ARRC offers milestones, reiterates banks still should target end of 2021 for transition from LIBOR.

On April 17th, 2020, the Alternative Reference Rate Committee (ARRC) issued its key objectives for 2020 in order to support the transition from LIBOR and encourage the use of the Secured Overnight Financing Rate (SOFR) as an alternative benchmark rate.1  

What this means 

The ARRC has stated that there is an expectation that LIBOR can no longer be guaranteed beyond the end of 2021, and  noted that the U.K. Financial Conduct Authority (FCA) highlighted this assumption in its statement on March 25th, emphasizing that it should remain the target date for the industry to drive towards.2  

The ARRC 2020 Priorities and Milestones:3 

  • Support SOFR Use and Liquidity:  
    • Establish criteria for recommendations for an ARRC-recommended forward-looking term SOFR rate and scopes for such a rate by September 30th, 2020. 
    • Establish final conventions for SOFR-based floating rate notes, business loans and securitizations by July 31st, 2020. 
    • Work with Clearing Houses, Chicago Mercantile Exchange (CME) and London Clearing House (LCH) to facilitate the use of SOFR in derivatives and explore methods of movement of legacy positions from LIBOR to SOFR. 
  • Encourage the Development and Strengthening of Market Infrastructure and Operations to Support SOFR: 
    • Create tools that help market participants make the transition from LIBOR with minimum disruption, and propose timelines, checklists and conventions that can address any specific implementation issues.
  • Create Robust Contractual Fallbacks: 
    • Establish a process for the selection of an administrator to publish the ARRC’s recommended spread adjustments and spread-adjusted rates by September 30th, 2020. 
    • Publish revisions to the ARRC’s fallback language, recommended conventions and supporting materials for business loans by June 30th, 2020. 
    • Develop materials for Consumer Products and publish recommended fallback language for student loans referencing LIBOR and conventions for new such loans referencing SOFR by June 30th, 2020. 
    • Develop guides for market participants to allow them to create effective plans for consumer education and outreach. 
  • Increase Clarity around Legal, Tax, Accounting and Regulatory Issues: 
    • Pursue potential legislative relief for LIBOR contracts that may be difficult to amend. 
    • Encourage global regulatory coordination, and work with organizations to address legal, tax and accounting issues associated with the LIBOR transition. 
  • Advance Outreach, Education and Global Coordination:
    • Promote comprehensive outreach and education regarding the LIBOR transition, and the work that the ARRC is doing to support the transition. 

Conclusion

In addition to these key objectives, the ARRC is developing “Best Practices” to support the transition from LIBOR, which it is expected to release within the coming months.4  

Tom Wipf, ARRC chair, stated, “2020 will be a pivotal year in the transition away from LIBOR. The new milestones we announced today and the upcoming best practices are a critical step to ensure that a transition to SOFR is streamlined and seamless.“5 He added, “The ARRC is committed to supporting and preparing all market participants for this important shift in global market infrastructure …”6  

References

  1. “ARRC Announces Its Key Objectives for 2020,” Alternative Reference Rates Committee, April 17, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_2020_Objectives.pdf 
  2. “Alternative Reference Rates Committee – 2020 Objectives,” Alternative Reference Rates Committee, April 17, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_2020_Objectives.pdf. 
  3. Ibid. 
  4. “ARRC Announces Its Key Objectives for 2020,” Alternative Reference Rates Committee, April 17, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_2020_Objectives.pdf.   
  5. Ibid. 
  6. Ibid. 

Newsletter Author: Venetia Woo; Mairi Bryan

Newsletter Contact Person: Venetia Woo 

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