The Alternative Reference Rates Committee (ARRC) is announcing recommendations and best practice advice to aid and accelerate the transition away from the U.S. dollar (USD) LIBOR. The committee is recommending loan conventions and highlighting areas where SOFR Term Rates can be leveraged to ease the transition. These recommendations are part of the last step in making the SOFR Term Rates widely available and is expected to follow shortly after the July 26 move of interdealer trading conventions to SOFR.
“Market participants now have the tools and necessary guidance to support use of the SOFR Term Rate in transitioning away from LIBOR.” said Tom Wipf, ARRC Chairman and Vice Chairman of Institutional Securities at Morgan Stanley.
“Once the SOFR First swaps convention switches on July 26th and the ARRC formally recommends the SOFR Term Rates, market participants should have what they need to use SOFR in all its forms across financial markets, including the use of the SOFR Term Rates for business loans.”
In its recommended best practices, the ARRC has highlighted particular areas where the use of the SOFR Term Rates will be helpful to support a smooth transition away from USD LIBOR, taking into account feedback from a broad set of stakeholders. The SOFR Term Rates will be especially helpful for the business loans market—particularly multi-lender facilities, middle market loans, and trade finance loans—where transitioning from LIBOR to an overnight rate has been difficult. The Best Practice Recommendations also support the use of SOFR Term Rates in end-user facing derivatives that hedge cash instruments linked to the Term Rates, and certain securitizations with underlying assets that are themselves tied to SOFR Term Rates.
To help further facilitate the use of the SOFR Term Rates and SOFR Averages in advance, the ARRC has published recommended conventions for these rates in the business loans market. The ARRC has previously released recommended conventions for the use of SOFR In Arrears using both daily simple SOFR average and a compounded SOFR average.
The announcement builds on the ARRC’s term rate principles, term rate market indicators and Request for Proposals update—which together provide clear guidance that would allow the ARRC to recommend a SOFR-based term rate shortly after the July 26 SOFR First convention switch.