Singapore Exchange (SGX) has listed its first three-month Singapore overnight rate average (SORA) futures contract.
The contract closely resembles short-term interest rate (STIR) futures that reference other overnight rates, reads the SGX three-month SORA futures fact sheet. The latest addition to the exchange facilitates the hedging of interest rate risks and helps in price discovery especially in the short end of the curve, says SGX in its Aug 1 statement.
According to the exchange, use cases for SGX’s STIR futures for SORA include allowing the hedging of up to five years of interest rate risk using 20 quarterly contracts. For instance, a company with a two-year loan tied to a floating rate can lock in a fixed rate by selling SORA futures. Should interest rates rise, the profit from the short SORA future position can offset the higher repayment on the loan.
To this end, Singapore dollar (SGD)-denominated bond portfolio managers can hedge their bond portfolios using STIR futures instead of having to liquidate cash bonds.
“Anchored to benchmarked central bank overnight interest rates, STIR futures allow participants to hedge interest rate risk in a transparent market at a single price point,” says KC Lam, global head of foreign exchange (FX) and rates at SGX Group.
“With the growing issuance of cash products referencing SORA, this exchange-traded contract will help fill a gap in the market for Singapore interest rates trading and hedging instruments which provide greater transparency and capital efficiencies, and we welcome Standard Chartered as a market participant,” Lam adds.
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“Since the interbank offered rate (IBOR) transition and the successful launch of SORA, the market depth and volumes of interest rate derivatives have grown significantly. Complementing the existing suite of instruments, this new product alternative helps enhance hedging and risk management, supporting the growing SORA over-the-counter (OTC) derivatives market across a wide range of client segments,” says Liu Chee Wei, head, markets, Singapore and Asean at Standard Chartered.
“As a leading market participant in the Singapore derivatives space, Standard Chartered Bank looks forward to the new opportunities presented by this new SORA futures instrument and block market trading,” Liu adds.
The introduction of the contract was first announced on March 12. It will augment SGX’s Singapore product shelf including its flagship SGX MSCI Singapore Index Futures and SGX USD/SGD FX Futures.
