LCH clears first SORA derivatives trade

GLOBAL clearing house LCH has cleared the first Sing-dollar interest rate swaps referencing the Singapore Overnight Rate Average (SORA), it said on Tuesday.

Singapore is transitioning from the use of the Sing-dollar Swap Offer Rate (SOR) to SORA over the next year, with the London Interbank Offered Rate (Libor) scheduled to be phased out by end-2021. 

This first cleared swap linked to SORA was done between Standard Chartered and OCBC.

The SORA is the average rate of unsecured overnight interbank Sing-dollar transactions brokered in Singapore. The transition is underway as SOR, a benchmark used to price derivatives and business loans here, will be impacted given the demise of Libor. This Singapore rates benchmark uses the US-dollar Libor in its computation.

LCH's central clearing for over-the-counter (OTC) SORA derivatives will deepen liquidity in such instruments, and catalyse the growth and development of the overall SORA market, said the Steering Committee for SOR Transition to SORA (SC-STS) in a statement. 

The central clearing of OTC SORA derivatives includes SORA overnight indexed swaps (OIS) and basis swaps between SORA and SOR.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Central clearing arrangements allow wholesale market participants to transact through a single central counterparty, instead of bilaterally with each other. This helps to mitigate counterparty credit risks, and allows participants to undertake greater volumes of transactions while gaining from operational and cost savings, said SC-STS.

The committee noted that enabling central clearing arrangements for SORA OIS and SORA-SOR basis swaps will catalyse interbank activity in these derivative products, and anchor SORA's role as the replacement benchmark for SOR. 

StanChart global head of treasury markets Daniel Koh, who also chairs SC-STS's work on SORA derivatives, said: "(LCH's launch of central clearing for SORA instruments) is an important enabler that will allow key local and international banks to step up their efforts to build a vibrant SORA derivatives market. This will help broaden participation in SORA derivatives trading, enhance price discovery, and facilitate the transition of legacy SOR derivatives to SORA."

Kate Birchall, LCH head of Asia-Pacific, said: "The introduction of clearing derivatives referencing SORA is another important milestone in the global efforts to move to alternative reference rates. Clearing this product has involved close collaboration with a variety of stakeholders in Singapore and the wider market."

SORA was selected as the new interest rate benchmark as it was found to be the "most robust and suitable alternative", underpinned by a deep and liquid overnight funding market.

Several banks in Singapore - including DBS, Deutsche Bank, OCBC Bank, StanChart and United Overseas Bank - have already undertaken SORA-derivative transactions.