Report on CCP Discounting Transition 

Tabletop Exercise

Market Risk Advisory Committee

Interest Rate Benchmark Reform Subcommittee 

July 21, 2020

APPROVED BY THE MARKET RISK ADVISORY COMMITTEE 

FOR CFTC CONSIDERATION

JULY 21, 2020
Background on CCP Discounting 

Transition Tabletop Exercise 

July 21, 2020 2

• On December 11, 2019, the CFTC’s Market Risk Advisory Committee (MRAC) voted to hold a tabletop exercise 

regarding CME Clearing (CME) and LCH Limited’s (LCH’s) single-step proposals for the transition of discounting and 

price alignment interest for certain products to the secured overnight financing rate (SOFR), scheduled for October 2020. 

The MRAC’s Interest Rate Benchmark Reform Subcommittee (Subcommittee) was tasked with the planning and 

execution of the exercise. Due to COVID-19, the Subcommittee opted to have a “virtual” table top discussion because of 

the complexities associated with conducting a “virtual” trading simulation.

• The five-hour interactive discussion among Subcommittee members on June 2, 2020 used scenario analysis to identify 

areas that could strengthen the current discounting transition proposals. Scenarios considered were the following:

1. Processes at Both CCPs go According to Plan

2. Failed Auction for Discounting Risk Swaps

3. Operational Failure

4. Member Default

5. FCM Not Operationally Prepared for CCP Discounting Transition

6. Prefunding Needs / Risk Limits

7. COVID-19 Related Interruptions

• The Subcommittee drew upon insights gained from the tabletop exercise to provide recommendations to CCPs, other 

market participants, and Regulators to improve likelihood of a successful discounting transition in October 2020.
July 21, 2020 3

Tabletop Objectives and Key Recommendations 

SECTION 1
Key Objectives

July 21, 2020 4

Understand Issues

1. Enhance understanding, especially between stakeholder groups, of expected transition period 

execution.

2. Expose misunderstandings between stakeholder groups. 

3. Explore how participants would react to/address problem scenarios, in particular, interactions 

between those reactions.

4. Highlight (but not reconcile) differences between current proposals from CME and LCH.

5. Inform CME and LCH about market awareness of technical differences, similarities, and interactions 

between their approaches.

6. Flag potential weaknesses in each plan and overall market preparedness based on scenario analysis.

Address Issues

1. Help CCPs develop actions that can be taken to address identified problems.

2. Advise MRAC on any actions the CFTC can take to improve execution of the discounting transition in 

October 2020.

3. Determine if any relief / guidance should be requested of other US regulators.
Key Issues and Insights from the Tabletop Exercise

July 21, 2020 5

Key Insights from 

Tabletop

• Enhanced education regarding discounting transition is needed for all involved parties.

• Risk mitigation strategies ahead of discounting transition should be considered; examples include trade 

compression and re-couponing.

• Internal preparation and proactive engagement by all impacted stakeholders in industry preparations is 

critical to produce a positive outcome for the market.

Key Issues

• There is a lack of understanding among market participants about precise timing of discounting 

transition milestones, as well as dynamics of CME and LCH auction processes.

• An auction in which some or all of allotted discounting risk swaps are not liquidated despite end user’s 

election to offload these swaps could be potentially disruptive to the pricing and liquidity of SOFR 

instruments leading to a negative outcome for the market overall.

• Lack of congruency between CCP-mandated dates by which market participants must finalize elections 

to offload discounting risk swap compensation may create confusion or perceived advantages for 

certain market participants.

• Major differences between the CCP plans may create significant operational and market risk for 

participants over the discounting transition period.
Recommendations from the MRAC Subcommittee

July 21, 2020 6

Recommendations for 

CCPs

• Produce detailed playbooks which could be shared with stakeholders to document step by step processes for 

successful and fallback scenarios (including auction failure scenario) and a list of reports the CCPs will make 

available to FCMs and clients.

