LCH Extends Central Clearing for SORA Derivatives to 21 Years

MAS will likewise extend the tenor of its daily SORA derivatives auctions with major derivatives dealers from 5-years to 20-years.

LCH has extended its central clearing services for SGD interest rate swaps referencing SORA from 5.5 years to 21 years, a move that is expected to accelerate the development of liquidity in SORA cash and derivatives products.

LCH launched central clearing for SORA OIS (overnight indexed swaps) and SORA-SOR basis swaps in May 2020. Standard Chartered Bank and OCBC Bank were parties to the first LCH cleared derivatives trade referencing SORA.

Earlier this month, MAS (Monetary Authority of Singapore) deputy managing director Leong Sing Chiong outlined plans to continue transitioning SOR and SIBOR to SORA, as part of a global shift to RFRs (risk free rates) from LIBOR and other IBORs.

The transition relies on the development of a robust SORA curve. As part of this effort, Leong had said MAS would coordinate with LCH to extend central clearing for SORA derivatives to the 21-year tenor.

In a joint statement, the SC-STS (Steering Committee for SOR & SIBOR Transition to SORA) and ABS (the Association of Banks in Singapore) welcomed the extension of central clearing for OTC SORA derivatives to the 21 year tenor.

The extension will help enable a build-up of liquidity across all tenors in SORA OIS and SORA-SOR basis swaps, and support the broad-based transitioning of the outstanding stock of SOR derivatives to SORA, the statement said.

With the LCH move, MAS will likewise extend the tenor of its daily SORA derivatives auctions with major derivatives dealers from 5-years to 20-years.

This will facilitate price discovery in the longer tenors, helping to establish robust pricing benchmarks for new SORA products, such as loans and bonds. It will also help facilitate pricing for conversions of outstanding SOR contracts to SORA.

The clearing extension also paves the way for switching the discount rate and price alignment interest (PAI) for centrally cleared SGD derivatives contracts from SOR to SORA later this year.

“The clearing extension is timely as banks prepare to support increasing client demand for longer-tenor derivatives hedges, which is set to increase as the industry ceases further usage of SOR in new cash market contracts after end-April 2021,” the SC-STS and ABS said.

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