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Singapore’s IBOR replacement breaks new ground

DBS and Standard Chartered have announced the successful execution of the industry’s first interbank option trade referencing the Singapore Overnight Rate Average (SORA).

This 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. Interest rate options, in the form of caps and floors, enable corporates to better hedge their risks.

Moving on from LIBOR

The execution of these innovative facilities marks a significant 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. This 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.

With the impending discontinuation of interest rate benchmarks such as the London Interbank Offered Rate (LIBOR), banks have been partnering clients to achieve a smooth and seamless transition to alternative Risk-Free Benchmark Rates (RFRs), including SORA for the Singapore cash and derivatives market. Risk-Free Benchmark Rates are typically derived from overnight deposit rates, based on a large number of observable transactions.

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.

New solutions for a new world

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. SORA-pegged loans now account for one-third of all new SME loans issued by DBS.

"What we achieved today marks a significant milestone in widening the breadth of SORA derivatives necessary for a robust and liquid benchmark," said Andrew Ng, group head of Treasury & Markets at DBS. "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."

Standard Chartered offers a full range of SORA-linked products across its businesses and is actively engaging with its clients to encourage RFRs 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 SGD SORA and USD Secured Overnight Financing Rate (SOFR) Cross-Currency Swaps with OCBC. In May 2020 when LCH launched the central clearing of over-the-counter SORA instruments, it cleared the first SORA swaps between Standard Chartered and OCBC, helping to catalyse interdealer activity in SORA derivatives products. Standard Chartered was also among the firsts to book bilateral SORA Interest Rate Swaps (IRS) trade on MarkitWire when the platform began supporting SORA derivatives in May 2020.

"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," said Daniel Koh, global head of Treasury Markets at Standard Chartered. "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."

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