LCH extends central clearing tenor for Sora derivatives to 21 years

THE maximum central clearing tenor for over-the-counter Singapore Overnight Rate Average (Sora) derivatives by global clearing house LCH has been extended to 21 years from 5.5 years previously.

With this clearing extension, the Monetary Authority of Singapore (MAS) will also extend the tenor of its daily Sora derivatives auctions with major derivatives dealers to 20 years from five years.

In a joint press statement on Monday, the Steering Committee for SOR Transition to Sora (SC-STS) and the Association of Banks in Singapore (ABS) said the clearing extension will enable a build-up of liquidity across all tenors in Sora Overnight Index Swaps and basis swaps between Swap Offer Rate (SOR) and Sora.

It also paves the way for switching the discount rate and price alignment interest for centrally cleared SGD derivatives contracts from SOR to Sora later this year, they added.

On the other hand, SC-STS and ABS said MAS's extension will facilitate price discovery in the longer tenors, thus helping to establish robust pricing benchmarks for new Sora products such as loans and bonds, and for pricing conversions of outstanding SOR contracts to Sora.

According to SC-STS and ABS, average monthly Sora derivatives turnover has increased over tenfold since Q2 of 2020, albeit from a low base.

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Based on their observations, there has also been growing adoption of Sora across a range of retail, corporate loan and floating-rate note products.

As such, both parties view the clearing extension as a "timely move" as banks prepare to support increasing client demand for longer-tenor derivatives hedges, which they believe is set to increase as the industry ceases further usage of SOR in new cash market contracts after end-April this year.

Daniel Koh, global head of treasury markets for Standard Chartered Bank, said he expects liquidity in Sora cash and derivatives products to accelerate in the coming months.

"We strongly welcome LCH's extension of central clearing of Sora derivatives to the longer tenors. This is a keenly awaited milestone that will enable the committee to roll out a series of key initiatives planned for in 2021 to further deepen Sora markets," said Mr Koh, who chairs the SC-STS's work on Sora derivatives.

"The clearing extension for Sora derivatives is a first of several major milestones for LCH in 2021, to support ongoing global efforts to move to alternative reference rates. We are pleased to be a global leader in the clearing of Asian currency products and look forward to continued close collaboration with a variety of stakeholders in Singapore and the wider market," said Kate Birchall, head of Asia Pacific at LCH.

Singapore is transitioning from the use of the Sing-dollar SOR to Sora over 2021, with the London Interbank Offered Rate scheduled to be phased out by the end of the year.

The first cleared swap linked to Sora took place on May 19 last year between Standard Chartered and OCBC.