Singapore Leads LIBOR Exit

Singapore is blazing a trail in the global effort to replace LIBOR, becoming one of the first countries to auction debt linked to an alternative benchmark.

The Monetary Authority of Singapore sold S$500 million (US$366 million) of six-month notes with a spread over the compounded Singapore Overnight Rate Average (SORA) on Tuesday. The country is adopting SORA as it moves away from the SGD Swap offer rate, which uses the London interbank offered rate (LIBOR) in computation.

The move is part of a broader push as policymakers around the world develop new benchmarks to replace LIBOR by the end of 2021, after trading informing the rate dried up and European and U.S. banks were found to have manipulated it for their own gain.

“It’s a ground-breaking initiative,” said Claude Brown, a partner at Reed Smith LLP in London. “It looks like MAS has already beaten the U.S. Treasury to it.”

Hundreds of trillions of dollars of global assets are still tied to LIBOR, from student loans and mortgages to interest-rate swaps and collateralized loan obligations (CLOs).

Analysts say banks, businesses, and other national authorities could follow Singapore’s example after the transition lost steam during the coronavirus pandemic.

“It’s a big deal,” said John Coleman, senior managing director of the fixed-income group at R.J. O’Brien & Associates in Chicago. “The buy-side community has to adjust. When they see a government going this way, it’s no longer a gimmick or something that may go away.”

In the U.S., the Treasury is “very seriously studying the issue,” said Jon Hill, U.S. rates strategist at BMO Capital Markets. “I expect them to formally announce SOFR-linked debt later this year,” he said, referring to the Secured Overnight Financing Rate, the Federal Reserve’s preferred replacement for dollar LIBOR.

Asia has lagged the rest of the world in preparing for the change, but Singapore could offer a regional template for the shift.

A few debt securities have already been issued off SORA, including ones from developer CapitaLand Ltd. and the country’s biggest lender DBS Group Holdings Ltd. Eleven banks—including Deutsche Bank AG, Standard Chartered Bank, Citibank NA, and DBS Group—are ready to trade SORA derivatives, according to a June statement.

Progress on establishing alternative reference rates across the rest of 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.

Singapore’s move “may convince other governments and jurisdictions to look at their own practices,” said Jonathan Horan, partner at Linklaters LLP in Singapore. “Everyone needs to focus on this as the date for LIBOR discontinuance looms.”

—With assistance from Adrian Sim.

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