• Establish clear list of factors that would impact go/no-go decision for transition, potentially including readiness 

attestations from FCMs and key vendors.

• Intensify industry education regarding discounting transitions and tailor such education to different 

constituencies and sophistication levels.

• Consider a CME and LCH dress rehearsal to occur in tandem on the same day (to include auction process 

and compensation) with industry participants, prior to October.

Recommendations for 

Futures Commission 

Merchants (FCMs)

• Intensify client outreach and education to improve transparency and information flow regarding discounting 

transition consequences, elections and milestones.

• Understand roles and responsibilities regarding facilitation of client elections and flows.

• Consider lessons learned from €STR/EONIA transition in July 2020 (which will not involve an auction 

process).

Recommendations for 

Buy-Side Participants

• Ensure operational and trading readiness for elections process and potential scenario where parties that opt 

out of discounting risk swap compensation nevertheless receive residual or full allotment of such swaps.

• Consider strategies to de-risk discounting risk swaps auction process ahead of transition and prepare for 

liquidation in the market.

• Consider lessons learned from €STR/EONIA transition in July 2020 (which will not involve an auction 

process).

Recommendations for 

Regulators

• Consider implications of Part 43 and other global real-time public reporting requirements for discounting risk 

swaps vis-a-vis potential concerns that broader market transparency into auction portfolios may disincentivize 

aggressive bidding and therefore potential benefits of the auctions. Also consider implications of reporting / not 

reporting on transactions that are purely intended to give effect to cash compensation payment.

• Confirm treatment and consider relief from tax and accounting implications of pre-hedging auction related 

exposures.

• Consider other areas for no action or interpretive relief that would facilitate discounting transition, potentially 

including relief in the uncleared market for swaptions and amendments to credit support annexes (CSAs) as 

proposed by the ARRC in its June 16th letter to Division of Swap Dealer and Intermediary Oversight.
July 21, 2020 7

Overview of CME and LCH Planned Approaches

SECTION 2
Summary of CME’s Planned Approach

July 21, 2020 8

• 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 16th, 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.

• Further information on CME’s proposal can be found here.
Summary of LCH’s Planned Approach

July 21, 2020 9

• In support of the ARRC Paced Transition Plan, LCH plans to transition to SOFR discounting for USD products as follows:

1. LCH plans to change the discounting and PAI/PAA1 on all SwapClear USD-discounted products (including inflation, MXN and 

non-deliverable currencies2) from Fed-Funds to SOFR;

2. LCH plans to apply cash and swap compensation to all accounts with open USD-discounted positions (including inflation, MXN 

and non-deliverable currencies2) on the conversion date;

3. Client accounts will be able to elect for cash-only compensation by notifying LCH via their Clearing Broker;

4. A cash settlement (auction) process will be used to close out the unwanted compensating swaps. A separate mid-setting auction 

will be held the same day to provide reference for cash compensation calculations across the whole service.

5. LCH is targeting a conversion date of October 16th, 2020.

• The above process has been designed to meet the industry-wide objective to transition the cleared swap market to SOFR without 

compromising market stability or causing unnecessary disruption.

• The design is intended to be resilient in a wide range of scenarios, operationally tractable yet with a reasonable degree of flexibility for 

customers with specific needs.

• Key design decisions have been subject to extensive consultation with LCH members and clients and have been communicated broadly

to the market.

• Further information on LCH’s proposal can be found here.

1. Price Alignment Interest/Price Alignment Amount

2. The eight non-deliverable currencies are KRW, CNY, INR, BRL, COP, CLP, THB, TWD
Differences Between the Plans

July 21, 2020 10

CME LCH

Option to Not Receive Discounting 

Risk Swaps No Yes

Timing of Auction Monday, October 19th Friday, October 16th

Cash Compensation SOFR

Valuation Methodology (EOD on 

Friday, October 16th)

Calculated using EOD SOFR curve Calculated using levels from midsetting auction

Today October 2020

CME

Timeline of Key Milestones in Discounting Transition

October 2nd

Client deadline for client elections 

& auction agreements

October 16th

Cash and discounting 

risk swap compensation 

are calculated

October 19th

Auction event

October 9th

Clearing Firm deadline for client 

elections & auction agreements

1. This is not an exhaustive list of differences between CME and LCH plans

LCH

October 1st

LCH will refresh indicative 

auction portfolio

October 15th

Final size and direction of 

auction portfolio published

October 14th

Discounting risk swap 

compensation calculated

October 16th

Auction event.

