Preparing for the Switch to SOFR Discounting

It’s been reported that both LCH SwapClear and CME Clearing will be shifting discounting of US interest rate derivatives to the new U.S. secured overnight financing rate, or SOFR in 2020. Switching from OIS to SOFR discounting will reshape both the cash flow (hence the present value) as well as the risk profile of an instrument, with the specific details being dependent on the trade term. When optionality is present this become even more complex.

For some this switch marks a turning point in the LIBOR transition, however many open questions remain. Understanding the full impact of these changes will be key to understanding the implications for trading and risk management going forward.

In a 1-hour webinar presentation on October 30th at 10 AM EDT, Ping Sun, SVP of Financial Engineering for Numerix explored the many facets of discounting risk as exchanges switch from OIS to SOFR discounting.

Key topics discussed included:

  • An update on the status of SOFR and upcoming milestones
  • SOFR discounting & financial instruments: from linear products to exotics
  • An analysis of SOFR discounting risk of cleared swaps and the proposed compensations by the exchanges
  • Market impact of SOFR discounting and what comes next

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