ARRC Announces Recommended Spread Adjustment Methodology for Cash Products Referencing LIBOR | Practical Law

ARRC Announces Recommended Spread Adjustment Methodology for Cash Products Referencing LIBOR | Practical Law

The Alternative Reference Rates Committee (ARRC) announced its recommended spread adjustment methodology for cash products referencing USD LIBOR in anticipation of the discontinuation of LIBOR after 2021.

ARRC Announces Recommended Spread Adjustment Methodology for Cash Products Referencing LIBOR

by Practical Law Finance
Published on 14 Apr 2020 • USA (National/Federal)
The Alternative Reference Rates Committee (ARRC) announced its recommended spread adjustment methodology for cash products referencing USD LIBOR in anticipation of the discontinuation of LIBOR after 2021.
On April 8, 2020, the Alternative Reference Rates Committee (ARRC) announced its recommended spread adjustment methodology for cash products referencing USD LIBOR in anticipation of the discontinuation of LIBOR after 2021.
The recommended spread adjustment methodology is based on a historical median over a five-year lookback period calculating the difference between LIBOR and the Secured Overnight Financing Rate (SOFR). This methodology matches what has been previously recommended by ISDA®. For consumer products, ARRC recommends a one-year transition period to the five-year-median spread-adjustment methodology.
The announcement states that the recommended methodology is:
  • For market participants' voluntary use.
  • To produce spread adjustments intended for LIBOR contracts that have incorporated ARRC's recommended hardwired fallback language.
  • For legacy LIBOR contracts where a spread-adjusted SOFR can be selected as a fallback.
In the coming weeks, ARRC is expected to release a more detailed, final recommendation of the spread adjustment methodology for cash products.
The recommendation follows ARRC's January 2020 consultation on the subject, as well as the feedback received (see Legal Update, ARRC Publishes Consultation on Spread Adjustment Methodologies for Cash Products Referencing LIBOR).
For more information on LIBOR and interest rate benchmark reform, see LIBOR Replacement Toolkit.
"ISDA" is a registered trademark of the International Swaps and Derivatives Association, Inc. (ISDA). ISDA is not a sponsor of Practical Law and had no part in the development of this Update.