Understanding SIBOR: Definition, Transition to SORA, Pros & Cons
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Summary:
The Singapore Interbank Offered Rate (SIBOR) was a benchmark interest rate used for lending between banks within the Asian market. It was replaced by the Singapore Overnight Rate Average (SORA) in June 2023. SIBOR played a crucial role in the Asian financial sector and served as a reference rate for various financial products. Understanding its function is essential for navigating the Asian financial landscape.
What is the singapore interbank offered rate (SIBOR)?
The Singapore interbank offered rate (SIBOR) was the benchmark interest rate, stated in Singapore dollars, for lending between banks within the Asian market. SIBOR served as a key reference rate for lenders and borrowers participating in the Asian economy. However, as of June 30, 2023, SIBOR was discontinued and replaced by SORA.
Understanding the role of SIBOR
The banking industry relied on the interbank market for transferring funds, managing liquidity, and borrowing money when needed. SIBOR played a crucial role in this market by providing a reference rate for short-term borrowing. Banks, especially regional ones, would turn to SIBOR when facing a shortage of cash reserves to fulfill their immediate liquidity needs. Loans based on SIBOR terms ranged from overnight to one year.
Transition to SORA
With the discontinuation of SIBOR, the financial industry shifted its focus to the Singapore Overnight Rate Average (SORA). SORA, being an overnight rate, reflects the average interest rates at which banks lend to one another in the overnight market. This transition marked a significant change in the benchmark rates used within the Asian financial sector.
Significance of singapore in finance
Singapore’s strategic location, political stability, stringent legal and regulatory framework, and significant business activity position it as a major hub of Asian finance. The city-state attracts a substantial volume of business transactions and serves as a gateway for financial activities in the region.
Benchmarking and regulation
SIBOR was determined daily by the Association of Banks in Singapore (ABS), with Thomson Reuters acting as the calculation agent. The rate was collated from contributions by 20 member banks before 11 a.m. Singapore time. SIBOR’s primary function was to serve as the benchmark reference rate for various financial products, including government and corporate bonds, mortgages, and derivatives such as currency and interest rate swaps.
Frequently asked questions
What replaced SIBOR?
SORA (Singapore Overnight Rate Average) replaced SIBOR as the benchmark interest rate in Singapore.
How often was SIBOR determined?
SIBOR was determined daily by the Association of Banks in Singapore, based on submissions from member banks.
What role did SIBOR play in the financial industry?
SIBOR served as a key reference rate for various financial products, including government and corporate bonds, mortgages, and derivatives.
What factors influenced the discontinuation of SIBOR?
The decision to discontinue SIBOR and transition to SORA was influenced by several factors, including global regulatory reforms in the financial industry, concerns over the integrity and reliability of interbank lending rates, and the need for a more robust and transparent benchmark rate aligned with international standards.
How does SORA differ from SIBOR?
SORA differs from SIBOR primarily in its calculation methodology and underlying reference rate. While SIBOR was based on interbank lending rates, SORA is derived from actual transactions in the Singapore dollar overnight interbank funding market. SORA reflects the average interest rates at which banks lend to one another in the overnight market, providing a more representative measure of borrowing costs.
What are the implications of the transition from SIBOR to SORA?
The transition from SIBOR to SORA has various implications for market participants, financial institutions, and consumers. It requires adjustments to existing contracts and financial products that reference SIBOR, as well as changes in risk management practices, valuation methodologies, and regulatory reporting requirements. Additionally, the transition may impact borrowing costs, interest rate hedging strategies, and the overall functioning of financial markets.
How are financial institutions and regulators facilitating the transition to SORA?
Financial institutions and regulators are actively involved in facilitating the transition from SIBOR to SORA. They are providing guidance, educational resources, and support to market participants to navigate the transition process smoothly. Initiatives include developing alternative reference rates, updating documentation and contracts, enhancing market infrastructure, and promoting industry-wide collaboration and coordination.
What are the benefits of using SORA as the new benchmark rate?
Using SORA as the new benchmark rate offers several benefits, including greater transparency, reliability, and resilience of the benchmark rate. SORA is based on actual transactions in the overnight interbank funding market, reducing the risk of manipulation or distortion. It also aligns with international best practices and enhances Singapore’s position as a leading financial center with robust market infrastructure and regulatory framework.
Key takeaways
- SIBOR was a benchmark interest rate used in the Asian market, replaced by SORA in June 2023.
- It provided a reference rate for various financial products, reflecting market conditions accurately.
- Singapore’s role as a major financial hub contributed to the significance of SIBOR in the region.
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