SOFR valuation change
  • Wednesday, 13 November 2019

SOFR valuation change

Earlier this year, London Clearing House (LCH) announced plans to move to Secured Overnight Funding Rate (SOFR) discounting on all USD-denominated SwapClear contracts in the second half of 2020 (target date is around October 17, 2020).

The changes to discounting will result in a valuation change giving rise to valuation gains and losses from the switch. LCH announced that they would provide a compensation process designed to minimise the impact of these changes. The discounting change will also have the effect of changing the risk profile of the portfolio, as Fed Funds discounting risk becomes SOFR discounting risk at the point of conversion.

The proposed compensation is to provide a combination of cash and compensating swaps (basis swap SOFR versus Fed Funds). Some clients may be able to choose a cash-only compensation. Read more about the proposed next steps for the transition to USD SOFR discounting in SwapClear.

Please contact Pierre Wernert for more information on SOFR valuation change.