DBS and Standard Chartered have executed the industry’s first interbank option trade referencing the Singapore Overnight Rate Average (Sora). The interbank trade was done on behalf of a global real estate group to manage the potential market risk arising from a Sora interest rate option.
The Sora interest rate option, another industry first, is designed to help clients which have loan facilities referencing Sora mitigate their downside risk in the event the compounded daily Sora rate turns negative, the two banks say.
The execution of the innovative facilities marks a milestone in Singapore’s transition towards Sora as its main interest rate benchmark, with corporate clients now able to tap on a wider range of instruments to ease their adoption of Sora-based financing solutions.
It also signifies the continued maturity of Singapore’s Sora markets as industry adoption grows and liquidity deepens. Furthermore, the development of an active interest rate option market enables the creation of structured products to better serve wealth and institutional investors.
Rate transition
Andrew Ng, group head of treasury and markets at DBS, says: “What we achieved today marks a significant milestone in widening the breadth of Sora derivatives necessary for a robust and liquid benchmark. As more companies make the shift towards Sora-based markets, clients are increasingly looking towards DBS for inventive ways to ease the transition to the new benchmark. By progressively offering more types of Sora derivatives, DBS is committed to ensuring a successful industry transition to Sora.”
Daniel Koh, global head of treasury markets at Standard Chartered, adds: “With this execution of Singapore’s first Sora interbank option trade, Standard Chartered has taken yet another major step in progressing the market’s adoption of Sora products. We are proud to deliver the various industry firsts and contribute to a more vibrant and active Sora derivatives market. We will continue to collaborate with our peers to develop more innovative financial products that can support our clients’ smooth transition to Sora and meet the industry’s guided timelines.”
With the impending discontinuation of interest rate benchmarks such as the London Interbank Offered Rate (Libor), DBS has been partnering its clients to achieve a smooth and seamless transition to alternative Risk-Free Benchmark Rates (RFRs), including Sora for the Singapore cash and derivatives market.
In Singapore, all financial institutions have ceased to offer new loan products referencing the existing SOR since the end of April 2021. Additionally, the Singapore Interbank Offered Rate (Sibor) will cease to be used in new loan products by the end of September 2021.
Floating rate
Since 2020, DBS has broken new ground such as pricing Singapore’s first Sora-referenced floating rate note, closing the first Sora club loan coupled with a cross-currency swap, and launching Singapore’s first business property mortgage loan referencing Sora, the bank says. Sora-pegged loans now account for one-third of all new SME loans issued by DBS.
Standard Chartered offers a full range of Sora-linked products across its businesses and is actively engaging with its clients to encourage RFR adoption. It is one of the pioneers launching industry-first solutions based on Sora. In November 2019, Standard Chartered completed Singapore’s first Overnight Indexed Swap (OIS) derivatives transaction using Sora as the interest rate benchmark with OCBC. In February 2020, it booked the market’s first Singapore dollar Sora and US dollar Secured Overnight Financing Rate (SOFR) cross-currency swaps with OCBC.
In May 2020 when British clearing house group LCH launched the central clearing of over-the-counter Sora instruments, it cleared the first Sora swaps between Standard Chartered and OCBC, helping to catalyze interdealer activity in Sora derivatives products. Standard Chartered was also among the first to book bilateral Sora Interest Rate Swaps (IRS) trade on MarkitWire when the platform began supporting Sora derivatives in May 2020.
