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ARRC Formally Recommends Forward-Looking SOFR Term Rate
Practical Law Legal Update w-032-0802 (Approx. 5 pages)
ARRC Formally Recommends Forward-Looking SOFR Term Rate
by Practical Law Finance
| Published on 01 Aug 2021 • USA (National/Federal) |
The Alternative Reference Rates Committee (ARRC) formally recommended the CME Group’s forward-looking SOFR Term Rates, marking the final step in the ARRC’s paced transition plan away from LIBOR.
On July 29, 2021, the Alternative Reference Rates Committee (ARRC) announced its formal ARRC recommendation of forward-looking Secured Overnight Financing Rate (SOFR) term rates (SOFR Term Rates) produced by the CME Group, Inc. (CME) for ARRC (ARRC formal SOFR recommendation). The ARRC also issued a related ARRC fact sheet.
The ARRC formal SOFR recommendation follows:
- The completion of a key change in interdealer trading conventions on July 26, 2021 under the SOFR First initiative recommended by the CFTC's Market Risk Advisory Committee (MRAC) (see Legal Update, Updated: CFTC MRAC Recommends July 26, 2021 LIBOR-to-SOFR Transition Date for Interdealer Interest Rate Swap Market).
- The ARRC’s July 21, 2021 announcement of recommended conventions and recommended best practices for use of the SOFR Term Rates (see Legal Update, ARRC Issues Update on Upcoming Formal Recommendation for Term SOFR).
With the issuance of the ARRC formal SOFR recommendation, the ARRC states that market participants can now employ these ARRC materials when using the SOFR Term Rates in legacy fallbacks and new contracts to prepare for LIBOR cessation. In the ARRC July 21, 2021 announcement, the ARRC stated that it supports the use of SOFR Term Rates for business loan activity where adapting to an overnight rate could be more difficult. The ARRC does not support the use of SOFR Term Rates for derivatives markets, except for end users to hedge cash products that use the SOFR Term Rates.
The ARRC formal SOFR recommendation marks the completion of the Paced Transition Plan, which the ARRC has been working toward since it was first outlined in 2017. The ARRC stated in the ARRC formal SOFR recommendation that the successful SOFR First convention change implemented on July 26, 2021, along with the continued growth in SOFR cash and derivatives markets, has allowed the ARRC to recommend SOFR Term Rates consistent with established ARRC principles and indicators (see Legal Update ARRC Publishes Key Principles for a Forward-Looking SOFR Term Rate and Practice Note, Interest Rate Benchmark Reform: Working Groups: Development of Term SOFR).
Also on July 29, 2021, the Loan Syndications and Trading Association (LSTA) issued a statement in support of the ARRC formal SOFR recommendation, following the successful launch of the SOFR First initiative. The LSTA noted that the ARRC formal SOFR recommendation is the critical final step for all parties to use Term SOFR for loan or collateralized loan obligations (CLO) origination to begin to do so.
For further information on LIBOR replacement and benchmark fallbacks, see Practical Law's LIBOR Replacement Toolkit.