On May 6, 2020, the Alternative Reference Rates Committee (ARRC) published a supplemental consultation (May 2020 consultation), which:

The May 2020 consultation disclosed that almost all respondents with an interest in consumer loans placed a high value on consistency with the International Swaps and Derivatives Association (ISDA®) methodology that uses a five-year median spread. In the absence of data for a five-year median for consumer cash products, more respondents favored an in-arrears adjustment over using a shorter series or overnight indexed swap (OIS) rates.

All of the consumer groups and most (but not all) mortgage lenders preferred the inclusion of a transition period for consumer products. For consumer products, the ARRC continues to recommend a one-year transition period to the five-year median spread adjustment methodology.

On April 8, 2020, the ARRC announced that at its April 7, 2020 meeting the ARRC agreed on a recommended spread adjustment methodology reflecting the market participant feedback received from the January 2020 consultation. The recommended spread adjustment methodology announced by ARRC in April will be based on a historical median over a five-year lookback period calculating the difference between USD LIBOR and the Secured Overnight Financing Rate (SOFR) (see Legal Update, ARRC Announces Recommended Spread Adjustment Methodology for Cash Products Referencing LIBOR USA).

However, in the May 2020 consultation, the ARRC announced it will consider feedback on another potential option for calculating the five-year median spread that had not been included in the January 2020 consultation. The May 2020 consultation invites participants to consider using the same spread adjustment values that will be used by ISDA across all of the different fallback rates, rather than using the same adjustment methodology to calculate a different spread adjustment for each potential fallback rate.

The ARRC also seeks feedback on a second issue related to ISDA's decision to include a pre-cessation USD LIBOR trigger. The May 2020 consultation seeks input on whether the timing of the calculation of the ARRC spread adjustment should match ISDA’s timing if a pre-cessation event related to LIBOR occurs.

In response to the January 2020 consultation, the ARRC posed the following two additional feedback questions in the May 2020 consultation to market participants – this feedback will be used by ARRC for spread adjustments that apply to its fallback rate recommendations:

Question 1. Do you believe that using the ISDA methodology of a 5-year median of the historical difference between LIBOR and the SOFR fallback rate is the best choice for the cash products with either a 5-year median methodology or 5-year median value, or would you prefer that the same spread value to be used by ISDA, based on the 5-year median of the historical difference between LIBOR and a compound average of SOFR in arrears should be applied to each potential fallback rate?

Question 2. Do you believe that the ARRC recommended spread adjustments should be set at the same time that ISDA’s spread adjustments are set in the event that a pre-cessation event is operative, or at the time that LIBOR is found to be no-longer representative, regardless of ISDA’s timing?

The ARRC has noted that some respondents to Question 1 in the January 2020 consultation took the question to be asking whether they preferred to use the same value rather than the same methodology. Additional background on the differences between these two spread options are set out in Appendix 1 to the May 2020 consultation.

Public comment on the May 2020 consultation must be received by the ARRC no later than June 15, 2020.