To support the transition from LIBOR, the identified administrator will calculate and publish SOFR term rates.

On September 10th, 2020, the Alternative Reference Rates Committee (ARRC) published a Request for Proposals (RFP) to select a potential administrator to publish forward-looking Secured Overnight Financing Rate (SOFR) term rates.1 When the ARRC first published their 2020 Objectives earlier in the year, they indicated the selected administrator would publish the SOFR term rates during the first half of 2021, if liquidity in the SOFR derivatives markets was sufficiently developed.2 It should also be noted, that creating SOFR term rates is the final step in the ARRC’s Paced Transition Plan.3

What this means

According to the ARRC, responses to this RFP should be used to help identify a recommended administrator who would then be responsible for calculating and publishing the SOFR term rates.4 This administrator would make these rates accessible on a daily basis, and more frequently if required. The recommended administrator would use the methodology and data sources proposed to calculate SOFR term rates, and should include one and three months forward, and the ability to calculate six months and one year if required.5 The data should also be made available to other vendors and parties at reasonable cost.6 The RFP detailed certain criteria on which the ARRC’s selection would be based on. These include:7

  • Technical Criteria – Firms have to demonstrate their ability to publish data on a daily basis in addition to describing their operating model, software capabilities, approach, governance and oversight of conduct and operations, in addition to compliance and benchmark regulations in multiple jurisdictions.
  • Firm Criteria – Firms have to describe the services currently provided to the commercial and consumer financial markets that demonstrate a good understanding of market interest rate computations and market participant users. They have to also detail their interest in producing these rates, and the institutional and managerial capacity of key staff, across people, process and technology.
  • Public Policy Criteria – Firms have to make sure that the data is readily accessible and identify any delays that may affect real-time access to it. A statement of transparency pertaining to the data, computations and processes should also be submitted. Examples of previous experience in similar projects, and a communications strategy for product launch should also be provided.
  • Calculation Methodology Criteria – Firms have to describe the methodology used for calculating SOFR term rates, and provide historical data looking back at least one year. A detailed description of the construction of the data inputs, and the testing methodology in place should also be submitted. The resilience of the methodology used needs to be tested to foresee any regulatory and monetary policy changes, for example negative rates, low liquidity or even high volatility.

Conclusion

Interested firms are to submit their responses by October 31st, 2020, and the same would be evaluated by the ARRC’s Term Rates Working Group.8 “We are pleased to launch this RFP process,” stated Tom Wipf, chair of the ARRC, “This is a necessary step in the ARRC’s assessment as to whether it will recommend a term SOFR rate and in ensuring that any recommended rate can be produced in a timely manner.”9

Following the ARRC evaluation and selection of proposals received, they plan to publish the name of the chosen administrator. The selected firm should be ready to begin publishing the forward-looking term rates by June 30th, 2021.10

References  

  1. “ARRC Releases Request for Proposals for the Publication of Forward-Looking SOFR Term Rates,” Alternative Reference Rates Committee, September 10, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_Term_Rate_RFP.pdf.
  2. “RFP for Vendor to Publish Forward-Looking SOFR Term Rates,” Alternative Reference Rates Committee. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/SOFR_Term_Rates_RFP.pdf.
  3. Ibid.
  4. “ARRC Releases Request for Proposals for the Publication of Forward-Looking SOFR Term Rates,” Alternative Reference Rates Committee, September 10, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_Term_Rate_RFP.pdf.
  5. Ibid.
  6. “RFP for Vendor to Publish Forward-Looking SOFR Term Rates,” Alternative Reference Rates Committee. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/SOFR_Term_Rates_RFP.pdf.
  7. Ibid.
  8. Ibid.
  9. “ARRC Releases Request for Proposals for the Publication of Forward-Looking SOFR Term Rates,” Alternative Reference Rates Committee, September 10, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_Term_Rate_RFP.pdf.
  10. Ibid.

Newsletter Author: Venetia Woo; Mairi Bryan

Newsletter Contact Person: Venetia Woo

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