Sunday, 10 November 2019

Change in collateral rate at CCP: quant perspective

CCPs have announced that they will change the PAI/collateral rate in USD from Effective Fed Fund rate (EFFR) to SOFR. This will be done as a big bang approach, not in line will the planned paced transition set by ARRC in 2017. The planned date for the big bang transition at CME and LCH is Friday 16 October 2020. Some description for CME can be found on their website; we have not found a similar description for LCH, even if it appears that the methodology will be similar.

Such a big bang approach does not offer the "choice between clearing swap contracts into the current PAI/discounting environment or one that uses SOFR for PAI and discounting" as planned by the ARRC. The change is forced on market participants at a price and with a methodology selected by the CCPs.

Such an approach creates the opportunity for value transfer between market participants and may generate unintended consequences. We have detailed some impacts, potential consequences and open questions in a technical document now available freely on a preprint server.

The document, in the muRisQ Advisory Market Infrastructure Analysis series, is titled

SOFR discounting transition: multi-curve and quantitative perspective.

and is available on SSRN with the reference

Henrard, Marc P. A., SOFR discounting transition: multi-curve and quantitative perspective. Market Infrastructure Analysis, muRisQ Advisory, October 2019. Available at SSRN:

Added 23-Nov-2019: The code used to create some of the PV01 reports is available (open source) on the marc-henrard/analysis Gitbub repository: