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Financial Services Law Insights and Observations

ARRC announces recommendation for SOFR term rate

Federal Issues ARRC LIBOR SOFR Federal Reserve Bank Regulatory

Federal Issues

On July 29, the Alternative Reference Rates Committee (ARRC) announced its recommendation of CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates, following the completion of key changes in trading conventions on July 26 under the SOFR First initiative. As previously covered by InfoBytes, ARRC announced in March that it “will not be in a position to recommend a forward-looking [SOFR term rate] by mid-2021.” However, the success of the SOFR First convention change, “along with the continued growth in SOFR cash and derivatives markets, has allowed the ARRC to recommend SOFR Term Rates, consistent with the principles and indicators it established to do so.” Federal Reserve Board Vice Chair for Supervision Randal K. Quarles noted that “[a]ll firms should be moving quickly to meet our supervisory guidance advising them to end new use of LIBOR this year.”

In addition to the announcement, ARRC released a factsheet outlining past milestones, SOFR’s strengths, and anticipated milestones. ARRC noted that SOFR is “the best replacement” for USD LIBOR because it is (i) deep enough to “not dry up in times of market stress”; (ii) resilient against market evolution; and (iii) entirely transaction-based, and therefore cannot be easily manipulated.