CME GROUP PUBLIC © 2020 CME Group. All rights reserved. 

Pending Regulatory Review

SOFR Discounting Transition 

Process For Cleared Swaps

Steven Dayon – Executive Director, OTC Products & Services

Dhiraj Bawadhankar – Executive Director, Clearing Solutions 

June 2nd, 2020
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CME Group has worked with market participants and industry groups to develop a plan for transitioning price alignment and discounting for 

USD OTC cleared swaps from the daily Effective Federal Funds Rate (EFFR) to SOFR

Scope: Cleared US Dollar interest rate swap products at CME (IRS, OIS, FRAs, Basis, ZCS, Swaptions)

- CME SOFR index swaps are excluded from the transition as they are already using SOFR discounting and price alignment

- CME believes market practitioners should continue to evaluate a future date for transitioning additional IRS currencies that contain a 

US Dollar-funding component, taking into consideration potential impacts on adjacent FX forward and cross-currency swap markets

Transition Date: Close of Business October 16, 2020

Transition Process: Following the standard EOD cycle using EFFR discounting/PA on Friday, CME will generate a discounting transition 

report that provides the NPV of all trades under SOFR discounting and corresponding cash adjustment amounts needed to account for the 

change in discounting rate

Re-Hedging Process:

- By changing the discounting curve, CME effectively moves the discounting risk of all participants from EFFR to SOFR

- To mitigate re-hedging costs CME will book a mandatory series of EFFR/SOFR basis swaps to participants’ accounts

- These basis swaps will approximately restore participants back to their original discounting risk profile at the portfolio level, and will 

be booked at closing curve levels ($0 NPV)

Auction: On Monday October 19th, CME will facilitate an auction for participants looking for an efficient way to unwind their basis swaps

Price Alignment & Discounting Transition 
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Pending Regulatory Review

Variation Margin & Cash Adjustment

SOFR Discounting Transition 
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Transition Cash Flow Example

Variation Margin and Cash Adjustment

The purpose of generating the IRS Discounting Transition Report is to:

• Isolate the impacts of the discounting transition for each USD IRS trade cleared at CME 

• Provide participants operational flexibility in processing this transition on Monday via either:

o Option A, referencing the cash adjustment amount and prior-day EFFR NPV

o Option B, referencing the prior-day SOFR NPV, consistent with Monday’s trade register

Date Current 

NPV

Prior 

NPV VM Adjustment Total Cash

1

T – 1 

(Thursday)

$100 

(EFFR)

2

T 

(Friday)

$125

(EFFR)

$100 

(EFFR) $25 $25

Processing Options: 

A

T + 1 

(Monday)

$140

(SOFR)

$125 

(EFFR Friday) $15 -$1 $14

B

T + 1 

(Monday)

$140 

(SOFR)

$126

(SOFR) $14 $14
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Pending Regulatory Review

IRS Discounting Transition Report

Variation Margin and Cash Adjustment

• Shows revised NPVs under the new 

discounting methodology and the cash 

adjustment at the trade level for each 

position account

• Produced as part of the Special EOD Cycle

- Publication targeted for 8 pm ET on 

the Transition Date

• CSV report delivered to firm and client sFTP

folders

- All parties receiving Trade Registers 

today will receive this report

• FCMs and Customers can find sample 

reports on CME’s Intra-Links site

Column Header Description Sample Value Type

Value Date Business Date 10/16/2020 Date

Position Account ID Position Account 3TTNN7 VARCHAR(8)

Cleared Trade ID CME Trade ID 6355844 Integer

Platform ID SEF/Platform ID 7897868G9H VARCHAR(255)

Client ID Client ID 1423523IS VARCHAR(255)

REG_TRADE_ID USI CCCIRS6355844 VARCHAR(255)

Firm ID 3 digit clearing firm ID 998 VARCHAR(3)

ORIGIN HOUS or CUST CUST VARCHAR(4)

PRODUCT_TYPE type of swap OIS VARCHAR(5)

Currency 3 digit currency code USD VARCHAR(3)

NPV_NEW_DISC NPV under SOFR discounting 2,266.34 Float

NPV_PRIOR_DISC NPV under EFFR discounting 2,244.28 Float

NPV_ADJ_NEW_DISC ADJ NPV under SOFR discounting 2,266.34 Float

NPV_ADJ_PRIOR_DISC ADJ NPV under EFFR discounting 2,244.28 Float

NPV_ADJ_DIFF New ADJ NPV minus Prior ADJ NPV 22.06 Float

FX_RATE

FX Rate use to convert nondeliverable currencies’ NPV 

differences to the adjustment amount.

