On 17 April 2020 the Alternative Reference Rates Committee (ARRC) unveiled its 2020 objectives for facilitating the industry's transition away from the US dollar (USD) London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR).(1) These goals and projected timelines build on the ARRC's previous transitioning work and aim to account for both the impact of COVID-19 on financial markets and the expectation that LIBOR will still be discontinued at the end of 2021.
The ARRC is the Federal Reserve's LIBOR-transition working group comprised of private sector entities and industry regulators. Among other things, the ARRC has:
- recommended SOFR plus a spread adjustment to replace USD LIBOR and operate as a fallback;
- released a transition plan(2) promoting the use of SOFR voluntarily; and
- conducted numerous market-wide consultations to determine how best to implement SOFR-based fallback language into existing (legacy) LIBOR-based financial contracts.
The ARRC has also proposed a New York law to legislatively incorporate its recommended fallback language into legacy contracts.(3)
In response to the COVID-19 pandemic and a 25 March 2020 UK Financial Conduct Authority (FCA) statement confirming that LIBOR will probably still not be published after 2021,(4) the ARRC developed the following objectives to help market participants meet transition goals:
- supporting SOFR use and liquidity;
- encouraging the development and strengthening of market infrastructure and operations to support SOFR;
- creating and encouraging the use of robust contractual fallbacks;
- developing materials to support consumer education and outreach efforts;
- increasing clarity on key legal, tax, accounting and regulatory matters; and
- advancing outreach, education and global coordination.
These objectives and their target achievement dates are outlined in more detail below.
Supporting SOFR use and liquidity
By 31 July 2020 the ARRC intends to finalise recommended conventions for SOFR-based floating rate notes, business loans and securitisations.
By 30 September 2020 the ARRC intends to:
- establish a request for proposal process for selecting an administrator of an ARRC-recommended forward-looking term SOFR; and
- define the recommended scope of the rate's use.
This forward-looking rate would be published in the first half of 2021 if there is sufficient liquidity in SOFR-based derivatives markets at that time.
On an ongoing basis, the ARRC will:
- work with market participants and central clearing organisations to facilitate the use of SOFR price alignment interest and discounting for USD interest rate derivatives;
- recommend voluntary options for conventions on the exchange of compensation for legacy swaptions or discounting of new swaptions; and
- explore methods for transitioning legacy derivative positions from USD LIBOR to SOFR before 2021.
Market infrastructure and operations
On an ongoing basis, the ARRC will:
- create tools for market participants in making operational and infrastructure changes while preparing to transition from USD LIBOR; and
- minimise disruption by proposing industry timelines, checklists, market conventions and other actions to address specific implementation issues.
Contractual fallbacks
By 30 June 2020 the ARRC plans to publish revisions to its hardwired fallback language, including a more permissive early opt-in trigger, recommended conventions and supporting materials for business loans.
By 30 September 2020 the ARRC intends to:
- establish an RFP process for selecting an administrator to publish the ARRC-recommended spread adjustments and spread-adjusted rates;(5) and
- finalise technical details relating to those spread adjustments.
Consumer products
By 30 June 2020 the ARRC plans to publish:
- recommended fallback language for new student loans referencing LIBOR; and
- conventions for new student loans referencing SOFR.
By 30 September 2020 the ARRC intends to develop resource guides recommending action that supports efforts to create clear and effective programmes for consumer education materials and outreach.
Legal, tax, accounting and regulatory clarity
On an ongoing basis, the ARRC will continue pursuing legislative solutions for legacy contracts that are difficult to amend or do not have economically appropriate fallback procedures. The ARRC will also collaborate with tax, regulatory and self-regulatory organisations to globally coordinate and finalise measures addressing the USD LIBOR transition (eg, the removal of unintended transition impediments).
Outreach, education and global coordination
On an ongoing basis, the ARRC will promote comprehensive outreach and educational programmes to facilitate the industry's participation in both the USD LIBOR transition and the ARRC's efforts to ease it.
To ensure market readiness for the USD LIBOR transition, the ARRC will circulate best practice guidance for achieving these objectives in the coming weeks. Although the ARRC recognises that its near-term goals may not be feasible because of the current economic environment, it continues to emphasise that market participants should be working to transition away from USD LIBOR.
Endnotes
(1) ARRC 2020 Objectives for the LIBOR Transition, 17 April 2020 and ARRC Press Release on 2020 Objectives, 17 April 2020.
(2) ARRC LIBOR Paced Transition Plan.
(3) ARRC Executive Summary of Proposed Legislative Solution to LIBOR Transition, 6 March 2020. For a detailed analysis of the ARRC's legislative proposal, see our previous report: ARRC Releases NY Law Proposal to Amend Transactions Referencing USD LIBOR, 1 April 2020.
(4) FCA Statement that LIBOR Discontinuation Timeline Remains Unaffected by COVID-19, 25 March 2020.
(5) For the preliminary results of the ARRC's consultation on recommended spread adjustment methodologies, see ARRC Spread Adjustment Methodology Press Release, 8 April 2020.
