For Discussion Purposes Only

September 3, 2019

SOFR Discounting & Price Alignment Transition

Proposal for Cleared Swaps 

After extensive consultation with our client base and the ARRC Paced Transition Working Group, CME 

Group has developed a high-level proposal for transitioning price alignment and discounting for USD OTC 

cleared swaps from the daily effective federal funds rate (EFFR) to SOFR. Our goal in publishing this 

proposal is to facilitate discussion on how this transition would be implemented. CME Group looks forward 

to working with the industry to continue building consensus on the best path forward for achieving singleday discounting conversion for existing swaps.

Scope: Cleared US dollar interest rate swap products at the respective clearinghouse. At CME, this 

includes: 

Timing: Given the goal of accelerating the timelines outlined in the ARRC Paced Transition Plan, and in 

consideration of other events scheduled for H2-2020 (e.g., Phase V implementation of Uncleared Margin 

Rules, U.S. elections), we would propose targeting a transition date of July 17, 2020.

Process: After close of business on July 17, 2020, CME would conduct a standard end-of-day valuation 

cycle, determining variation margin and cash payments as calculated with EFFR discounting and price 

alignment. Upon completion of this initial cycle, CME would then conduct a special cycle in which 

positions would be valued with SOFR discounting.

Cash Compensation: To neutralize the value transfer attributed to the change in the discounting rate, 

CME would make a cash adjustment that is equal and opposite to the change in each cleared swap’s net 

present value (NPV) as part of the special cycle.

Cash Compensation Example

Net Present Value

Trade

Standard Cycle

EFFR Discounted

Special Cycle

SOFR Discounted

NPV

Diff

Offsetting

Adjustment

Net Cash 

Flow

Position 1 $442,528 $456,214 $13,686 ($13,686) $0 

Position 2 ($208,621) ($212,879) ($4,258) $4,258 $0 

Position 3 $26,730 $27,000 $270 ($270) $0 

Position 4 ($726,075) ($756,328) ($30,253) $30,253 $0 

Position 5 $528,961 $545,321 $16,360 ($16,360) $0 

Total $63,523 $59,328 ($4,195) $4,195 $0 

S M T W T F S S M T W T F S S M T W T F S

1 2 3 4 1 1 2 3 4 5

5 6 7 8 9 1 0 1 1 2 3 4 5 6 7 8 6 7 8 9 1 0 1 1 1 2

1 2 1 3 1 4 1 5 1 6 1 7 1 8 9 1 0 1 1 1 2 1 3 1 4 1 5 1 3 1 4 1 5 1 6 1 7 1 8 1 9

1 9 2 0 2 1 2 2 2 3 2 4 2 5 1 6 1 7 1 8 1 9 2 0 2 1 2 2 2 0 2 1 2 2 2 3 2 4 2 5 2 6

2 6 2 7 2 8 2 9 3 0 3 1 2 3 2 4 2 5 2 6 2 7 2 8 2 9 2 7 2 8 2 9 3 0

3 0 3 1

July August September

Fixed/Float IRS Overnight Index Swaps Forward Rate Agreements

Zero Coupon Swaps Basis Swaps Swaptions 
For Discussion Purposes Only

September 3, 2019

Discounting Risk Exchange: By changing the discounting curve, CME would effectively move the 

discounting risk of all participants from EFFR to SOFR at closing curve levels on July 17, 2020, as 

illustrated by the hypothetical examples below.

17-Jul-20 Starting Risk (DV01) Conversion Risk Change Post Conversion Risk

EFFR SOFR EFFR SOFR EFFR SOFR

Firm 1 $218,076 $0 ($218,076) $218,076 $0 $218,076 

Firm 2 $240,663 $0 ($240,663) $240,663 $0 $240,663 

Firm 3 ($86,923) $0 $86,923 ($86,923) $0 ($86,923)

Firm 4 $110,181 $0 ($110,181) $110,181 $0 $110,181 

Firm 5 ($481,997) $0 $481,997 ($481,997) $0 ($481,997)

To mitigate hedging costs associated with this transition and sensitivity to closing curve marks on July 17, 

2020, CME would book a series of EFFR/SOFR basis swaps to participants’ accounts. These swaps 

would restore participants back to their original risk profiles and be booked at the July 17, 2020 closing 

curve levels ($0 NPV). The examples below illustrate the proposed process. (Please note that risk 

exposures would be bucketed and exchanged at key benchmark tenors during the actual transition.)

17-Jul-20 Pre-Risk Exchange Risk Basis Swap Risk Post Risk Exchange

EFFR SOFR EFFR SOFR EFFR SOFR

Firm 1 $0 $218,076 $218,076 ($218,076) $218,076 $0 

Firm 2 $0 $240,663 $240,663 ($240,663) $240,663 $0 

Firm 3 $0 ($86,923) ($86,923) $86,923 ($86,923) $0 

Firm 4 $0 $110,181 $110,181 ($110,181) $110,181 $0 

Firm 5 $0 ($481,997) ($481,997) $481,997 ($481,997) $0 

To facilitate smooth operational processing of this risk exchange, participants would be able to choose to 

have these swaps booked as either float-versus-float basis swaps, or pairs of fixed-versus-float swaps 

with equal and opposite fixed cash flows.

Effective July 20, 2020, and thereafter, CME would utilize SOFR discounting and price alignment on all 

US dollar interest rate swap trades. 

Risk Exchange Auction Mechanism: For participants who do not wish to hold EFFR/SOFR basis swaps

resulting from the discounting risk exchange, CME Group intends to engage 3

rd party providers to 

facilitate an auction and/or transfer mechanism. 

Treatment of Legacy Swaption Exercises: CME is proposing to offer a service which would facilitate a 

standardized compensation methodology for Swaption exercises which were executed under the premise 

that the resulting swap would be centrally cleared in an EFFR discounting regime. This service would 

allow counterparties to signal for CME to calculate the difference in value between SOFR and EFFR 

discounting and settle a corresponding cash compensation adjustment via a new field provided by 

affirmation platforms. CME believes this approach provides counterparties the flexibility to either 

negotiate bilateral agreements before Swaption exercise or utilize CME’s standardized compensation 

methodology. 

CME Group fully supports efforts to promote liquidity in the SOFR benchmark and looks forward to 

facilitating wider adoption of SOFR in continued partnership with the industry. 

Please direct comments or questions to sofrdiscounting@cmegroup.com.