Secured Overnight Financing Rate (“SOFR”) Rate Change Notice

Report date

Circular No.

LCH Circular No 4109


28 August 2020


All SwapClear Clearing Members


This Circular constitutes a Rate Change Notice pursuant to paragraph 1.12 of Section 2C of the Procedures and paragraph 3.5.1 of the FCM Procedures of LCH Limited (“LCH”). It sets out information regarding the forthcoming transition to SOFR discounting. This information is consistent with other recent communications from LCH to clearing members and their clients.

On 19 October 2020 (the “Rate Change Effective Date”), LCH will replace the Fed Funds Rate (“FFR”) with SOFR for the purposes of: (i) calculating Price Alignment Interest; (ii) calculating Price Alignment Amount; and (iii) constructing the relevant zero coupon yield curves for USD. This change will apply to (1) all USD and MXN denominated SwapClear Contracts and (2) all non-deliverable SwapClear Contracts which are settled in USD (the “Impacted SwapClear Contracts” or “Impacted FCM SwapClear Contracts”, as applicable). The FFR will continue to apply for the purposes of discounting future cash flows until the end of the Business Day on 16 October 2020.

For the purpose of determining Discounting Risk Swaps, LCH will use the portfolios of Impacted SwapClear Contracts or Impacted FCM SwapClear Contracts as at the end of the Swap Portfolio Calculation Date, which will be Wednesday 14 October 2020. Compensation amounts will be calculated based on the Impacted SwapClear Contracts or Impacted FCM SwapClear Contracts registered with LCH at the end of the Business Day on Friday 16 October 2020. The Auction Date will also be 16 October 2020. Upon SwapClear opening on 19 October 2020, a Cash Compensation Contract and (where applicable) one or more Discounting Risk Swaps will be registered in each relevant account. The amount payable under the Cash Compensation Contract will consist of one or more of: (i) the Cash Valuation Amount USD; (ii) the Cash Valuation Amount (MXN); (iii) the Cash Only Client Position Account Auction Adjustments; and (iv) the Auction Winner Amounts. The Cash Compensation Contract will be settled on 20 October 2020.

Please note and make your clients aware that Portfolio Transfers and other Bulk Events will not be permitted on either 15 October or 16 October 2020. Clearing Members are reminded that the FCM SwapClear Suspension Sub-Account and SCM SwapClear Suspension Sub-Account will be treated as a regular client account for any unallocated SwapClear Contracts for the purposes of cash compensation and Discounting Risk Swaps (and a Cash Election must be made in order to apply to such accounts).

As previously notified, clients are permitted to make a Cash Only Election until the Cash Only Election Cut-Off on 4 September 2020. If, following the Cash Only Election Cut-Off, a Clearing Member determines that it has made an erroneous election, it should contact the Clearing House immediately. Please note that from 11 September 2020 onwards, no further amendments will be possible.

Any new client accounts that are opened on or after 4 September 2020 will be treated as not having made a Cash Only Election. SwapClear Clearing Members must make their clients aware of this prior to on-boarding. Cash Only Elections for the same client may differ between one clearing member to another and its status as a Cash Only Client may therefore be impacted the event that it begins clearing with an alternative SwapClear Clearing Member (for example, following a transfer).

LCH plans to publish the first indicative auction portfolio on its website on 18 September 2020 at 9.30am EST. 

LCH will set and publish the final “Gross Client Cap” levels on 15 October 2020.  The Gross Client Cap limits the allocation of auction costs to Client accounts to a defined number of basis points for each tenor.  The Bid/Offer Limit (auction proceeds cap) is then calculated by dividing the Gross Client Cap by the net-to-gross ratio for each tenor.  In the auction itself, any auction bids outside the Bid/Offer Limit will not be accepted. 

Either the ‘SwapClear SCM Service – Rate Change Annex – Secured Overnight Financing Rate (SOFR)’ or the ‘SwapClear FCM Service – Rate Change Annex – Secured Overnight Financing Rate (SOFR)’ of the Rulebook or FCM Rulebook will apply with respect to the rate change, depending upon whether the impacted clearing member is an SCM or an FCM Clearing Member. A PDF version of the Annex is available in the ‘SOFR Annexes’ folder of the secure area (available here) for onward distribution to clients. 

LCH plans to report the Cash Compensation Contracts and Risk Discounting Swaps in accordance with its usual processes. LCH is making indicative compensation amounts available daily on Report 315, allowing Clearing Members and their clients to see the amount of theoretical compensation that would apply to an existing portfolio of SwapClear Contracts on a given day. The indicative notional(s) for Discounting Risk Swaps will be made available on the LCH Portal. 

Further general information regarding the transition described in this Circular is available here. A detailed timeline for the transition weekend is available to view here. Please contact your usual LCH representative if you have any questions.


Terms used herein have the meaning assigned to them in the Rulebook or FCM Rulebook (as applicable). References to a SwapClear Clearing Member or a SwapClear Contract should be interpreted to include an FCM Clearing Member and an FCM SwapClear Contract. The LCH Rulebooks are available here.