Equal to 1 for USD

1.000000 Float

OFFSET_ADJ_AMT Cash adjustment amount

Prior ADJ NPV minus new ADJ NPV -22.06 Float
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Pending Regulatory Review

Curve Construction

Variation Margin and Cash Adjustment

The below demonstrates the SOFR curves construction used for computing the cash compensation:

- The short end of the SOFR curve is constructed using monthly and quarterly listed SOFR futures contracts. These products are the

most liquid futures in the marketplace.

- Convexity adjustment is applied to SOFR futures to better reflect the differential of interest rate risk between OTC and exchange 

traded instruments.

- Fed Funds-SOFR Basis swaps are used for the remainder of the curve as they are the most liquid OTC product.

- Quotes taken at 3:00 p.m. ET.

Forward rates will be held constant for the transition process

Draft proposal intended for soliciting further participant feedback

Tenor Instruments

Forecasting and 

DiscountingCurve Inputs

1MCME Monthly SOFR Futures (SR1)

3M-2YCME Monthly SOFR Futures (SR3)

3Y,4Y,5Y,7Y,10Y,12Y,15Y,20Y,25Y,30Y, 40Y, 50Y Fed Funds-SOFR Basis Swap
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Re-Hedging Process

SOFR Discounting Transition 
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Maintaining Original Discounting Risk Exposures with Mandatory Basis Swaps 

Discounting Re-Hedging Process

The Goal of the ARRC’s Discounting Transition is to Gradually Expose Participants to SOFR

($MM DV01) PreTransition

Transitioning 

w/o Re-hedging

Basis 

Swaps

Transitioning 

w/ Re-hedging

Outright ICE LIBOR Risk $20MM $20MM - $20MM

EFFR Discounting Risk $1MM $0 $1MM $1MM

SOFR Discounting Risk $0 $1MM ($1MM) $0

Transitioning to SOFR discounting will effectively move the discounting risk of all CME-cleared participant portfolios from EFFR to SOFR at closing 

curve levels on October 16, 2020

To mitigate both the re-hedging costs associated with this transition and the sensitivity of valuations to closing curve marks on that day, CME will 

book a series of EFFR/SOFR basis swaps to participants’ accounts

Through these basis swaps, CME’s Re-hedging mechanism restores participants back to their approximate EFFR discounting exposures

• If the basis swaps are held, participants gain incremental exposure to SOFR as new risk is cleared and as the dynamics of the legacy 

portfolio change after the transition

• Alternatively, by unwinding the resulting basis swaps via auction or directly sourcing liquidity, participants immediately transition their 

discounting risk from EFFR to SOFR

For illustration purposes only 

Delta ladder computed based on zero-rate bump
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Pending Regulatory Review

Basis Swap Details 

• Swap Tenors: 2Y, 5Y, 10Y, 15Y, 20Y, 30Y

• Participants can choose to have these swaps booked as either CME cleared:

o Float-versus-float basis swaps, or

o Pairs of fixed-versus-float synthetic basis swaps

• Basis Swaps will be processed after the close on October 16th with a cleared date of October 19th

o Swaps booked at a $0 NPV

o No variation or initial margin will be calculated for these swaps on transition date

o Basis swaps: Breakeven spread is included on the SOFR leg

o Synthetic basis swaps: Difference in par rates will reflect the breakeven spread

Discounting Re-Hedging Process
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Pending Regulatory Review

Basis Swap Characteristics

• Index: USD-SOFR-COMPOUND vs USD-Federal Funds-H.15-OIS-COMPOUND

• Start Date: 10/21/2020 Maturity Date: + {2yr, 5yr, 10yr, 15yr, 20yr, 30yr}

• Roll convention: 21 (both legs)

• Cal period Adj Frequency: 3M (both legs)

• Cal period Adj Calendar: USNY (both legs)

• Payment Frequency: 3M (both legs)

• Payment Offset: 2D (both legs)

• Payment Related to: End period (both legs)

• Payment Calendar: USNY (both legs)

• Spread: On SOFR leg

• Comp Method: Spread Exclusive (both legs)

• Day Count: ACT/360 (both legs)

• Fixing Date Cal: SOFR – USGS; EFFR - USNY

• Floating Index Tenor: 1D

• Fixing Date Offset: 0D

• Fixing Date type: Business

• Fixing Date Business date convention: Preceding (both legs)

Discounting Re-hedging Process
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Pending Regulatory Review

