Libor Shift Quickens in Singapore as Contracts Jump Fourfold

(Bloomberg) — Banks in Singapore are embracing a new benchmark for derivatives transactions as the city state prepares to transition away from Libor by the end of September.

The outstanding amount of financial contracts pegged to the Singapore Overnight Rate Average jumped fourfold to $87.4 billion in July from May, according to data from LCH Ltd. But, that’s still a fraction of the $1 trillion of products that are linked to the Singapore Swap-Offer Rate, which is computed using Libor, figures from a steering committee set up by the central bank show.

Policy makers worldwide are ramping up efforts to phase out the use of Libor in the coming months, with some economies moving at a quicker speed than others. An orderly shift to a new benchmark rate may help accelerate the growth of Singapore’s derivatives market, which records about $116 billion of transactions daily — about a quarter of Hong Kong’s volumes.

“Going forward, Singapore dollar-based interest-rate derivatives are expected to be predominantly SORA-linked,” said Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities Pte in Singapore. Derivatives used to switch to SORA from legacy rates will be only liquid when the transition is taking place, “which favors the early adoption of SORA-based interest-rate swaps,” he said.

SORA stood at 0.1002% on Thursday, while the six-month Swap-Offer Rate was 0.20668%.

The global reform of benchmark money-market was sparked by evidence emerging in 2008 that European and U.S. lenders had manipulated rates to benefit their own portfolios.

Last month, the U.S. reached a milestone in the Libor transition with a formal endorsement of forward-looking term benchmarks tied to the Secured Overnight Financing Rate. Progress has been relatively slower in Japan, where several rates are still competing to succeed the yen Libor.

The central bank has played a part in the city state’s migration to SORA. Since August last year, the Monetary Authority of Singapore has been issuing floating-rate notes that are linked to the new benchmark. The outstanding amount of the securities has soared 20-fold to S$9.9 billion in the past year.

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“There is a push” for the transition as the deadlines loom for the discontinuation of legacy rates, said Eugene Leow, a rates strategist at DBS Bank Ltd. in Singapore. Also, “a lot of products linked to SORA are being launched, so the transition process is gathering steam,” he said.

(Adds SORA and SOR levels in fifth paragraph)

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