SIBOR to SORA transition commences: Consultation on setting of adjustment spreads to convert legacy loans referencing SIBOR to a SORA reference

30 March 2023

On 15 March 2023, the Association of Banks in Singapore published a media release announcing the launch of a consultation on 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 Singapore Dollar (SGD) Swap Offer Rate (“SOR”) to SORA transition nears its successful completion, the Steering Committee for SOR & SIBOR Transition to SORA (“SC-STS”) on 15 March 2023 launched a consultation on the setting of adjustment spreads to convert legacy loans referencing SIBOR to a SORA reference. The consultation begins the second phase of the orderly transition to a SORA-based interest rate landscape in Singapore. The consultation closes on 28 April 2023.

Details on the consultation and the waiver of fees and property loan rules for the transition of SIBOR retail loans are set out below.

SC-STS consultation on adjustment spreads for conversion of legacy SIBOR loans to SORA

ABS explains that historically, there has been a difference in the rates for SIBOR and SORA, where SIBOR is typically higher. Hence, the conversion of a legacy SIBOR contract to a SORA-based contract requires an adjustment spread. This spread accounts for inherent differences between SIBOR and Compounded SORA, such as the credit and term risk premium absent in SORA.

For the proposed approach for conversion of SIBOR retail loans, SC-STS considered that macroeconomic and interest rate conditions for 2023 and 2024 are uncertain at this juncture. The proposed approach seeks to give retail customers options for transition that best meet their needs, provides certainty and transparency to retail customers and banks, and safeguards against extreme adjustment spread outcomes. As such, the two aspects of the proposal are as follows:

  • Choice to switch to SIBOR-SCP or another bank’s prevailing package during active transition period, or be converted automatically after: There will be a period of active transition from 1 August 2023 to 30 April 2024, where 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 can choose between (i) switching to the SIBOR-SCP, (ii) switching to banks’ prevailing packages, and (iii) doing nothing and be converted automatically after the period of active transition.
  • Five-year historical median spread to apply for industry-wide automatic conversion around June 2024: The industry-wide automatic conversion will be carried out by banks around June 2024 after the period of active transition, converting all outstanding SIBOR retail loans to reference SORA. This is necessary to prevent loan disruption as interest payments based on SIBOR cannot be computed after SIBOR is discontinued. The adjustment spread applied at automatic conversion will be determined as the five-year historical median spread between SIBOR and Compounded SORA and will be published by SC-STS before 1 August 2023. SC-STS takes the view that the five-year historical median spread as reflective of a fair rate through the lifetime of the loan. The application of the historical median at automatic conversion also safeguards against extreme scenarios where spot spreads may experience unexpected and volatile surges.

Waiver of fees and property loan rules for transition of SIBOR retail loans

SC-STS 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 one-time fee-free switch will apply to all switches from existing SIBOR retail loans to the SC-STS recommended SIBOR-SCP or prevailing packages offered by the banks. This is available to customers from 15 March 2023 to 31 December 2024.

In parallel with SC-STS’ announcement, the Monetary Authority of Singapore (“MAS”) has affirmed that the taking up of the SIBOR-SCP and prevailing packages offered by their banks to customers with existing SIBOR property loans will not be regarded as a refinancing of property loans under MAS’ property loan rules, i.e. the computation of Total Debt Servicing Ratio, Loan-To-Value, and Mortgage Servicing Ratio requirements will not be applicable. 

Reference materials 

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