ARRC has issued updated guidelines for various products including cash products and loans that currently reference LIBOR.

On June 30th, 2020, the Alternative Reference Rates Committee (ARRC) released a number of updated recommendations for various products which are currently referencing USD LIBOR.1 The ARRC had initially issued recommendations for spread adjustments on cash products, syndicated loans and student loans and had solicited feedback from financial institutions.2 These announcements reflect that, and follow the release of the ARRC’s 2020 Objectives.

What this means

The ARRC updates include details regarding its spread adjustments for cash products, revisions to hardwired fallback language for syndicated loans, and recommended fallback language and conventions for using the Secured Overnight Finance Rate (SOFR) in student loans.  

Spread Adjustments for Cash Products3

At its meeting in June, after reviewing responses received to its consultation on spread adjustments, the ARRC decided to provide further guidance. They have recommended a spread adjustment methodology based on a historical median over a five year look back period, calculating the difference between LIBOR and SOFR. This is aligned to the methodology recommended by the International Swaps and Derivatives Association (ISDA) for derivatives. For cash consumer products, the ARRC recommended a one-year transition period to this five-year median spread adjustment methodology, reflecting feedback received from consumer advocacy groups and mortgage lenders.  

In addition, the ARRC issued a supplemental consultation to a mix of banks, government sponsored entities, asset managers, insurance companies and industry bodies, asking them to consider using the same spread adjustment values that the ISDA plans to use across all fallback rates, and if the timing should match that of the ISDA. A clear majority favored this recommendation and aligning on timing, citing the importance of consistency with ISDA for hedging purposes. 

Hardwire Fallback Language for Syndicated Loans4 

The ARRC released recommended fallback language for syndicated loans as early as April 2019. The update recommends the use of simple daily SOFR in arrears, and includes a more permissive early opt in trigger, which will allow parties involved in syndicated loans to switch to SOFR or other alternative rates before LIBOR is officially discontinued.  

Fallback Language and Conventions for Using SOFR in Student Loans5 

The ARRC also released in June its final recommended contractual fallback language for new variable rate private student loans. The language was developed for new contracts that reference LIBOR in order that any risk may be “minimized” in the event LIBOR is not available. They also released conventions for using SOFR in new loan products, recommending SOFR-based loans reference the 30 or 90-day SOFR Average, with a monthly or quarterly reset period. As well, rates should be determined before the interest period, and a margin set by the lender. The recommended fallback language represents the feedback from the ARRC Consumer Products Working Group, which includes lenders, consumer groups, investors and servicers.  

Conclusion

ARRC Chair Tom Wipf stated, “Refreshing this language has been a near-term priority for the ARRC in 2020, and we are pleased to share these updates, which will help reduce the risk of disruption when LIBOR is no longer available,”6 and the ARRC is encouraging market participants, where possible, to incorporate the new fallback language and begin writing contracts using SOFR instead of USD LIBOR.7 He added the announcement of further details on recommended spread adjustments, “… demonstrates that the ARRC is committed to providing clarity, and the responses to our consultations again show the high value that market participants place on ensuring consistent outcomes across cash and derivatives products.”8

References  

  1. “ARRC Announces Further Details Regarding Its Recommendation of Spread Adjustments for Cash Products,” Alternative Reference Rates Committee, June 30, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Recommendation_Spread_Adjustments_Cash_Products_Press_Release.pdf 
  2. “Summary of Feedback Received in the ARRC Spread-Adjustment Consultation and Follow-Up Consultation on Technical Details,” Alternative Reference Rates Committee. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation_Follow_Up.pdf. 
  3. Ibid. 
  4. “ARRC Releases Updated Recommended Hardwired Fallback Language for Syndicated Loans,” Alternative Reference Rates Committee, June 30, 2010. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Revisions-to-Hardwired-Fallback-Language-2020-06-30.pdf. 
  5. “ARRC Release Recommended Fallback Language for Private Student Loans,” Alternative Reference Rates Committee, June 30, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Private-Student-Loans-Fallback-Language-06-30-2020.pdf. 
  6. “ARRC Releases Updated Recommended Hardwired Fallback Language for Syndicated Loans,” Alternative Reference Rates Committee, June 30, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Revisions-to-Hardwired-Fallback-Language-2020-06-30.pdf. 
  7. Ibid. 
  8. “ARRC Announces Further Details Regarding Its Recommendation of Spread Adjustments for Cash Products,” Alternative Reference Rates Committee, June 30, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Recommendation_Spread_Adjustments_Cash_Products_Press_Release.pdf 

Newsletter Author: Venetia WooMairi Bryan

Newsletter Contact Person: Venetia Woo 

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