Singapore leads on Libor replacement in Asia with note sale

HONG KONG • Singapore is blazing a trail for London interbank offered rate (Libor) replacement in Asia, as its central bank becomes the first government entity in the region to auction notes based on a new risk-free rate.

The Monetary Authority of Singapore (MAS) auctioned S$500 million (RM1.53 billion) of six- month floating-rate notes with a spread over compounded Singapore Overnight Rate Average, or SORA, yesterday. It received S$2.1 billion of applications. The country is adopting SORA as it moves away from the SGD Swap offer rate, which uses the Libor in computation.

Trillions of dollars are at stake, as everything from home mortgages to interest-rate swaps are underpinned by two local rates that are due to be discontinued. The shift is part of a broader global push as policymakers around the world develop new benchmarks to replace Libor by the end of 2021, after European and US banks were found to have manipulated it for their own gain.

Asia has lagged the rest of the world in preparing for the change, but Singapore could offer a template for how the transition can be managed.

“They are certainly ahead of the curve so far as issuing government-backed products referencing the alternative rate,” said Natalie Curtis, Singapore-based partner at Herbert Smith Freehills LLP.

Some S$3.5 trillion of derivative products were pegged to the existing swap offer rate, as were S$37.5 billion of bonds, according to a panel in March. That rate is due to be discontinued after 2021.

In Singapore, a few debt securities have already been issued off SORA, the alternative benchmark, including ones from developer Capita- Land Ltd and the country’s biggest lender DBS Group Holdings Ltd.

Banks also need to have the infrastructure in place to trade SORA-linked products. Eleven banks including Deutsche Bank AG, Standard Chartered Bank (Singapore) Ltd, Citibank NA and DBS Group were ready to trade SORA derivatives, according to a June statement.

“The challenge is market acceptance, so that you’ll end up with enough liquidity to be a viable benchmark and also for the market to have confidence in it,” said Curtis.

The MAS offering marks the start of what will be monthly issuance of such securities from the central bank.

Progress on establishing alternative reference rates across Asia has been patchy. In Hong Kong, the Treasury Markets Association has identified the Hong Kong Dollar Overnight Index Average, or Honia, as an alternative rate to the Hong Kong interbank offered rate (Hibor). The first Honia-linked interest-rate swap was centrally cleared in July.

Honia still lacks traction in Hong Kong, partly because banks can continue to reference Hibor for existing and future loan products beyond 2021, according to Francis Chan, senior analyst at Bloomberg Intelligence in a note this month. — Bloomberg