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December 3, 2019

CME Group SOFR Discounting & Price Alignment 

Transition Plan for Cleared USD Interest Rate Swap Products 

CME Group believes that migrating the discounting and price alignment environment for cleared USD interest rate swap

products (IRS) from the daily effective federal funds rate (EFFR) to the secured overnight financing rate (SOFR), in 

accordance with the ARRC Paced Transition Plan, will foster liquidity across the SOFR term structure. By conducting a 

single-day transition, we intend to efficiently transition discounting and price alignment while mitigating any potential risks 

and ensuing valuation changes.

Scope: All existing Cleared US Dollar IRS products at CME, comprising: 

Market practitioners should continue to evaluate future dates for transitioning additional IRS currencies for which valuation 

involves a USD funding component, taking into consideration potential impacts on adjacent FX forward and crosscurrency swap markets.

Timing: We are targeting a transition date of October 16, 2020, with the dual aims of accelerating the timeline outlined in 

the ARRC Paced Transition Plan while providing adequate notice to market participants to facilitate an orderly transition

on a date supported by the significant majority of firms.

October 2020

S M T W T F S

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Process: After close of business (Central Time) on October 16, 2020, CME Clearing will conduct a standard end-of-day 

valuation cycle, determining settlement variation (variation margin/VM) and cash payments on open positions in USD IRS 

products as calculated in the current EFFR-based discounting and price alignment environment (discounting/PA). Upon 

completion of this initial cycle, CME Clearing will then conduct a special valuation cycle, determining settlement variation 

and cash payments on those positions as calculated with SOFR-based discounting/PA.

Cash Adjustment: To neutralize value transfer attributable to the change in the discounting basis, the special valuation 

cycle will include a cash adjustment that is equal and opposite to the resultant change in the net present value (NPV) of 

each cleared IRS product.

Cash Adjustment Example

Net Present Value

Trade

Standard Cycle 

EFFR Discounted

Special Cycle 

SOFR Discounted

NPV

Change

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 

Fixed/Float IRS Overnight Index Swaps Forward Rate Agreements

Zero Coupon Swaps Basis Swaps Swaptions 

After extensive consultation with market participants and the ARRC Paced Transition Working Group, pending 

regulatory approval, CME Group intends to proceed with the following aspects of its Discounting & Price 

Alignment Transition Plan for USD IRS products as outlined below: scope, timing, cash adjustment, and 

discounting risk exchange.
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December 3, 2019

Discounting Risk Exchange: The transition would effectively move the discounting risk for all 

participants from EFFR to SOFR at closing curve levels on October 16, 2020, as illustrated by the hypothetical examples 

below.

16-Oct-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 both the potential re-hedging costs associated with this transition and the sensitivity of valuations to closing 

curve marks on October 16, 2020, CME Clearing will facilitate a mandatory process to book a series of EFFR/SOFR basis 

swaps to participants’ accounts. Such basis swaps will restore participants’ positions to their original risk profiles and will 

be booked at closing curve levels ($0 NPV) as of October 16, 2020. The hypothetical examples below illustrate the 

economic impact of the proposed process. (Note that such risk exposures would be bucketed and exchanged at key 

benchmark tenors in the actual transition process.)

16-Oct-20

Risk Profile Before

Risk Exchange

Risk Exchange

via Basis Swaps

Risk Profile After

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, market participants would be able to choose to have such basis swaps 

booked as either float-versus-float basis swaps or as pairs of fixed-versus-float swaps with equal and opposite fixed cash 

flows.

Effective October 19, 2020, and thereafter, CME Clearing will apply SOFR-basis discounting/PA to all cleared USD IRS

products. 
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December 3, 2019

Basis Swap Auction Mechanism: CME Group believes that an auction should be made available to market participants 

wishing to liquidate any EFFR/SOFR basis swap exposures arising from the mandatory Discounting Risk Exchange

process. We intend to engage a third-party service provider (or providers) to conduct an auction to enable participating 

firms to offload these positions. 

We believe that an appropriate auction service would first net down gross payer and receiver discounting risks across 

firms electing to participate, and then auction the residual risk exposures. The resulting costs of the auction would then be

allocated across firms participating in the auction. Such mechanism would benefit participants by helping them to

efficiently liquidate basis swap positions to minimize market impacts, and by providing a single fill price for participating 

firms.

We believe it will be important for the provider(s) conducting this service to incorporate pre-defined risk and profit/loss 

controls into the process to mitigate the adverse (and potentially disruptive) effects of an auction whose risk may exceed 

the market’s appetite.

We continue to consult with market participants on this proposal and will provide further details in due course.

Treatment of Uncleared Legacy Swaption Exercises: We recognize that the SOFR Discounting & Price Alignment 

Transition Plan for cleared USD IRS products may create ambiguities with respect to the exercise of legacy uncleared 

Swaption contracts, notably in connection with those contracts that (a) were executed on the premise that any IRS 

resulting from exercise would be cleared subject to EFFR discounting/PA and (b) expire after October 16, 2020. We 

encourage the industry to resolve these ambiguities by agreeing to a set of best practices (e.g. ISDA guideline endorsed 

by the ARRC), including:

1. Identification of a date on which the industry will begin pricing Swaptions such that any IRS created in 

exercise/assignment will be presumed to be cleared with SOFR discounting/PA. We recommend that this date 

should be no later than the discounting/PA transition date, October 16, 2020, and provide for the broadest 

possible preparation and support for this change, while minimizing potential disruptions to liquidity or market

conditions.

2. Determination of whether a cash and/or risk adjustment should be applied to legacy Swaption contracts entered

into prior to the date determined in Item 1 and exercised after the discounting/PA transition date.

3. Creation of a standard for calculating and processing the potential corresponding adjustments, if such

adjustments are deemed appropriate for the population of legacy Swaption contracts identified in Item 2.

Operational Readiness: As CME Group moves forward with the scope, timing, cash adjustment, and discounting risk 

exchange aspects of the discounting transition, we intend to begin internal and external validation of operational and 

reporting requirements through Q1-2020 with operational build out and testing proceeding through Q2-2020. We will 

provide regular updates on this effort to our participants through the OTC clearing initiatives forum. 

We fully support efforts to promote liquidity in the SOFR benchmark, and we look forward to facilitating wider adoption of 

SOFR in continued partnership with industry participants.

The Following Topics Are Not Finalized - For Discussion Purposes Only