ARRC Publishes Key Principles for a Forward-Looking SOFR Term Rate | Practical Law

ARRC Publishes Key Principles for a Forward-Looking SOFR Term Rate | Practical Law

The Alternative Reference Rates Committee (ARRC) issued principles that will guide the ARRC as it considers the conditions it finds necessary to recommend a forward-looking Secured Overnight Financing Rate (SOFR) Term Rate.

ARRC Publishes Key Principles for a Forward-Looking SOFR Term Rate

Practical Law Legal Update w-030-7511 (Approx. 3 pages)

ARRC Publishes Key Principles for a Forward-Looking SOFR Term Rate

by Practical Law Finance
Published on 28 Apr 2021 • USA (National/Federal)
The Alternative Reference Rates Committee (ARRC) issued principles that will guide the ARRC as it considers the conditions it finds necessary to recommend a forward-looking Secured Overnight Financing Rate (SOFR) Term Rate.
On April 20, 2021, the Alternative Reference Rates Committee (ARRC) issued a set of key principles for an ARRC-recommended-forward looking Secured Overnight Financing Rate (SOFR) term rate, which will guide the ARRC as it contemplates the conditions necessary to recommend a SOFR term rate. These key principles, along with those identified in the ARRC's March 2021 statement (March statement), will inform the ARRC's consideration of a SOFR-based rate.
The key principles for an ARRC-recommended forward-looking SOFR term rate are that the rate should:
  • Meet the ARRC’s criteria for alternative reference rates (similar to SOFR itself).
  • Be rooted in a robust and sustainable base of derivatives transactions over time to ensure that its use as a reference rate is consistent with best practices and the ARRC’s own standards.
  • Have a limited scope of use to avoid:
    • use that is not in proportion to the depth in the underlying derivatives market; or
    • use that materially detracts from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct a term rate, rendering the term rate itself unstable over time.
In the March statement, the ARRC announced that it is not yet in a position to recommend a SOFR term rate due to:
  • Lack of sufficient development in liquidity in the SOFR derivatives market.
  • Continued evaluation of the limited scope of use of a forward-looking SOFR term rate.
The ARRC is having ongoing discussions regarding development of the forward-looking SOFR term rate. For further information on the ARRC's March statement, see Legal Update, ARRC Issues Recommended Hardwired Fallback Language for Syndicated and Bilateral Business Loans and Publishes Suggested LIBOR-to-SOFR Swap Fallback Formula.
According to its April 2021 press release, the ARRC encourages market participants to continue to transition away from LIBOR using SOFR conventions currently available, such as the SOFR averages and index data with guidance from the User's Guide to SOFR.
For further information on LIBOR replacement and benchmark fallbacks, see Practical Law's LIBOR Replacement Toolkit.