Trade-Level Report for Discounting Risk

Discounting Re-hedging Process

• Available on SOFR Transition Date

• Attributes SOFR discounting risk impacts back to individual trades, helping participants allocate risk between 

entities sharing the same position account

• Produced as part of the Friday transition process

• CSV report delivered to firm and client sFTP folders

o All parties receiving Trade Registers will receive this report

Value Date Trade ID Curve Name 2 Year 5 Year 10 Year 15 Year

10/16/2020 1446246 USD_SOFR_1D -157.0307 442.3291 2.7073 -5.9383

10/16/2020 1447678 USD_SOFR_1D -357.9837 -188.2520 99.8234 806.2125

10/16/2020 1442453 USD_SOFR_1D 59.7710 64.9625 225.4575 165.3493

10/16/2020 1444939 USD_SOFR_1D -259.9575 19.7858 8.5534 19377.8389

10/16/2020 1441641 USD_SOFR_1D 1.0911 3.1523 5.8781 9.1668

10/16/2020 1445732 USD_SOFR_1D -28596.9878 11165.1008 -102124.1556 13373.9478

....

Sample report:
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Pending Regulatory Review

Auction Mechanism

SOFR Discounting Transition 
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Pending Regulatory Review

Overview 

• Re-hedging exercise is mandatory for all participants at CME

• Basis Swap Tenors: 2Y, 5Y, 10Y, 15Y, 20Y, 30Y

Client Elections 

Legal Agreement Details - CME SOFR Auction Customer Agreement

• Client consents that results of the auction are binding 

• All re-hedging swaps received for the position account are submitted to the auction (no partials)

• Maximum loss limit based on a percentage of gross discounting exposure in DV01

Discounting Re-Hedging Process

Election: 1. Choose how re-hedging swaps are booked 2. Whether to liquidate swaps in the auction

Default: Float v. Float Basis Swap Not to participate in the auction

Alternative: Pairs of Fixed v. Float Synthetic Basis Swaps Participate in the auction

Process FCMs facilitate clients’ selection FCMs facilitate clients’ selection &

Clients sign CME agreement
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Pending Regulatory Review

Maximum Loss Limit

• Defined as the maximum dollar amount that each client could incur as a result of the auction

• The limit will be set based on prevailing liquidity prior to the auction legal agreement being made 

available 

• If the cost of auctioning the net risk, when allocated back to participants’ portfolios, exceeds the 

loss limit, then the auction will not be executed
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Pending Regulatory Review

1. Positions netting across all participating clients is expected to result in lower cost of execution, as demonstrated below:

2. A sizeable pool of large and active SOFR/Fed Funds basis dealers combined with an optimal auction setup

Basis Swap Auction Process

Potential Auction Benefits

Gross DV01: $5M 

Market Bid/Ask: 1.0bp

Net DV01: $2M

Realized Bid/Ask: 0.4bp

Realized Savings: 60% 

Customer DV01 Cost Based on

Individual Liquidation

Cost Using

The Auction $ Saving

Customer A ($500,000) ($500,000) ($200,000) $300,000

Customer B ($1,000,000) ($1,000,000) ($400,000) $600,000

Customer C $1,500,000 ($1,500,000) ($600,000) $900,000

Customer D $2,000,000 ($2,000,000) ($800,000) $1,200,000

Total $2,000,000 ($5,000,000) ($2,000,000) $3,000,000 
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Pending Regulatory Review

Timing: Monday, October 19th , CME will open the auction window between 9-10am ET 

• Auction will be held over a short period of time (approximately 30 minutes)

Eligible Bidders: Auction participants will be invited by CME

• May include CME IRS members and active participants in the SOFR/Fed Funds market

• All participants will be subject to NDA

Design: Single voluntary auction, inclusive of all 6 tenor points

• Allows dealers to consider offsetting risk when providing prices

• CME will be asking for a 2-way price to protect participating clients if the auction is not executed

Auction Type: Determined by CME based on the size of the portfolio being auctioned

• Winner-takes-all: The best price wins the portfolio (Smaller portfolio) 

• Dutch-style: Execution price is determined based on the bid filling the last clearing size of the portfolio (Larger Portfolio)

Basis Swap Auction Process 

Approach Overview 
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Basis Swap Auction Process

Dutch Auction Example 

Final auction cost will be:

$500,000 x 4 Slices = $2,000,000

Process: 

1. Portfolio divided into equally proportioned “vertical slices” across all six tenor points, these “slices” represent the 

minimum portfolio bidding size 

2. Each bidder submits bid (stated in terms of $ bid/ask) at either the minimum bidding size, or its multiples

3. The auction price is determined based on the last clearing size of the portfolio, all winning bidders get filled at that 

price

Example: Auction portfolio with net $2M DV01, shown on slide 21, divided into four equal slices (25% of portfolio):

