On July 8, 2020, the Alternative Reference Rates Committee (ARRC) released a SOFR adoption tool to help market participants transition from LIBOR to the Secured Overnight Financing Rate (SOFR). On July 10, ARRC submitted an email to the IRS and US Treasury Department requesting accommodations of bilateral modifications of derivatives contracts to incorporate terms of the forthcoming ISDA® protocol relating to IBOR discontinuation.

The ARRC SOFR adoption tool is intended to be used in conjunction with prior ARRC publications to identify the processes and systems that market participants may need to update internally for a successful transition to SOFR. The SOFR adoption tool broadly classifies transition activities into the following categories and provides a one-page summary for each of the sub-categories:

The summaries:

On July 10, 2020, the ARRC submitted an email to the US Treasury Department explaining a technical aspect of ARRC's December 2019 request that Treasury issue guidance stating that adherence to the upcoming ISDA protocol relating to IBOR discontinuation (ISDA fallback provisions), as well as bilateral modifications that implement comparable fallback provisions (collectively, with the ISDA fallback provisions, derivatives fallback modifications), will not create a taxable event under Section 1001 of the Internal Revenue Code (26 U.S.C. § 1001).

This guidance was requested to prevent market participants from delaying adherence to the ISDA IBOR-replacement protocol or making contractual modifications due to concerns regarding uncertainty over tax consequences.

The ARRC requests that the upcoming Treasury guidance on the derivatives fallback modifications will allow for:

The ARRC's initial request encouraged Treasury to provide flexible relief with respect to bilateral incorporation of contractual language comparable to the ISDA fallback provisions and therefore recommended permitting contract modifications that are "substantially similar" to the modifications allowed under the protocol in order to allow individual contracting parties to tailor the terms of the protocol to their particular documents or scope of transactions.

In the event that Treasury does not adopt the ARRC's recommendations to allow "substantially similar" contract modifications, the ARRC suggests, as an alternative approach, that the upcoming Treasury guidance on the derivatives fallback modifications state that any other contemporaneous alteration or modifications made by the parties would be tested under Treasury Regulation Sections 1.1001-1(a) or 1.1001-3, as applicable, for purposes of determining whether such alterations or modifications result in a taxable event with respect to the contract. This alternative approach would allow parties to make similar limited modifications to their contracts.