SOR liquidity drought complicates SGD benchmark shift

Asia Risk Congress: SMBC exec says exiting SOR trades is becoming harder as Sora liquidity surges


With the Singapore dollar interest rate swap market swiftly adopting the currency’s new risk-free rate as the benchmark for new positions, dealers say unwinding existing positions referencing the outgoing rate is increasingly challenging.

Singapore’s swap offer rate (SOR) was until recently the prevailing reference rate for Singapore dollar-denominated interest rate swaps, but liquidity has drained away to the Singapore overnight offered rate (Sora). That means unwinding positions linked to SOR – which for a bank can involve trading a swap with the client that offsets their risk, plus a hedge for itself in the interdealer market – has become harder due to the reduced liquidity in SOR swaps.

“Liquidity to hedge SOR is getting thin now, and that can be a challenge when a client comes to unwind a trade,” said Salim Zaman, head of sales and trading for Asia-Pacific at Sumitomo Mitsui Banking Corporation in Singapore.

“As it continues to get thinner, this will become an even greater challenge.”

Zaman was speaking on an industry panel at the Asia Risk Congress on November 18.

SOR is implied from the cost of borrowing in US dollars and swapping back to the Singaporean currency and uses USD Libor as a benchmark for dollar borrowing costs. Since USD Libor is used in SOR’s computation, the rate cannot be calculated after June 2023 when publication of the benchmark ends, though a fallback version of SOR has been developed that uses the compounded secured overnight financing rate (SOFR) with an added spread adjustment.

Following a directive from a central bank-led working group that there should be no new use of SOR swaps from September, SOR liquidity has begun to decline rapidly in recent months, say market participants.

Speaking on the same panel, John Luk, head of foreign exchange linear and emerging markets trading at Crédit Agricole Corporate and Investment Bank, said dealers have been attempting to limit the impact of SOR’s coming cessation by reducing the notional value of their exposures tied to the outgoing benchmark with the use of portfolio compression tools.

“Liquidity [in SOR swaps] is going down to almost nothing, so we need to compress as much as possible to reduce the impact,” he said.

For cleared trades, LCH recently confirmed that it plans to consult the market next year on a methodology for the automatic conversion of outstanding SOR swaps to Sora at some point prior to SOR’s discontinuation.

However, Luk said there is a risk that if the LCH switch happens while firms still have significant bilateral risk tied to SOR, it could create basis risks for dealers to manage.

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