Cash compensation 

calculated

September 4th

Deadline for client 

elections regarding auction

September 18th

LCH will publish indicative 

auction portfolio
July 21, 2020 11

Review of Tabletop Scenario Analysis

APPENDIX
Scenario 1: Processes at Both CCPs go According to Plan

July 21, 2020 12

Topic Viewpoints CME Response LCH Response

Auction Portfolio 

Transparency

• Market-Maker expressed concerns

about auction winners having their 

positions known to the market (“winners’ 

curse”).

• Neither size nor direction to be disclosed 

prior to the auction.

• Size will be disclosed to participating

bidders under NDA at time of auction.

• Only auction winners will know direction 

of portfolio.

• To further protect auction bidders, CME 

may request relief from real-time 

reporting requirements.

• Indicative size and direction of the 

auction portfolio intended to be made 

public in mid-Sept with a refresh at the 

beginning of October. Final size and 

direction to be confirmed on 10/15 

(based on positions as of EOD 10/14).

• Size and direction of the risk would then 

be known and therefore priced into the 

market well in advance of the auction, 

which should ensure that the auction 

price is a true market price.

Competitive 

Dynamics

• Asset Manager questioned if publicly 

known max loss limits for each auction 

would disincentivize aggressive bids 

inside this limit.

• Other asked if differences between EOD 

curves on 10/16 would provide dealers 

with incentives to transfer exposures 

between CCPs.

• Max loss limit is a client-specific limit 

based on portfolio of exposures similar 

to a limit order concept; dealers can only 

see the net max loss limit.

• Due to friction costs, it is unlikely one 

could recognize significant gain by 

transferring exposures between CCPs.

• Revenue opportunity inherent in auction 

should incentivize economic bids inside 

of max loss limit.

• Loss limits will be set based on 

refreshed liquidity data so should merely 

protect against bad/off market bids.

Risk Taking 

Capacity

• Asset Manager described a finite daily 

risk-taking capacity from dealer 

community, and questioned how 

potential auction size compares to this 

limit.

• Difficult to estimate auction size until 

after opt-out decision are finalized.

• Difficult to estimate auction size until 

after opt-out decision are finalized (size 

to be made public soon thereafter).

Decision Making 

Timeline

• End User noted that it was unfair for 

opt-out decision at LCH to be finalized in 

September, when auction bidders have 

several weeks to finalize their views on 

bidding.

• Asset Manager felt that LCH should 

delay its September 4 opt-out notification 

deadline.

• Clients will have until October 2nd to 

finalize decisions to auction off 

discounting risk swaps.

• Clearing firms will have until October 9th

to finalize client elections and auction 

agreements.

• Earlier deadline for opting out of 

discounting risk swaps promotes 

transparency around size of auction 

portfolio and auction participant 

readiness, but LCH is willing to consider 

delaying the publication date if required.
Scenario 2: Failed Auction for Discounting Risk Swaps

July 21, 2020 13

Participants who wish to offload discounting risk swaps may receive some or all of their allotted 

swaps due to insufficient demand in the auctions, potentially creating additional market 

disruption

Topic Viewpoints CME Response LCH Response

Operational Capacity 

to Process Risk

Compensation

• End User and Asset Manager noted that the 

possibility of a failed or partial-fill auction 

necessitates that buy-side market participants 

should build the operational capacity to 

process discounting risk swaps.

• Partial fill auction is not possible 

in CME’s process.

