Keeping Up With the ARRC

The transition to alternative interest rate benchmarks is well underway but much work lies ahead. In the U.S., the Alternative Reference Rates Committee (ARRC) was convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to identify best practices for developing alternative reference rates, identify best practices for contract robustness, develop an adoption plan, and create an implementation plan. If you haven’t heard of the ARRC’s work, now is the time to learn: an estimated $200 trillion of financial contracts based on U.S. dollar LIBOR are currently outstanding in the face of a permanent end of LIBOR expected after 2021.

Source: Alternative Reference Rates Committee (ARRC)

The ARRC has identified the Secured Overnight Financing Rate (SOFR) as the alternative rate to LIBOR that represents best practice for use in certain new U.S. dollar derivatives and other financial contracts. It also published its Paced Transition Plan, with specific steps and timelines designed to encourage adoption of SOFR. The ARRC was reconstituted in 2018, expanding the membership of the ARRC to include a broader set of market participants, including trade associations such as SIFMA. The broader market representation will help ensure the successful implementation of the Paced Transition Plan and serve as a forum to coordinate and track planning across cash and derivatives products currently referencing U.S. dollar LIBOR. To that end, the ARRC will endeavor to deliver recommendations for addressing risks in contract language, orderly transitions to SOFR on a voluntary basis, and actions that would facilitate such transitions as it deems appropriate in order to meet these objectives.

The ARRC Outreach and Communications Working Group compiles a monthly newsletter with critical updates for those interested in its work and key news relating to the transition to risk-free rates in the U.S. and global markets. In the latest edition, the ARRC highlights:

• The ARRC released consultations on U.S. dollar (USD) LIBOR fallback contract language for bilateral business loans and securitizations for public feedback. Comments are due by February 5, 2019
• The ARRC posted comments received on its consultations on fallback language for floating rate notes (FRNs) and syndicated business loans (here and here)
• The ARRC published a timeline of key milestones as well as a set of frequently asked questions regarding the previously released consultation on USD LIBOR fallback contract language for FRNs

Sign up here to receive the next edition, which publishes on January 31, with information on ARRC Developments, International Highlights, Market Developments, SOFR Market Liquidity and more.

As of December 12, 2018; Source: Clarus Financial Technology; Via Alternative Reference Rates Committee (ARRC)

For more on the transition to alternative reference rates, visit SIFMA’s resource center.