition in 2023 and 2024. The conversion of a legacy SIBOR contract to a SORA-based contract requires an adjustment spread because SIBOR incorporates term and credit risk premiums. This typically results in a higher rate than SORA, which is an overnight near risk-free rate. The consultation ends on 28 April 2023.

The SIBOR transition will closely mirror the SOR transition, and the key recommendations include the following:

(a) For the SIBOR corporate loan transition, application of the 5-year historical median spread between SIBOR and Compounded SORA as the applicable adjustment spread. The advantages of a 5-year historical median are that it reflects a fair rate over the lifetime of the loan, is consistent with international practices and the SOR corporate loan transition, and would also give a reasonable estimate of the spread in the long run. The actual 5-year historical median will be calculated and published by SC-STS in 3Q 2023 to facilitate this transition.

(b) For the SIBOR retail loan transition, transition in two key phases:

active transition from 1 August 2023 to 30 April 2024: The adjustment spread on the SIBOR-SORA Conversion Package (“SIBOR-SCP“) for each month will be determined as the average spread between SIBOR and Compounded SORA over the preceding three months. During this period, customers may choose to: (i) switch to the SIBOR-SCP; (ii) switch to the banks’ prevailing packages; or (iii) do nothing and be converted automatically after the period of active transition; and
industry-wide automatic conversion around June 2024: A bank-facilitated automatic conversion will convert all outstanding SIBOR retail loans to reference SORA by April 2024, to prevent loan disruption to customers when SIBOR is discontinued. The adjustment spread applied at automatic conversion will be determined as the 5-year historical median spread between SIBOR and Compounded SORA, and will be published by SC-STS before 1 August 2023.

From now to 31 December 2024, SC-STS announced that it has worked with banks in Singapore to offer customers with existing SIBOR retail loans a one-time fee-free switch to any prevailing package offered by the same bank.

The Monetary Authority of Singapore (“MAS“) has also affirmed that the taking up of the SIBOR-SCP and prevailing packages offered by banks to customers with existing SIBOR property loans will not be regarded as refinancing their property loans under MAS’ property loan rules. As such, MAS will not require financial institutions to re-compute the Total Debt Servicing Ratio, Loan-To-Value and Mortgage Servicing Ratio requirements for affected customers making the switch within the same financial institution.

Click on the following links for more information (available on The Association of Banks in Singapore (“ABS“) website at www.abs.org.sg):