ARRC Publishes Recommended Best Practices for LIBOR Transition | Practical Law

ARRC Publishes Recommended Best Practices for LIBOR Transition | Practical Law

The Alternative Reference Rates Committee (ARRC) published recommended best practices to assist market participants preparing for the anticipated discontinuation of US dollar (USD) LIBOR by the end of 2021.

ARRC Publishes Recommended Best Practices for LIBOR Transition

Practical Law Legal Update w-025-8366 (Approx. 4 pages)

ARRC Publishes Recommended Best Practices for LIBOR Transition

by Practical Law Finance
Published on 02 Jun 2020 • USA (National/Federal)
The Alternative Reference Rates Committee (ARRC) published recommended best practices to assist market participants preparing for the anticipated discontinuation of US dollar (USD) LIBOR by the end of 2021.
On May 27, 2020 the Alternative Reference Rates Committee (ARRC) published recommended best practices to assist market participants preparing for the anticipated discontinuation of US dollar (USD) LIBOR by the end of 2021.
The ARRC's key recommended guidance is as follows:
  • New USD LIBOR cash products should include ARRC-recommended (or substantially similar) fallback language as soon as possible.
  • Third-party technology and operations vendors relevant to the transition should complete all necessary enhancements to support the Secured Overnight Financing Rate (SOFR) by the end of 2020.
  • New use of USD LIBOR should stop, with timing depending on specific circumstances in each cash-product market.
  • For contracts specifying that a party will select a replacement rate at its discretion following a LIBOR transition event, the determining party should disclose its planned selection to relevant parties at least six months prior to the date that a replacement rate would become effective.
Specific steps and timelines for the recommended best practices are outlined according to product type. In pertinent part:
  • Issuers of floating rate notes should:
    • incorporate hardwired fallbacks by June 30, 2020;
    • have relevant technology and operations vendors ready to support SOFR by June 30, 2020;
    • set a target for stopping any new use of USD LIBOR of December 31, 2020; and
    • disclose the anticipated fallback rate at least six months prior to the date it would become effective.
  • Parties to business loans should:
    • incorporate hardwired fallbacks by September 30, 2020;
    • have relevant technology and operations vendors ready to support SOFR by September 30, 2020;
    • set a target for stopping any new use of USD LIBOR of June 30, 2021; and
    • disclose the anticipated fallback rate at least six months prior to the date it would become effective.
  • Parties to consumer loans should:
    • incorporate hardwired fallbacks by June 30, 2020 for mortgages and September 30, 2020 for student loans;
    • have relevant technology and operations vendors ready to support SOFR by September 30, 2020 for mortgages;
    • set a target for stopping any new use of USD LIBOR of September 30, 2020 for mortgages; and
    • ensure that identification and notification systems are in place and are compliant with all relevant consumer regulations.
  • Parties to securitization transactions should:
    • incorporate hardwired fallbacks by June 30, 2020;
    • have relevant technology and operations vendors ready to support SOFR by December 30, 2020;
    • set a target for stopping any new use of USD LIBOR of September 30, 2021 for collateralized loan obligations and June 30, 2021 for all other securitizations.
    • disclose the anticipated fallback rate at least six months prior to the date it would become effective.
  • Parties to derivatives transactions should:
    • incorporate hardwired fallbacks no later than four months after the amendments to the 2006 ISDA® Definitions are published (see Legal Update, ISDA Publishes Two Consultations on IBOR Benchmark Fallbacks);
    • set a target for stopping any new use of USD LIBOR of June 30, 2021;
    • offer electronic market-making and execution in SOFR swaps by September 30, 2020;
    • amend interdealer credit support annexes (CSAs) to use SOFR "interest amount" for USD collateral by December 31, 2020;
    • make markets in SOFR-linked interest rate volatility products by December 31. 2020; and
    • change the market convention for quoting USD derivative contracts from LIBOR to SOFR by March 31, 2021.
The ARRC also issued a press release and a fact sheet on the recommended best practices.
For more information on LIBOR and interest rate benchmark reform, see LIBOR Replacement Toolkit.