• Operational readiness is 

important part of CME’s client 

checklist.

• CME will host dress-rehearsal to 

test operational readiness.

• Operational readiness is 

important part of LCH’s client 

checklist.

• LCH will host dress-rehearsal to 

test operational readiness.

Economic Risk

• Asset Manager noted that market volatility 

implied in a failed auction could result in

offloading allocated risk compensation at 

significant costs relative to market rates.

• Market-Maker proposed that clients 

concerned about receiving significant and 

unwanted discounting risk swaps may 

consider ‘re-couponing’ their positions prior to 

the auction.

• Clients can choose to hedge 

discounting risk swap exposures 

prior to auction date.

• Netting benefits of auction across 

tenor buckets may be realized to 

lessen risk of a failed auction.

• Discounting risk swaps are 

intended to mitigate economic 

risk.

Compliance-Related

Issues

• Asset Manager and Other expressed 

concern about how dealers might be able to 

provide liquidity if they have prior knowledge 

regarding auction results.

• Masking size and direction of the 

auction to the greatest extent 

possible incentivizes aggressive 

bidding and improves probability 

of a successful auction.

• Transparency on auction size 

intended to be provided to the 

broader market, eliminating “prior 

knowledge” issue.
July 21, 2020 14

Topic Viewpoints CME Response LCH Response

Increased Testing 

Opportunities

• Market-Maker inquired if there would be a 

dress rehearsal to test various operational 

processes.

• There will be an extended testing 

period prior to the discounting 

switch, likely to last two months.

• Testing will be done in two 

phases: one focused on the 

booking of cash and risk 

compensation, and the other 

focused on auction mechanics.

• LCH has executed tests and will 

continue to do so until October.

• Further dress rehearsal 

exercises planned for August and 

September.

Reliance on 3rd Party 

Vendors

• Market-Maker asked if there was any reliance 

on 3rd party vendors and if so, what is their 

likely state of readiness.

• CME has been working closely 

with external vendors to ensure 

readiness, though they are not 

directly dependent on vendors for 

the auction process.

• LCH has been working closely 

with external vendors to ensure 

readiness, though they are not 

directly dependent on vendors for 

the auction process.

‘Go / No-Go’ Decision 

and Contingency 

Plans

• End User asked if one CCP’s inability to go 

forward with October discounting transition 

would impact the other CCP’s ability to 

execute their transition.

• Market-Maker asked if either CCP had 

considered a backup date, in case unable to 

execute the discounting transition in October.

• CME noted that EOD Friday is 

the ‘point of no return’ (i.e. once 

cash and discounting risk swaps 

are processed, the auction must 

proceed on Monday).

• CME intend to consult on 

potential backup dates and 

procedures.

• It is possible for LCH to proceed 

while CME reschedules to a 

backup date, though market 

feedback has been clear it is 

suboptimal for CCPs to conduct 

their transitions at materially 

different times.

• Have not determined a backup 

date, but would need more than 

a week. May need to reconfirm 

client opt-out elections, 

depending on cause of delay.

Scenario 3: Operational Failure

Operational failure may provide challenges to booking of cash and/or discounting risk swaps, and 

could impair auction processes
Scenario 4: Member Default

July 21, 2020 15

Topic Viewpoints CME Response LCH Response

Potential to Delay 

Discounting Switch

• Facilitator asked if a member or client default 

could occur at the same time as the auction, 

or if that might necessitate a delay of the 

discounting switch altogether.

• Market-Maker and End User proposed that 

each CCP create a transition playbook that 

prescribes how timing and magnitude of 

defaults could impact discounting transition.

• Market-Maker noted that market may not 

have capacity to handle default auction and 

discounting risk swap auction concurrently.

• Noted that if the default occurred 

prior to the ‘cut-off time’ (EOD 

10/16), CME can communicate 

with members to understand if 

there is sufficient appetite to 

continue discounting transition.

• If the auction continues, the 

defaulting member would be 

excluded from participating.

