Singapore’s Benchmark Interest Rate the Singapore Overnight Rate Average (SORA) Explained

What is SORA?

SORA or the Singapore Overnight Rate Average is a new benchmark interest rate that is used as a reference rate by banks operating in Singapore to price the interest rate of bank loans made in Singapore dollars.

SORA replaces two old benchmarks, namely the Singapore Interbank Offered Rate (SIBOR) and the Singapore Swap Offered Rate (SOR) in the pricing of bank loans.

How is SORA calculated?

In short, SORA is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank Singapore dollar cash market in Singapore between 8 am and 6.15 pm.

Why is the banking industry moving towards a new benchmark reference rate?

One of the key differences between SORA and the old benchmarks SIBOR and SOR is that SORA is calculated based on a volume-weighted average basis instead of a simple average basis. The volume-weighted average is a more robust measure as the simple average can be skewed by a few outliers especially if the number of transactions is low with a low volume for each outlying transaction. Therefore, the volume-weight approach gives a better representation of the interbank loan market than the simple average approach.

In addition, SORA is underpinned by actual transactions whereas SIBOR is calculated based on the interest rates submitted by each contributor bank to the Association of Banks in Singapore (ABS). The rates contributed by each contributor bank reflect what the banks believe they will be charged for borrowing in the interbank market at around 11 am on a particular working day. Since the rates submitted are based on individual bank’s opinion and not actual transactions, banks can collude to fix SIBOR. In fact, SIBOR has been rigged before. Since SORA is a volume-weighted benchmark based on actual transactions, it is very difficult for it to be manipulated. The 6-month SIBOR was discontinued on 31 March 2022 while the 1-month and 3-month SIBOR will be discontinued after 31 December 2024.

As for SOR, it is a synthetic rate that reflects the cost of borrowing in Singapore dollars by first borrowing in U.S. dollars, converting it to Singapore dollars and then repaying the loan back in U.S. dollars using a predetermined forward exchange rate. The calculation of SOR involved the benchmark LIBOR, which is the London equivalent of SIBOR for U.S. dollar interbank borrowing. In the past, banks have colluded to fix LIBOR, and as such LIBOR will be discontinued from 30 June 2023 onwards.

Why do banks borrow overnight from each other?

Banks are mandated by central banks to keep a certain percentage of their customers’ deposits as reserves to ensure that they can meet their customers’ demand for cash withdrawals. This ratio is known as the reserve requirement ratio. If a bank finds itself with a reserve ratio lower than what is statutory required, it will have to borrow from other banks that have excess reserves to make up the shortfall.

What is the difference between SORA, 1M SORA, 3M SORA and 6M SORA?

SORA refers to the volume-weighted average of overnight interbank Singapore dollar transactions on a particular working day. The other measures of SORA are the compounded average rate of SORA for a one-month period (1M SORA), three-month period (3M SORA) or 6-month period (6M SORA). One of these three benchmarks are used to price floating rate or hybrid bank loans in Singapore. For residential mortgages, most banks use 3M SORA as the benchmark. Though SORA is a better measure than SIBOR or SOR, it can still be volatile as liquidity conditions can change quickly in the financial markets. The 3M SORA, being the 3-months compounded average of SORA smooths out the volatility and is a fairer reference rate as it is based on three months of transactions rather than transactions on a single day.

Where can I find the figures for SORA?

The figures for SORA, IM SORA, 3M SORA and 6M SORA can be found on the MAS website.

Is there a difference between the Fed Fund Target Rate and SORA?

As the name suggests, the Fed Funds Target Rate is the target for the U.S. overnight interbank rate set by the Federal Reserve. It is the main tool of monetary policy in the U.S. As of April 2023, the Fed Funds Target Rate is between 4.75% and 5.00%.

Unlike the U.S. Federal Reserve, the Monetary Authority of Singapore (MAS) does not have a target range for SORA. This is because our main policy tool is through the exchange rate, not interest rate. As such there is no restriction on how high or how low SORA can go. Given that Singapore is an open financial centre, with no restriction to capital inflow or outflow, higher Fed rates will likely result in higher rates of SORA and vice versa.

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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.