Bidder Submission Allocation

Premium 

Received

1 $375,000 $500k DV01 “Slice” $500,000

2 $450,000 $500k DV01 “Slice” $500,000

6 $475,000 $500k DV01 “Slice” $500,000

4 $500,000 $500k DV01 “Slice” $500,000

3 $550,000 N/A -

5 $625,000 N/A -

Included Bid Excluded Bid Auction Clearing Price
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Pending Regulatory Review

Immediately after the auction window closes, CME will determine whether or not the auction is executed based on whether 

the cost per customer does not exceed universal loss threshold

• Auction participants will be notified within minutes whether or not the auction is successful

• Participating clients will be notified shortly thereafter

If auction is executed, CME will allocate the auction cost to individual clients (based on DV01) and book offsetting trades. 

Cost Participation % Share is calculated as a ratio of a client’s gross DV01 to the entire portfolio gross DV01.

If auction is not executed, CME will notify all participating clients immediately after the auction’s end so that they can seek 

alternate means of risk mitigation

Customer Gross DV01 Cost Participation 

% Share

Net DV01: $2M

Bid/Ask: 1.0bp

Cost: ($2,000,000)

$ Cost

Customer A ($500,000) 10% ($200,000)

Customer B ($1,000,000) 20% ($400,000)

Customer C $1,500,000 30% ($600,000)

Customer D $2,000,000 40% ($800,000)

Total $5,000,000 100% ($2,000,000)

Basis Swap Auction Process

Auction Results and Communication
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Pending Regulatory Review

• If there is no, or limited, position netting, i.e. all participating clients are in the same direction, this may materially 

diminish the auction benefits and increase the cost of the auction due to the large concentrated risk being auctioned 

off at the same time vs bilateral trading which may be spread over longer period of time

• A large move in the SOFR/Fed funds basis price from Friday night, October 16th to Monday morning, October 19th

may jeopardize CME’s ability to execute an auction as the resultant mark-to-market may exceed the previously 

communicated loss threshold

• By participating in the auction, you agree to sell your SOFR/Fed Funds basis swaps according to following:

o If the auctioned portfolio generates a loss (expected case): The cost would be no greater than the Maximum Loss Level, as 

communicated by CME

o If the auctioned portfolio generates a gain: The gain would be allocated consistent with the earlier participation share 

methodology

• Clients with very small exposures may get a better price transacting on a bilateral basis

Basis Swap Auction Process

Auction Risks and Considerations
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Pending Regulatory Review

Testing & Readiness

SOFR Discounting Transition
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Pending Regulatory Review

Available Analysis – SOFR Discounting Transition 

CME can provide indicative impacts from the discounting transition for existing cleared portfolios based 

on data for a pre-selected date:

1. Change in NPV on a trade level (Cash Adjustment) 

2. Discounting Risk Sensitivities by Tenor – Portfolio and/or trade level 

3. Resulting Basis Swaps from Re-hedging Process 

4. Historical descriptive statistics of the EFFR/SOFR basis

CME plans to periodically refresh data used to conduct such analysis and, beginning on September 28th, 

will provide the Discounting Transition Report in a production environment for testing 

To receive this information, please send an email with the CME position account ID to: 

CMEOTCAnalysis@cmegroup.com
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Pending Regulatory Review

Operational process to account for the change in discounting rate

❑ Determine whether to update prior NPVs or recognize a cash adjustment 

❑ Decide how to reconcile the above choice 

Develop a strategy for handling basis swaps for SOFR Transition

❑ Ability to process SOFR & EFFR OIS, SOFR vs EFFR basis swaps and SOFR discounting

❑ Identify whether there is a need to allocate basis swap risk between entities utilizing the same position account

❑ Ensure internal systems can capture trades created by the CCP

❑ Elections: basis swaps vs fixed vs. float swap pairs, auction participation

Preparing for the transition

❑ Develop understanding of the magnitude of the cash adjustment

❑ Gain familiarity with discounting risk sensitivities and corresponding basis swap notional amounts for SOFR 

Transition

❑ Setup to trade and clear SOFR/€STR discounted instruments as well as SOFR-indexed instruments

❑ Engage with FCMs ahead of the transition to ensure all elections and operational setups are in place

Client Readiness Checklist
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Pending Regulatory Review

This presentation contains references to draft proposals that have been provided for the purposes of soliciting participant feedback. Such proposals may be subject to change at CME’s discretion.

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