• Simultaneous execution of a 

default auction and discounting 

transition could present market 

safety and soundness concerns.

• Clearing member default 

immediately prior to / on Auction 

Date could pose significant risk 

of delaying the discounting 

transition, though a client default 

is viewed as less compromising 

to the timeline.

• The focus of the discounting 

transition is a successful auction, 

and it’s difficult to see how this 

could happen if LCH is also 

auctioning off a member portfolio. 

Note LCH process is intended to 

be single day.

Member default could necessitate a default auction, which may impair ability or risk appetite of 

other members to participate in discounting risk swaps auctions
July 21, 2020 16

Topic Viewpoints CME Response LCH Response

Transferring

Positions Between 

FCMs

• End User proposed that positions can be 

moved between FCMs if clients are given 

sufficient notice of a particular FCMs 

operational constraints.

• End User noted that if an FCM is not 

operationally capable of executing the 

discounting transition, they may not be 

operationally capable of migrating client 

positions.

• CME does not foresee 

operational issues as the 

discounting transition will 

leverage existing workflows.

• Wiling to work with clients to 

migrate positions leading up to 

auction.

• It is prudent for clients to have 

alternative FCM relationships 

ready and available.

• LCH has discussed with FCMs 

and not expecting operational 

issues.

• FCM responsibilities on behalf of 

their clients are only to facilitate 

election of discounting risk swap 

opt-out (no ongoing FCM 

intervention required although 

members of FCM group will be 

bidders in the auction).

FCM Responsibilities 

in the event of failed 

or partial-fill auction

• Market-Maker asked who is responsible for 

discounting risk swap liquidation in the event 

the CCP auction does not provide complete 

offloading of risk compensation.

• This would become a bilateral 

conversation between the client 

and their FCMs.

• This would become a bilateral 

conversation between the client 

and their FCMs.

Scenario 5: FCM Not Operationally Prepared for CCP Discounting Transition

FCM operational constraints may impact clients as well as auction dynamics
July 21, 2020 17

Topic Viewpoints CME Response LCH Response

FCM Knowledge of 

Client Exposures

• Facilitator asked how client exposures will be 

communicated to FCMs in order to facilitate 

prefunding needs / risk limits.

• Clearing member firms will 

receive detailed client exposure 

reports from CME.

• Note that discounting risk swaps 

are booked ‘at-market’, and no 

IM or VM will be calculated for 

these swaps on the transition 

date.

• Auction costs to participants 

unwinding their discounting risk 

swaps are booked as fees.

• Detailed reports will be provided 

in advance, including “what if” IM 

requirement analysis.

• Note that discounting risk swaps 

are booked ‘at-market’, and 

therefore have no VM impact.

• Auction costs to participants 

unwinding their discounting risk 

swaps are booked as fees.

Client Bidding in 

Auction

• Facilitator asked if client bidding activity in the 

auctions are subject to FCM approvals.

• On October 9th, clients that 

intend to bid in the auction will 

need to get pre-approval from 

clearing member firms.

• Approximate max size of auction 

will be known and communicated 

to auction bidders to facilitate 

approvals.

• Clients bidding in the auction 

must go through FCMs.

• Clients not able to bid in the 

auctions directly.

Scenario 6: Prefunding Needs / Risk Limits

Client receipt of discounting risk swaps may have margin requirements, and client participation in 

discounting risk swaps auctions may have client risk limit implications
July 21, 2020 18

Topic Viewpoints CME Response LCH Response

Business Continuity 

Planning

• Facilitator asked if CCPs feel comfortable 

executing discounting transition if their 

respective teams are working remotely.

• Market-Makers noted that key person risk 

may exist with certain traders or operations 

experts that should be mitigated.

• Employees have been 

predominantly working remotely 

since March 2020, and planning 

for a considerable portion to still 

be working remotely in October.

• Noted that plan held up well 

during volatile markets earlier in 

the year when teams were 

largely working remotely.

