Rates committee approves SOFR best practices

Federal Issues ARRC LIBOR SOFR

On April 21, the Alternative Reference Rates Committee (ARRC) announced the endorsement of the CME Group’s Term SOFR rates, which ARRC formally recommended in 2021 (covered by InfoBytes here). The ARRC endorsement recommended that use of Term SOFR rates be limited to specific purposes, including as a fallback rate for legacy LIBOR cash products, for new use in business loans and certain securitizations, and for use in derivatives issued to end-users to hedge cash products that reference the Term SOFR rate. ARRC stated that, while it recognizes the usefulness of Term SOFR in certain business lending transactions, it continues to recommend the use of overnight SOFR and SOFR averages for all products. ARRC further encouraged market participants “to continue to monitor use of Term SOFR over time given the importance that such use continues to be proportionate to the base of transactions underlying the Term SOFR rate, and does not materially detract from those transactions in a way that compromises the robustness of the Term SOFR rate itself as the market evolves, as outlined in the ARRC’s principles.” Additionally, ARRC stated that the recommended uses outlined within the document regarding the use of Term SOFR will not change and “are meant to apply as permanent recommendations for the market.”