What Does SIBOR Mean?
The Singapore Interbank Offered Rate, known by its abbreviation SIBOR, is the benchmark interest rate, stated in Singapore dollars, for lending between banks within the Asian market. The SIBOR is a reference rate for lenders and borrowers that participate directly or indirectly in the Asian economy.
The banking industry uses an interbank market for transferring funds and currency, and for managing liquidity. If a regional bank is near the point at which withdrawals are close to depleting short-term cash reserves, that bank will go into the Singapore interbank market and borrow money at the Singapore Interbank Offered Rate (SIBOR). The terms of the loans vary from overnight to one year. The U.K. version, the London Interbank Offered Rate (LIBOR), is similar to the SIBOR.
Because of its location, political stability, strict legal and regulatory environment, as well as the volume of business undertaken in Singapore, the city-state is regarded as a major hub of Asian finance. Commonly, very large loans to businesses in the area and interest rate swaps involving businesses participating in the Asian economy are quoted or denominated in SIBOR plus a number of basis points.
In Asia, SIBOR use is more common than LIBOR, which is the benchmark for much of the rest of the world. It is set daily by the Association of Banks in Singapore (ABS). Thomson Reuters acts as the calculation agent to collate the SIBOR rate from 20 member banks, each day, before 11 a.m. Singapore time. If a minimum of 12 banks fail to report the rates in a given day, there is no SIBOR for that day. If more than 12 report, the top and bottom quartiles are discarded and an average is calculated.
SIBOR as a Measurement
SIBOR's primary function is to serve as the benchmark reference rate in the Asian markets for debt instruments. This function assists government and corporate bonds, mortgages, and derivatives, such as currency and interest rate swaps, among many other financial products. For example, an interest rate swap involving two counterparties with good credit ratings, both of which have bonds issued in Singapore dollars, will likely be quoted in SIBOR plus a given percentage.
In another example, a Singapore dollar-denominated floating-rate note (FRN), or floater, which pays coupons based on SIBOR plus a margin of 35 basis points (0.35%) annually. Every year, the coupon rate is reset to match the current Singapore dollar one-year SIBOR, plus the predetermined spread. If, for instance, the one-year SIBOR is 4% at the start of the year, the bond will return 4.35% of its par value at year's end. The spread usually increases or decreases depending on the creditworthiness of the institution issuing the debt.
A Benchmark Under Attack
Since the Asian currency crisis in 1997, concerns over volatility and even liquidity grew to a point where the value of some interest rate benchmarks, especially HIBOR in the Hong Kong Market, is questioned. Even LIBOR, which is a global benchmark, is under fire, especially since the 2012 LIBOR fixing scandal. In Europe, the Sterling Overnight Interbank Average rate (SONIA) will replace LIBOR as the benchmark by 2021. SONIA is based on actual bids and offers from the contributing banks and not indicated levels. The LIBOR subject to manipulation if the contributing banks want to hide or enhance their capital position.
The push for a replacement centers on LIBOR since it is the globally recognized standard. The U.S. Federal Reserve introduced the Secured Overnight Financing Rate (SOFR), a new reference rate created in cooperation with the U.S. Treasury Department’s Office of Financial Research.
With LIBOR being replaced, similar rates, including SIBOR, are in jeopardy as well.