• Largely working from home 

currently, and have undergone 

several successful releases 

during this period.

• Feels comfortable executing 

discounting transition in current 

environment if required.

Scenario 7: COVID-19 Related Interruptions

Operational and economic challenges of transition may be exacerbated with parties working 

remotely
Members of the Market Risk Advisory Committee Interest Rate 

Benchmark Reform Subcommittee (May 11, 2020)

July 21, 2020 19

Member Primary Representative Position Title

1. Morgan Stanley Thomas Wipf (Subcommittee 

Chairman)

Vice Chairman, Institutional Securities

2. AQR Capital Management Richard Grant Global Head of Regulatory and Government Affairs

3. Barclays Tyler Wellensiek Managing Director and Head of Official and Financial 

Institutions Rates Sales

4. BlackRock Jack Hattem Deputy CIO, BlackRock Obsidian Fund

5. BNP Paribas Simon Winn Managing Director - Head of America’s IBOR 

Transition Office

6. Capital One Thomas Feil Senior Vice President and Treasurer

7. Chatham Financial Robert Mangrelli Director, Global Real Estate Hedging and Capital 

Markets

8. Citadel Stephen Berger Managing Director and Global Head of Government & 

Regulatory Policy

9. Citigroup Biswarup Chatterjee Managing Director, Global Head of Innovation, 

Markets & Securities Services

10. CME Group Agha Mirza Managing Director and Global Head of Interest Rate 

Products

11. CoBank ACB James Shanahan Vice President – Financial Regulatory Compliance
Members of the Market Risk Advisory Committee Interest Rate 

Benchmark Reform Subcommittee (May 11, 2020)

July 21, 2020 20

Member Primary Representative Position Title

12. Deborah North Partner, Allen & Overy LLP

13. Federal Home Loan 

Bank of Atlanta

Annette Hunter Senior Vice President and Director of Accounting 

Operations

14. Federal Home Loan 

Bank of New York

Rei Shinozuka Director of Capital Markets Research

15. Federal Reserve Bank 

of New York

Nathaniel Wuerffel Senior Vice President

16. Federal Home Loan 

Mortgage Corporation 

(“Freddie Mac”)

Ameez Nanjee Vice President, Asset Liability Management

17. Goldman Sachs Jason Granet Managing Director, Program Lead for LIBOR Transition

18. HSBC Neil Middleton US CRO, GBM and CMB and CRO, US Swap Dealer

19. ICE Benchmark 

Administration

Timothy J. Bowler President

20. International Swaps and 

Derivatives Association, 

Inc.

Ann Battle Assistant General Counsel, Head of Benchmark Reform

21. JP Morgan Marnie Rosenberg Managing Director and Global Head of Clearinghouse 

Risk & Strategy
Members of the Market Risk Advisory Committee Interest Rate 

Benchmark Reform Subcommittee (May 11, 2020)

July 21, 2020 21

Member Primary Representative Position Title

22. LCH Group Limited Dennis McLaughlin Chief Risk Officer

23. MetLife Joseph Demetrick Managing Director

24. Nomura Global Financial 

Products, Inc.

Jonathan Raiff Senior Managing Director, Head of Global Markets 

Americas

25. Pacific Investment 

Management Company, 

LLC 

Nadia Zakir Executive Vice President and Deputy General Counsel

26. Prudential Chris McAlister Managing Director, Global Head of Derivatives Trading

27. The Depository Trust & 

Clearing Corporation

Gregg Rapaport Managing Director, Repository and Derivatives 

Services

28. TriOptima Vikash Rughani Business Manager

29. Tradeweb Scott Zucker Chief Administrative Officer

30 Vanguard Dr. Sam Priyadarshi Principal, Global Head of Portfolio Risk and 

Derivatives, Fixed Income Group

31. Virtu Financial Craig Messinger Vice Chairman

32. Wells Fargo Eric S. Lashner Senior Counsel, Derivatives and FX Section