Slide 1: Discounting and Price Alignment (PA) Transition
Discounting and Price Alignment (PA) Transition Emerging Markets IRS and OTC FX Products January 2021 Pending Regulatory Approval CME GROUP PUBLIC © 2021 CME Group. All rights reserved.
Slide 2: Discounting Transition Overview
Discounting Transition Overview Scope: All existing Cleared MXN IRS, NDIRS, and OTC FX products at CME referencing either USD or EUR discounting, comprised of: LatAm IRS Products: MXN, BRL, CLP, COP APAC IRS Products: KRW, INR, CNY OTC FX Products: NDFs (11 Pairs), CSFs (20 Pairs), FX Options (3 Pai
Slide 3: Overview - Variation Margin and Cash Adjustment
Overview - Variation Margin and Cash Adjustment Discounting Transition Cash Flow Example Current Prior Date VM Adjustment Total Cash NPV NPV T–1 $100 1 (Thursday) (EFFR) T $125 $100 2 $25 $25 (Friday) (EFFR) (EFFR) T+1 $140 $125 $15 -$1 $14 (Monday) (SOFR) (EFFR Friday) The purpose of generating the
Slide 4: Overview - Variation Margin and Cash Adjustment
Overview - Variation Margin and Cash Adjustment IRS Discounting Transition Report: Available in Production Beginning March 8th Column Header Description Sample Value Type • Shows revised NPVs under the new Value Date Business Date 10/16/2020 Date discounting methodology and the cash Position Account
Slide 5: Overview - Timelines and Testing Summary
Overview - Timelines and Testing Summary February 10 March 8 Start Test Phase 1 Start Test Phase 2 Mock Transition March 5 March 26 End Test Phase 1 Discounting Transition Test Phase 1: February 10 – March 5 Test Phase 2: March 8 – March 26 • NR environment performs a daily simulation of the process
Slide 6: Valuation and Curve Methodology
Valuation and Curve Methodology MXN and Non-Deliverable IRS Transition Pending Regulatory Approval CME GROUP PUBLIC © 2021 CME Group. All rights reserved.
Slide 7: Transition for MXN and NDIRS
Transition for MXN and NDIRS Valuation Methodology CME will transition swaps to SOFR discounting and PA on March 26, 2021 as highlighted below: MXN (31Y) Products ND IRS: BRL (10Y), CLP (20Y), CNY (10Y), COP (20Y), INR (10Y), KRW (21Y) Discount curves implied using Spot FX, FX forwards, cross-curren
Slide 8: Overview: Mark to Market (MTM)
Transition for MXN and NDIRS Overview: Mark to Market (MTM) MXN ✓ MXN Swaps variation margin (VM) and cashflows (CF) are settled in MXN. CME generates a discount curve and a forecast curve for MXN ✓ MTM of the MXN swaps is determined in local currency by discounting the future cashflows…
Slide 9: Overview: Current Curve Construction Mechanism
Transition for MXN and NDIRS Overview: Current Curve Construction Mechanism MXN and NDIRS Curve construction ✓ The discount curve for each of the currencies is generated using FX spot, FX forwards and cross-currency swaps instruments along the term-structure. Forecast curve is generated using Fix/Fl
Slide 10: Overview: Current Curve Construction Mechanism
Transition for MXN and NDIRS Overview: Current Curve Construction Mechanism The below shows the current curve construction process for NDIRS & MXN interest rate curves USD SOFR Boot-strapping USD LIBOR BBA 6M Instruments used for Boot-strapping Algorithm for of USD curves USD using SOFR discounting
Slide 11: Overview: Current Price Alignment Calculation
Transition for MXN and NDIRS Overview: Current Price Alignment Calculation MXN PA Calculation In order to account for the USD funding used by most market participants, the MXN PA rate is currently calculated based on the Fed Funds rate. The rate is adjusted by the USD/MXN exchange rate as the actual
Slide 12: Cash Compensation Mechanism
Transition for MXN and NDIRS Cash Compensation Mechanism The below highlights the process for cash compensation which is computed as: 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑁𝑃𝑉𝐸𝐹𝐹𝑅 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 − 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑁𝑃𝑉𝑆𝑂𝐹𝑅 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 Cash compensation for MXN and NDIRS will be local…
Slide 13: Cash Compensation Mechanism – Curve Generation Process
Transition for MXN and NDIRS Cash Compensation Mechanism – Curve Generation Process Pending Regulatory Approval CME GROUP PUBLIC © 2021 CME Group. All rights reserved. 13
Slide 14: Post Transition Curve Construction Mechanism
Transition for MXN and NDIRS Post Transition Curve Construction Mechanism The below shows the curve construction process for EM interest rate curves after the discounting transition switch USD EFFR Boot-strapping USD LIBOR BBA 6M Instruments used for Boot-strapping Algorithm for of USD curves USD us
Slide 15: Post Transition Price Alignment Calculation
Transition for MXN and NDIRS Post Transition Price Alignment Calculation MXN PA Calculation In order to account for the USD funding used by most market participants, the MXN PA rate will be calculated based on the SOFR rate. The rate will be adjusted by the USD/MXN exchange rate as the actual cash f
Slide 16: IRS Pricing Curve Reports
IRS Pricing Curve Reports February 10 March 8 Start Test Phase 1 Start Test Phase 2 Mock Transition March 5 March 26 End Test Phase 1 Discounting Transition CME will make SOFR-based pricing curves available on the Transition Date for reconciling to the SOFR-discounted NPV Curve Input Files - Each di
Slide 17: Valuation and Curve Methodology
Valuation and Curve Methodology OTC FX Products Pending Regulatory Approval CME GROUP PUBLIC © 2021 CME Group. All rights reserved.
Slide 18: Transition for OTC FX
Transition for OTC FX CME will transition OTC FX products to SOFR/€STR discounting and PA on March 26, 2021 alongside our emerging market IRS currencies. CME Cleared Settlement Current Discounting New Discounting Currency Pair Instrument Type Currency and PAA and PAA AUDUSD, EURUSD, GBPUSD, NZDUSD,
Slide 19: Overview - Variation Margin and Cash Adjustment
Overview - Variation Margin and Cash Adjustment OTC FX Discounting Transition Report: Available in Production Beginning March 8th Column Header Description Sample Value Type • Shows revised MTMs under the new Bus_Date Business Date 3/15/2021 Date discounting methodology and the cash adjustment at th
Slide 20: OTC FX: Mechanism for products settled in USD
Transition for OTC FX Mechanism for products settled in USD The below highlights the process for cash compensation which is computed as: 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑁𝑃𝑉𝐸𝐹𝐹𝑅 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 − 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑁𝑃𝑉𝑆𝑂𝐹𝑅 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 All FX products settled in USD are in scope for…
Slide 21: OTC FX: Mechanism for products settled in EUR
Transition for OTC FX Mechanism for products settled in EUR The below highlights the process for cash compensation which is computed as: 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑁𝑃𝑉𝐸𝑂𝑁𝐼𝐴 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 − 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑁𝑃𝑉€𝑆𝑇𝑅 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 All FX products settled in EUR are in scope for…
Slide 22: Disclaimer
Disclaimer Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and
Slide 23: CME Group
& CME Group